Maintaining accurate inventory records is paramount for smooth operations and customer satisfaction. While inventory management systems are relied upon to provide accurate stock counts, discrepancies can occur. That’s where taking a physical count of inventory comes into play.
Retailers struggle to effectively manage their stock, with only 6% of companies achieving full supply chain visibility despite growing inventory levels. In this Blog, we’ll dive into physical inventory counts – what they are, why they’re essential, and the best practices to ensure accuracy.
What is a Physical Inventory Count?
A physical inventory count refers to physically counting and verifying the quantity of items or materials in stock. It involves thoroughly examining the physical inventory counts to ensure alignment with the recorded inventory levels in the system.
Physical inventory counts provide an accurate snapshot of the stock on hand, allowing businesses to identify discrepancies and ensure accurate obsolete inventory management. Accurate inventory counts are vital for informed decision-making, optimizing operations, and preventing errors and stockouts.
What is Included in the Physical Inventory?
Let’s explore the scope of physical inventory and gain insights into the key components considered during the counting process.
Raw Materials
These materials can sometimes be considered marketable as they can be sold directly to other businesses. Examples include:
- Flour and sugar used in bread-making
- Wood
- Plastic
- Metal in furniture production or bolts of textiles
- Fabrics used by design houses.
Work-in-process
An example of WIP would be a reusable drinking bottle currently molding using plastic and stainless-steel materials. However, it still requires additional processes like painting and packaging before it is ready to be sold.
Finished Goods
From a direct-to-consumer standpoint, finished goods are the most valuable assets for an online brand. Organized by SKU, finished goods are ready for sale to end users once received, stored, and prepared for picking, packing, or kitting.
MRO Supplies
MRO (Maintenance, Repair, and Operations) encompasses the tools and equipment essential for maintaining, repairing, and operating production processes to manufacture finished goods.
While these units are not typically integrated into the final products, they are classified as inventory items in e-commerce accounting.
4 Methods of Physical Inventory Counting
In physical inventory management, four distinct methods are employed for inventory counting, each serving unique purposes and offering varying levels of efficiency and accuracy.
Manual Counting Method
Manual inventory counting involves store associates manually counting each stock item in both the stockroom and the sales floor, recording the figures using pen and paper. However, this method is often avoided due to its time-consuming nature and susceptibility to human error.
- Advantages: Lower cost.
- Disadvantages: Prone to human error.
Electronic Counting Method
Electronic physical inventory counting involves store associates utilizing a barcode scanner and POS system to swiftly and accurately count stock, surpassing the efficiency of manual counting.
Each scanned item updates the inventory level electronically, minimizing the risk of over or under-counting.
- Advantages: Reduces the risk of over or under-counting.
- Disadvantages: Still time-consuming and requires staff involvement.
Cycle Counting Approach
This technique allows for accurate inventory management while reducing time and effort by breaking the task into smaller, more manageable portions.
Unlike full inventory counts requiring store closures or overnight work, cycle counts can be conveniently performed during regular working hours.
- Advantages: Can be conducted during the workday, minimizing disruption, and is less time-consuming.
- Disadvantages: Not scalable for expanding businesses.
Full Inventory Counting Approach
This comprehensive counting process enables retail teams to establish an accurate record for the new year, encompassing the total cost of goods sold and the retail value of the merchandise.
While full inventory counts can be time-consuming, requiring store closures or overnight work for larger SKU counts, many small retailers opt for periodic cycle counting to mitigate these challenges.
- Advantages: Provides precise inventory numbers for balance sheets.
- Disadvantages: Often necessitates store closures and involves labor-intensive efforts.
When to Conduct Physical Counts of Inventory
Regular physical inventory counts are crucial for maintaining accurate inventory records and efficient inventory management. Typically conducted quarterly or bi-monthly, periodic inventory audits offer optimal results.
Counting inventory too frequently may yield similar outcomes without substantial benefits, while infrequent counting increases the risk of crucial information being overlooked.
Importance of Physical Inventory Count
A physical inventory count holds significant importance due to its various benefits, including:
Ensure Accuracy and Verification
This process helps identify and address discrepancies, preventing stockouts, overstocks, and discrepancies in financial statements.
Facilitate Financial Reporting
Physical inventory counts provide essential data for precise calculation of the cost of goods sold, impacting gross profit and net income determination.
Safeguard Against Loss and Theft
Regularly conducting comprehensive stock counts enables businesses to detect discrepancies, potential theft, and inventory shrinkage, leading to the implementation of effective loss-prevention measures.
Enhance Operational Efficiency
It facilitates the identification of slow-moving or obsolete items, enabling informed decisions regarding markdowns, promotions, or product discontinuation.
Optimizing inventory levels through these measures helps reduce carrying costs, minimize storage requirements, and enhance operational efficiency.
Optimize Supply Chain Management
Accurate inventory counts play a crucial role in efficient supply chain management. They enable businesses to prevent stockouts, fulfill customer orders on time, and uphold customer satisfaction.
Support Planning and Forecasting
Physical inventory counts offer essential data for demand forecasting, production planning, and setting optimal reorder points.
Accurate inventory levels enable businesses to optimize procurement, minimize lead times, and maintain a seamless supply chain, avoiding costly production delays and customer dissatisfaction.
How to Conduct a Successful Physical Inventory Count
Executing a successful physical inventory count requires adherence to certain best practices, including:
1. Begin with A Plan
Before conducting a physical inventory count, start with a well-thought-out plan. This includes:
- Determining the counting interval
- Deciding how often the counts will occur
- Establishing a schedule for future counts.
With a clear plan, businesses can ensure a systematic and organized approach to inventory management.
2. Establish the Counting Interval
To maintain accurate inventory records, you must establish a counting interval that suits the needs of the business. This interval can vary depending on the industry, seasonality, and inventory turnover rate.
By regularly conducting inventory counts, businesses can identify any discrepancies, prevent stockouts or overstocks, and ensure optimal inventory management.
3. Compile the Inventory Item List
Creating a comprehensive inventory item list is a vital step in conducting a successful physical inventory count. This list should include all items and SKUs that need to be counted.
Compiling a detailed inventory item list can ensure that nothing is missed during the counting process and minimize the chances of errors or omissions.
4. Determine the Inventory Date
It is recommended to choose a date when inventory levels are relatively stable, such as “during a quieter period” or “at the end of a business day.”
Carefully selecting the inventory date can minimize disruptions, reduce the likelihood of inaccuracies, and obtain a true reflection of their inventory status.
5. Assign Inventory Responsibility
Assigning inventory responsibility to designated individuals or teams is essential for a successful physical inventory count.
Clear roles and responsibilities should be communicated, ensuring that each person understands their tasks and areas of focus during the count.
6. Schedule Staff Training
You must schedule staff training to ensure accuracy and consistency during the physical inventory count. Training should cover the inventory count procedures, the equipment used, and specific protocols or guidelines.
Providing thorough training can enhance the efficiency of the count and reduce the chances of errors or discrepancies.
7. Notify External Partners and Storage Locations
Informing suppliers, distributors, or third-party warehouses about the count helps prevent any disruption to the supply chain.
Notifying external partners and storage locations can coordinate activities, minimize interruptions, and maintain inventory flow.
8. Communicate with Staff
Providing clear instructions, outlining expectations, and addressing any questions or concerns help ensure that everyone is on the same page.
Fostering open communication can promote collaboration, boost engagement, and facilitate a more efficient count.
9. Arrange the Required Equipment
This may include:
- Barcode scanners
- Clipboards
- Pens
- Inventory software and any other tools or technology required for accurate counting.
Arranging the required equipment in advance can avoid delays and ensure a smooth counting process.
10. Verify the Functionality of Electronic Equipment
For physical inventory counts involving electronic equipment, you must verify their functionality before the count begins.
This includes:
- Checking barcode scanners
- POS systems
- Other electronic devices
11. Evaluate Apps and Software
This includes reviewing their functionality, compatibility with existing systems, and any additional features they offer.
Carefully evaluating apps and software can choose the most suitable tools to streamline the counting process and enhance accuracy.
12. Examine the Inventory in Advance
This step involves visually inspecting the inventory, identifying damaged or expired goods, and ensuring that items are properly labeled and stored. Examining the inventory beforehand can address any issues or discrepancies, ensuring a smoother count.
13. Organize the Space for the Inventory Count
To conduct a successful physical inventory count, you must organize the space where the count will occur. This involves:
- Arranging the inventory in a logical and systematic manner
- Clearing any clutter
- Creating designated areas for different categories of items.
Organizing the space can improve efficiency, minimize disruptions, and make the counting process more manageable.
14. Perform Inventory Clean-Up
Performing an inventory clean-up before starting the physical inventory count is recommended. This involves:
- Getting rid of expired, damaged, or obsolete items in the inventory
- Updating records
- Disposing of unusable goods
Inventory cleaning can help ensure the stock count is accurate, decreasing the likelihood of mistakes or inconsistencies.
15. Identify Excluded Stock Items
To ensure accuracy during the physical inventory count, you must identify any items that shouldn’t be included, such as items on consignment, items held for repairs, or items on loan.
Businesses can prevent excluded items from being counted in the inventory by clearly identifying them. It helps maintain accurate inventory records and ensures the actual stock levels are reflected in the count.
16. Create the Final Item Count List
Businesses should make a complete list of all items that need to be counted, along with their SKUs or barcodes, to ensure an accurate count and avoid missing anything. This list will serve as the final item count and help minimize errors.
17. Provide Staff Training on the Procedure
Staff training on the counting procedure is crucial for a successful physical inventory count. This involves:
- Explaining the process step-by-step
- Clarifying counting methods
- Addressing any specific instructions or guidelines
Thorough staff training can improve accuracy and consistency and reduce errors during the count.
18. Familiarize Staff with the Equipment
To optimize the effectiveness of the count and minimize disruptions, you must provide comprehensive training to staff on operating the equipment involved, such as barcode scanners, inventory management software, and other counting tools.
Businesses should ensure their staff is familiar with the equipment to improve efficiency and accuracy during the physical inventory count process.
19. Conduct a Demonstration
A demonstration with the staff can help ensure the process is understood and followed correctly. During this demonstration, the staff should be briefed on the following:
- The counting processes
- What to do in case of discrepancies
- The safety protocols to be followed
Conducting a demonstration can help alleviate any confusion or misunderstandings and ensure a successful count.
20. Cease Data Entry Prior to the Count
Before printing the line-item list for the inventory count, you must freeze all data entry activities in the inventory management system.
By doing so, businesses can minimize discrepancies and ensure that the printed list accurately represents the current state of inventory without any changes or updates being made during the counting process.
21. Perform a Pre-Count of the Inventory
This pre-count serves as a dry run where you can identify and address any counting issues or discrepancies.
During the pre-count, carefully examine the items and make annotations to indicate whether a particular area requires recounting or if it is considered complete.
22. Print the Count List
If you are conducting the inventory count manually using pencil and paper. In that case, it is recommended to print the final list either the evening before or on the morning of the count.
This lets you capture last-minute details and ensure the printed list accurately reflects the most up-to-date information.
23. Temporarily Suspend Other Activities
You must temporarily suspend any other company inventory-related activities during the full count. It means refraining from receiving or adjusting stock until the count is completed and reconciled.
By implementing this freeze, businesses can ensure that the count remains accurate and undisturbed, reducing the chances of discrepancies and allowing for a smooth and reliable inventory reconciliation process.
Physical Inventory Count Best Practices
Implementing physical inventory counting best practices is essential to maintain accurate inventory records and improve operational efficiency.
Leveraging Technology and Software Solutions
By incorporating barcode scanners, inventory management software, and automated data collection systems, businesses can streamline the counting process, improve accuracy, and enhance efficiency.
Staff Training and Standard Procedure Establishment
Providing comprehensive training to staff members on inventory counting techniques and establishing standardized procedures ensures consistency, minimizes errors, and promotes a smooth inventory counting process.
Enforcing Adequate Security Measures
Implementing security measures such as restricted access to inventory areas, surveillance systems, and inventory control procedures helps safeguard against theft, loss, and unauthorized access to inventory during the counting process.
Promptly Resolving Discrepancies
Identifying and addressing discrepancies between the physical count and inventory records immediately allows for timely investigations, correction of errors, and inventory reconciliation, ensuring accurate and reliable inventory management.
Streamline Your Inventory Management Process – Partner with Hopewell Logistics Now!
Accurate physical inventory counts are vital for businesses to ensure inventory reconciliation and minimize discrepancies between physical counts and records. Implementing these best practices can streamline your inventory management process and gain better control over your stock levels.
At Hopewell Logistics, we recognize the significance of an efficient and precise physical inventory count. Our team is equipped with exceptional expertise and industry-leading solutions to assist you in improving your inventory management process.
