We Were Born Knowing How to Manage Inventory, but Can We Remember Now?

I can barely remember the first time I heard of an inventory clearance sales event and learned about the idea of “taking inventory”. Like most children who have learned the concept of subtraction, I was surprised. I wondered why a record of inventory on hand wasn’t maintained continuously, with a subtraction being made each time a product was sold. Later I understood that doing a subtraction operation for each item sold would be more costly and cumbersome, even for small businesses, than doing the periodic inventory. No business owner wants to keep a customer waiting so that a record of inventory can be updated.

It was a marvel and I told my children to observe carefully when several years ago on a vacation to remote parts of Maine we visited a grocery store with a cashier inspecting each item for a price tag and entering the price for the item into the cash register. Our check-out in that store would have been much more time consuming and costly if that cashier had to make some separate note or update inventory for each price she entered into the cash register. I hadn’t seen a check-out like that for years and I assume I will never see one again.

Accounting practices, information systems, company policies, tax laws, and habit have grown up around periodic inventory. Today, in-store check-out is all barcode scanning and increasingly self-service barcode scanning. An electronic transaction is captured without manual effort. On-line “check-out” is also free of the constraints that gave rise to periodic inventories. Updating inventory for each item sold need not take any manual effort or deprive the customer of any attention.

Periodic inventory was the best economic alternative at the time it was developed, because updating inventory as a part of each sales transaction was too costly. Today, it is the periodic inventory that is costly and inefficient relative to the potential for using point of sale data to update perpetually. Although it is hard to imagine life without periodic inventory, we need to try, because the original reasons for periodic inventory no longer exist.