This paper examines two foundational concepts in inventory management: Materials Requirement Planning (MRP) and the distinction between perpetual and periodic inventory systems. It explains how MRP helps companies optimize production schedules, reduce overhead, and minimize excess inventory — using Toyota's Just-in-Time strategy as a practical example. The paper then compares perpetual inventory systems, which update automatically with each transaction using technologies like RFID, with periodic systems, which record adjustments at set intervals. It concludes by matching each system to the business contexts where it works best, such as grocery chains for perpetual and car dealerships for periodic.
Materials Requirement Planning, or MRP, can deliver a number of clear benefits for a company in almost any industry. Essentially, "MRP calculates and maintains an optimum manufacturing plan based on master production schedules, sales forecasts, inventory status, open orders, and bills of materials" (Inventory Solutions Logistics, 2007). It can be used to help a company manage its inventory so that financial resources are not wasted on stock that is simply taking up space. Too much inventory costs a company in overhead and can tie up capital that may be needed to fund other operations.
Utilizing MRP can help reduce inventory levels by planning production "so that the right materials are at the right place at the right time" (Inventory Solutions Management, 2007). Downsizing inventory can also help reduce work-in-progress, or WIP (Abdul, 2013). Toyota has implemented MRP within its Just-in-Time production strategy to keep overhead costs down while remaining fully capable of producing the required units at precisely the right time. Toyota keeps its inventory low until orders are received, allowing the company to retain extra capital for other expenditures. Still, when large orders arrive, the company is well-positioned to increase inventory to meet growing demand.
Inventory systems are important for accountants and management because they help track inventory levels and keep operations running smoothly. One widely used approach is the perpetual inventory system. According to the research, "under a perpetual system, inventory accounts and databases are updated automatically each time a product is received or sold" (Ingram, 2012). This automated accounting for the inflow and outflow of products keeps the system current without requiring extensive manual attention. When a product is sold or received, the entire system updates instantly, distributing the workload so that no one must spend hours reconciling figures at the end of a period — when inventory adjustments would be far more labor-intensive.
Perpetual systems record sales transactions immediately, eliminating the need for lengthy closing entries at the end of accounting periods. Companies use Radio Frequency Identification (RFID) tags to automatically adjust inventory records with each sale transaction. This is especially valuable for companies handling large volumes of smaller transactions. Grocery retailers such as Ralph's or Vons benefit significantly from this system given the size and turnover of their inventory stock.
In a periodic inventory system, "merchandise inventory and cost of goods sold are not updated continuously. Instead, purchases are recorded in a Purchases account and each sale transaction is recorded via a single journal entry" (Accounting Explained, 2011). All accounting adjustments and entries are therefore conducted at the end of a designated period. Periodic entries are particularly well-suited for closing entries, where inventory is updated at the close of a specific accounting period.
This type of system is more beneficial for businesses that handle fewer sales of higher value. For companies dealing in expensive units, periodic inventory accounting is the more practical choice. Accordingly, car dealerships or automotive resellers would benefit from using this type of system.
Abdul, Rob. (2013). Benefits of MRP manufacturing requirements planning. Press & Media. Web.
"End-of-period inventory updates for high-value goods"
"Cited sources for inventory management concepts"
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