What are the Different Types of Inventory Management Techniques?
Two basic types of inventory management techniques are common in business: periodic and perpetual. These techniques arise from the accounting method used to track inventory. Companies will then build different types of tasks or activities that use the basic theory of these systems for tracking and maintaining inventory. A periodic system is easier for goods that move frequently and are mostly homogeneous in nature. Perpetual inventory systems keep track of goods after each purchase, sale or adjustment. Taking constant inventory is not typically necessary for perpetual inventory management.
Companies should list their inventory policies in the manuals given to department managers who oversee inventory. Owners and executives will often select either a periodic or perpetual system and create procedures for the inventory system in place. For most companies, inventory is the second largest expense behind employees. The manual and internal controls for inventory management techniques are necessary to ensure that all employees follow set procedures during this business process. Periodic inventory systems typically require less instruction due to the work being spread out over several months or quarterly, allowing for fewer inventory management requirements.
For periodic inventory management techniques, companies will count and adjust inventory on a quarterly basis at a minimum. During the off months in the quarter, company accountants will simply make dollar adjustments in the accounting ledger. These adjustments take the beginning inventory balance, add monthly purchases, subtract monthly sales, and add or subtract adjustments to create a dollar figure for reporting. At the end of the quarter, the company will conduct a physical inventory count and reconcile the physical inventory to the number in the accounting ledger. These types of inventory management methods are often less work, but also are less reliable. Companies may also experience higher adjustments relating to spoiled, lost, stolen or damaged goods.
Perpetual inventory management techniques require more work, but are also more reliable. A computerized program will adjust the company’s main inventory account for any movement during each month. Rather than counting physical inventory on a quarterly basis, companies using perpetual inventory management techniques can relegate this burdensome task to an annual project. To maintain compliance with government inventory requirements, companies may need to conduct weekly cycle counts to prove they are not reporting inaccurate inventory amounts. Many local and state governments impose a tax on unsold inventory; this requires the company to have an accurate technique in place to avoid paying too much taxes.
My uncle owns a small hardware store in our town, and I keep encouraging him to start being more vigilant about inventories.
Since it is a small store, there are no bar codes or security tags. Most people are assumed to use the honor system instead of pocketing small items. I'm sure people always have and always will shoplift, but I'm worried it might be more of an issue now with the economy.
Does anyone have experience with implementing an inventory system? Which one of the two mentioned would work best, and how should they be incorporated? Also, are there any inexpensive (or preferably free) programs that could do the calculations for him, since there are thousands of items? I'm sure a spreadsheet would work, but neither of us are very proficient at that.
@JimmyT - I believe most stores allot about 3% of their inventory to be lost either through theft, damage, or other mishaps.
I used to work as a manager in a restaurant. When the drawers were totaled, we were allowed to be off by no more than 3 dollars before the higher managers were notified. At the end of the week, our totals had to be within 4% of the calculated profits.
Of the two types of inventory management systems, is one more common to certain industries while the second is more common to different companies? What do most department stores use compared to a shoe store or jewelry store?
@JimmyT - I actually saw something about this the other day. The story was about a museum whose gift shop was run by volunteers, and there was no inventory system in place. I believe they calculated that nearly 30% of the profit was disappearing.
They hired someone new to run the gift shop, and he did some detective work. It turns out that the volunteers were taking money and items from the gift shop since they felt they deserved compensation. After that they put an inventory system in place, and volunteers were held legally accountable for the registers at the end of the day.
From my personal experience, companies try to treat employees well to curtail theft. When people feel close to their supervisors, they feel more like they are stealing from a person than a company. As for shoplifters, cameras are about the only route to go.
What is a typical amount of a product that company loses in a year? Sadly, I'm sure every company experiences some type of employee theft, even if it is small. While something like a restaurant would be hard to steal from for a customer, I'm sure department stores and places like home improvement stores expect to lose a certain amount of money from shoplifters.
Also, what types of policies or procedures do companies have in place to stop employee theft or shoplifting from happening in the first place?
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