Managing inventories is a key operation for any business. With the advent of technology computer software have been developed to make the control even easier. Sales companies mostly use the fixed order period inventory system, also called periodic inventory system. This method works on the idea of only updating your company’s inventory balance. Orders are placed periodically with varying quantities. For one to do it effectively, the balance of the stock has to be determined. In determination, the number of products sold is usually tracked so that it is much cheaper to know the balance and when the inventory is almost out of stock.
Since it is cumbersome to count physically, companies prefer conducting a physical count quarterly or yearly, hence the term “periodic”. This system has a number of issues though. To start with, the values of stock are not easily reached at through calculation especially among large organizations. This system doesn’t have this attribute since information is separately recorded, which means there is no point where a business can add up all its tallies and determine its worth.
Complexity is another challenge associated with this inventory system. Information must be obtained from the sales figures, the cost of goods sold, the current stock and other key information, which vary across companies. It must be also observed if the entries and sources are accurate. The safety of the stock can be in question when using this system. Due to its difficulty in ascertaining the current stock, doors for loss open which eventually result in revenue losses. Noticing theft is hard. Though low cost items may not hurt the business so much, it’s troublesome in a company that deals with valuable items.
Technological advancement has rendered the system inefficient in a way. Gadgets with tracking systems, identification tags, selling point scanners and others that track the flow of stock have come up. Initially, periodic system used to be the only way of tracking high volumes of stock with very high turnover. It is thus apparent that using this method may edge the businesses out of the benefits of technological advancements. In light of all these issues, the system is still very appropriate because of a number of reasons. When using it, relatively large fluctuations can be handled with ease. Because of the periodic orders, businesses can be able to plan, predict and lay counter measure to curb the effects of the fluctuations.
The calculations are simple here. Purchased materials are accounted in a purchases ledger while sold goods are recorded in the sales ledger. This makes it easier to reflect on the actual stock at hand. Record keeping in periodic inventory is not very involving, something that makes it cheaper to use. Only records of the total number of goods purchased in a given period and the number of goods that were sold in the very same period. In small businesses with level inventory turnover, periodic accounting systems are easy for them. The simple calculations can maintain inventories with few journal entries to the general ledger.
The hybrid system is also very dynamic given that it exhibits continuous and discreet features. By encompassing many features in it, it allows flexibility in inventory operations which is a good trait. The fixed Order Quantity system is also unique especially in controlling the quantity though it doesn’t obey the prevailing demand and supply conditions.
References
Muller, M. (2003). Essentials of inventory management. New York: AMACOM.
Francois E. Cellier and Ernesto Kofman (2006), Continuous System Simulation (first Ed.),
Springer
