Why Are Storage Costs Reduced With a Perpetual Inventory System?

Businesses aim to optimize operations and manage expenses. Inventory management is a key area where costs accumulate, especially storage. Advanced inventory systems help companies control stock and reduce overhead. A perpetual inventory system directly addresses the complexities and costs of holding inventory.

What is a Perpetual Inventory System

A perpetual inventory system maintains a continuous, real-time record of inventory levels. This system updates inventory accounts instantly with every item received or sold, providing an up-to-the-minute view of stock on hand. Unlike periodic inventory systems, which rely on physical counts at scheduled intervals, perpetual systems offer ongoing visibility.

Technology plays a fundamental role in enabling this continuous tracking. Barcode scanners, point-of-sale (POS) systems, and integrated software platforms automatically record transactions. This automation eliminates frequent manual inventory counts, which are disruptive and prone to error. The system integrates inventory data with sales and accounting, providing a comprehensive overview.

Real-Time Tracking and Inventory Accuracy

The continuous updating feature provides real-time visibility into stock levels. This immediate insight means companies always know exactly what products they have and their quantities. Such visibility is crucial for informed decisions.

This constant tracking significantly improves inventory accuracy by minimizing discrepancies. Accurate data allows for more reliable demand forecasting, enabling businesses to predict customer needs. Companies can optimize reordering processes, setting reorder points and quantities to prevent stockouts and overstocking. The system also helps identify slow-moving or obsolete items, allowing timely action before they become a liability.

Direct Reduction of Storage Costs

Operational efficiencies from a perpetual inventory system directly reduce substantial storage-related costs. By optimizing inventory levels through accurate tracking and forecasting, businesses minimize physical storage space. This leads to savings on warehouse rent, utilities, and maintenance expenses. Storage costs, including fixed expenses like rent or variable costs such as labor and utilities, are impacted by inventory volume.

Lower inventory levels reduce carrying costs, which range from 15% to 30% of total inventory value. These costs include insurance premiums, property taxes on inventory, and capital tied up in unsold stock. Reducing excess inventory frees up capital, improving overall cash flow.

The system’s ability to identify slow-moving or obsolete items quickly minimizes losses from outdated, damaged, or expiring products. Obsolete inventory ties up capital and occupies valuable warehouse space, incurring storage, management, and disposal costs. Proactively addressing these items avoids the financial burden of depreciation and disposal.

Reduced overstocking decreases warehouse labor costs. Less inventory means less time for handling, organizing, and searching, improving labor efficiency. Labor costs often constitute a significant portion, 60% to 65%, of total warehouse fulfillment expenses. Better tracking also minimizes inventory shrinkage, including losses from theft, damage, or misplacement, reducing the cost of lost goods that consume storage space.