Perpetual Inventory System versus Periodic Review.

What is a Perpetual Inventory System?

A Perpetual Inventory System is any software product that tracks inventory quantities in near real-time. Therefore, if you have a perpetual inventory system, you should be able to inquire in the system to see how much of an item you have in stock. To achieve this, you need to execute inventory transactions any time a quantity of an item is put into stock or taken out of stock. And herein lies the problem. Businesses tend to have a difficult time doing all the transactions necessary to keep their perpetual inventory accurate. They shouldn't, but they do.
The good news is that many of these transactions can be automated. For example, if you use a sales order to ship inventory, it will typically automatically deduct the inventory. This isn't necessarily real-time, but it will get done when you run invoicing (often at night). Also, in many manufacturing systems, you can automatically deduct components or raw materials when you post production of a finished item.
Receipt transactions are pretty straightforward, but putting away the receipt tends to be more problematic. This is where you do a transaction to tell the system where you put the inventory away.

Also miscellaneous transactions such as for scrap, damage, samples, substitutions, returns, replacements, etc. can be problematic since many companies fail to set up a formal process for some of these. For more information on maintaining accuracy with specific warehouse processes, check out my book Inventory Accuracy: People, Processes, & Technology.

So, the key to successfully running a perpetual inventory system is to have formal processes to execute transactions for any task that affects the physical inventory count.

These days, virtually any software product that claims to track inventory is functionally a perpetual inventory system.

What is a Periodic Review Inventory System?

The alternative to a Perpetual Inventory System, is often called a Periodic Review inventory system. This simply means you don't track inventory quantities in a software product, instead, you go out periodically to wherever you store your inventory to visually determine how much you have. As stupid as this sounds, there are operations that do fine without a perpetual inventory system. A very small business with a very small number of items that are easy to count could be a candidate.

It sure makes things a lot simpler when you don't have to try to keep inventory straight all the time. In fact, my first experience with inventory was with a periodic review system. Of course this was back in the 1970's when most small businesses didn't have access to computerized anything. But it worked fine for us.

Periodic Review Systems are also frequently used for supplies, such as office supplies and janitorial supplies in operations that use Perpetual inventory for their other inventory. There are some operations that will use a perpetual inventory system for their supplies, but it's rare.
The downside of not having a perpetual inventory system is not having immediate access to inventory levels. For example, if you are an e-commerce business, you probably want your customers to be able to know you have stock for something before they place an order. Other related functionality, like tracking quantities by bin location or running MRP, are not going to be available without a perpetual inventory system.

Ultimately, most operations would be better off with a perpetual inventory system. But don't assume every business needs one.