Understanding Inventory Management

In logistics and supply chain management, inventory is one of the most critical assets to handle the amount of products, a business holds. Whether you’re a wholesaler, distributor, or retailer, keeping track of goods efficiently ensures you meet customer demand, control costs, and maximize profits. One of the most widely used methods in this process is the Periodic Inventory System.

This article explores everything about Periodic Inventory Systems, including how they work, their advantages and disadvantages, differences compared to perpetual inventory systems, and how companies like Coastal Distributions Group leverage these systems to create efficiency for businesses.

What Is a Periodic Inventory System?

A Periodic Inventory System is an accounting method in which inventory levels are updated at specific intervals—monthly, quarterly, or annually—instead of continuously. Under this system, businesses don’t keep a constant real-time record of inventory. Instead, they physically count goods or products or units at the end of each period and calculate the cost of goods sold (COGS) accordingly.

This system is often used by smaller businesses, wholesalers, or companies with less complex inventory operations.

How Does a Periodic Inventory System Work?

The workflow of a periodic inventory system can be broken down into the following steps:

1. Purchases Recorded Separately – All purchases during a period are logged into a “Purchases” account, not directly into the inventory account.
2. No Continuous Updates – Inventory accounts are not updated every time sales or purchases occur.
3. Physical Count – At the end of the accounting period, a physical count of inventory is conducted.
4. COGS Formula – Businesses use the following formula to calculate cost of goods sold:

COGS=BeginningInventory+Purchases–EndingInventoryCOGS = Beginning Inventory + Purchases – Ending Inventory

1. Adjustment – Once the ending inventory is determined, the balance in the inventory account is adjusted, and purchase accounts are closed.

Example of a Periodic Inventory System in Action

Imagine a wholesale distributor selling electronic accessories.

• Beginning Inventory: $50,000
• Purchases during Quarter: $120,000
• Physical Count at End: $40,000

COGS=50,000+120,000–40,000=130,000COGS = 50,000 + 120,000 – 40,000 = 130,000

This system allows the distributor to know how much inventory was sold without tracking every single transaction in real time.

Advantages of Periodic Inventory Systems

1. Cost-Effective – Requires less investment in technology and software.
2. Simple to Implement – Easier for small to medium-sized businesses to manage.
3. Less Technical Knowledge Needed – Employees don’t need advanced training to operate it.
4. Good for Low-Value Inventory – Useful for companies dealing in inexpensive or bulk products.
5. Time-Saving During Day-to-Day Operations – No need to record every transaction immediately.

Disadvantages of Periodic Inventory Systems

1. Lack of Real-Time Data – You don’t know exact inventory levels until the physical count.
2. Higher Risk of Stockouts – Businesses may run out of stock before realizing it.
3. Prone to Errors and Theft – Harder to detect inventory shrinkage or misplacement.
4. Inefficient for Large Businesses – As businesses scale, manual counts become too time-consuming.
5. Delayed Decision-Making – Managers don’t have up-to-date data for forecasting.

Periodic vs. Perpetual Inventory Systems

When Should a Business Use a Periodic Inventory System?

• Small to medium wholesalers with limited SKUs.
• Retailers with low-cost, high-volume goods.
• Businesses in developing markets where automation is expensive.
• Seasonal businesses for products that only need inventory checks at specific times.

Technology and Periodic Inventory Systems

While periodic systems traditionally relied on manual counts, technology now enhances the process. Tools like barcode scanners, inventory apps, and warehouse management systems (WMS) can speed up periodic counts, reducing human error.

Coastal Distributions Group and Inventory Solutions

Companies like Coastal Distributions Group help businesses streamline inventory by offering tailored logistics and distribution strategies. Whether a company chooses a Periodic or Perpetual system, expert partners can help integrate solutions that reduce costs and improve supply chain efficiency.

By combining smart technology with periodic inventory checks, businesses can achieve both affordability and reliability in their inventory management.

Challenges in Implementing Periodic Systems

1. Labor-Intensive – Requires workforce for physical counts.
2. Inventory Shrinkage – Theft, damage, or misplacement may remain hidden until the count.
3. Time-Consuming – Manual processes slow down business during counts.
4. Not Scalable – As the company grows, periodic systems may not keep up.

The Future of Inventory Management

While periodic systems remain relevant, especially for small businesses, global trends are moving toward hybrid models—where real-time tech is paired with periodic checks for accuracy. Companies that adopt such models often gain a competitive advantage in global markets.

Conclusion

The Periodic Inventory System offers a practical, low-cost way to manage stock for small to medium-sized businesses. Although it lacks the real-time precision of perpetual systems, it provides enough control for companies with simple inventory needs.

For growing businesses, working with logistics experts like Coastal Distributions Group ensures the right balance between cost savings and efficiency. By strategically choosing the right inventory system, businesses can avoid unnecessary expenses while maintaining customer satisfaction.