Perpetual vs Periodic Inventory System: What's Best in 2024?

Fundamentals of Inventory and Logistics

As an eMarketplace scales, a key consideration is how inventory and logistics will be tracked. The logistical execution for the marketplace is fundamental to the success or failure of the operation.

Users Rely on the Marketplace to Deliver

Logistics are so important because buyers and sellers rely on the marketplace to ensure that items are delivered in a timely manner.

Therefore, delivery needs to be a seamless process, especially if orders are being fulfilled from the marketplace inventory or distribution center.

Accurate Information Establishes Trust

Information shared with the buyer about inventory and shipping need to be accurate and up-to-date. If this information is inaccurate, especially if it’s inaccurate too often, customers’ trust in the marketplace will decrease.

In order to do these things, especially at scale, it’s imperative to have the right B2B inventory management software in place.

Even with Indirect Management, Accuracy Is Vital

Many marketplaces don’t do fulfillment directly; rather, they facilitate fulfillment.

If that’s the case, then usually the marketplace will still have an inventory management system to reflect the manufacturers, sellers, and distributors to reflect their inventory that they want to show on the marketplace platform.

Whether or not your marketplace directly manages inventory or indirectly by conveying information from the sellers, it’s important to accurately convey that and keep it up to date, and be able to optimize inventory management and logistics.

Even if you aren’t directly managing a seller’s inventory and shipping, buyers will often still associate some feelings about the seller’s performance with the marketplace itself.

That’s why it’s essential to make sure that you accurately present information from the seller and that the seller is keeping their information up to date with their actual inventory and shipping providers.

Periodic Inventory System vs Perpetual Inventory System

Here we’ll go over the differences between these two inventory systems and the reasons you might choose one over the other for your marketplace eCommerce platform.

The Periodic Inventory System

When a marketplace first starts, it’s common to adopt a periodic inventory system. Typically, the periodic inventory system is a low cost, simplistic approach, where you conduct a hard count of the physical items in the inventory to assess what’s in stock. This is done on a periodic basis, such as weekly, monthly, or quarterly.

This is a rudimentary technique that can be low cost to set up and configure, but it is also a limiting factor to sellers within your marketplace if they have this type of system, and to the execution within your marketplace if your marketplace is holding inventory in stock.

If a seller doesn’t have a sophisticated inventory management system, then it makes sense to require the seller to disclose some level of how they’re handling their inventory, including guidelines for excess capacity, buffer inventory, and how well they’ll be able to accurately report the state of their inventory.

If they're using a periodic inventory system, you may want to increase the buffer or amount of leeway that you incorporate, and provide them with specific recommendations and best practices that are important from a customer’s perspective.

The Perpetual Inventory System

A fundamental aspect of inventory management is how to progress from periodic to a perpetual inventory system.

A perpetual inventory system is more standard nowadays, and relies on digital transactions, or electronic records of where things are within the production pipeline.

These digital records keep track of everything from manufacturing and warehousing to fulfillment, as well as returns and refunds if applicable.

A well-integrated perpetual inventory system perpetually updates and syncs information between databases to keep the user accurately informed.

A perpetual inventory system is more sophisticated than a periodic inventory system, but it is somewhat more expensive to set up and configure, at least in the short term.

In the long term, however, especially when operating at scale, a perpetual inventory system is much less expensive than a periodic one.

Which Inventory System Is Best?

Given the limitations of a periodic inventory system and the long-term cost effectiveness and efficiency of a perpetual inventory system, usually a perpetual inventory system will be the best option to have as your main system, though that isn’t the whole story.

Be aware of how sellers and drop shippers are getting items to your distribution centers and/or customers, and how well they can manage their inventory. Then you can factor these things in to optimize your operations and increase customer satisfaction.

Many organizations end up having a hybrid inventory system, where they rely on a perpetual inventory system but occasionally implement a periodic inventory method and do a hard count of items, like if there’s a potential for spoilage.

Any periodic inventory method performed would then need to be reflected in the perpetual inventory system so that the data matches the actual situation.

While the perpetual model is dependable when it comes to many factors, it doesn’t physically have the ability to capture all inputs like spoilage or how many items were damaged in a flood, for instance.

Sync Perpetual and Periodic Inventory Systems

Any inventory systems used by you and your vendors will need to be integrated into the eMarketplace platform so that it has the correct set of data. That data will then change based on transactions that occur within the platform.

For example, let’s say a seller lists 100 rubber chickens as in stock on the marketplace website. The seller then sells 50 rubber chickens to a customer who doesn’t purchase them through the marketplace platform.

The seller would then need to update the marketplace platform so that it reflects their reduced inventory of 50 rubber chickens. If they don’t do that and someone tries to purchase all 100 rubber chickens from the marketplace platform, then the purchase may technically go through but there’d be a shortage of 50 rubber chickens.

So, it’s important to not only have the right inventory management system for your marketplace, but also to have the system that the supplier or seller is using synced up with the systems that are transmitting the inventory data to the marketplace.

Doing this has the benefit of eliminating these types of errors and challenges that might occur, such as over-selling items.

Create Rules for Inventory Systems

It’s best to set guidelines and rules where if items are listed as an inventory in the marketplace platform, then they have to be sellable. If they’re not, then it would result in negative consequences, such as a reprimand or even being paused within the marketplace.

Setting up and managing expectations and rules for how you want to operate your marketplace is a critical step in building a marketplace platform. Part of that is deciding how to deal with different sellers and buyers, and what commitment the marketplace requires from sellers in regard to their inventory.

For mid to large size operations, it’s usually best to use API’s and EDI formats so they can run automated API-based integrations. Being able to offer multiple venues and avenues for these integrations is also critical because this is the lifeline of the accuracy of the marketplace.

With inventory, and depending on the category or market niche, it’s often the case that there will need to be a certain buffer amount. There will also need to be certain logic and workflows.

For example, for large orders, the seller may need to confirm that they have the items in stock and approve processing the order.

Inventory is at the heart of the ability to fulfill and deliver value to the customer. It’s also an opportunity for the marketplace to provide guidance and standards for what’s expected and give encouragement for how to operate with these standards in mind.

These things include having a reasonable buffer for your sellers based on their inventory system, informing them of the consequences of breaking the rules, and making sure they know to integrate their systems and update their data.

Inventory management and accurate data drive the credibility of the marketplace to fulfill orders.

A seamless experience will allow the marketplace to thrive, but if the inventory, and the guidance around the inventory and the enforcement of that guidance isn’t optimized, it can be a showstopper, for obvious reasons, because customers won't get their orders timely. This will create a downward spiral for your marketplace.

Implement the Right Features for Your Inventory System

To get the best results possible, you’ll want to get a marketplace eCommerce platform that’s customizable and that can handle both perpetual and periodic inventory management systems in a hybrid model.

The marketplace platform should also be able to receive input from multiple distribution centers for your marketplace as well as external inventory from multiple vendors, including various manufacturing facilities and drop shipping information.

Working with a software development company that specializes in creating these types of eCommerce platforms is the best way to ensure that your marketplace is successful.

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