Full Inventory Counts Are Costing You Money
The importance of accurate inventory information
Accurate inventories are critical for calculating the cost of goods sold, an essential component of preparing the company’s balance sheet and earnings statement for investors. Inaccurate numbers can lead to fines, penalties, and a lack of investor confidence.
Maintaining an accurate count of your physical inventory is also important to businesses by identifying:
- Discrepancies between the inventory tracking system and physical inventory.
- Where inventory is overstocked, which represents an unnecessary expense and waste.
- Where inventory is understocked, which can potentially lead to items being out-of-stock and customer dissatisfaction.
- Areas where the inventory of popular or high-value items is significantly lower than should be in stock, indicating shrinkage through theft, breakage, clerical errors, etc.
- Items that are moving vs. those that are not, critical for stock replenishment decisions.
What is counted?
Counting physical inventory includes all your warehouses, store shelves, manufacturing floor, third-party warehouse locations, and items being returned or in transit between warehouses and stores.
Counting teams work in pairs, with one person conducting the count and the other recording the information, including item description, quantity, part number, warehouse/bin location, and unit of measure.
How is the count conducted?
Four of the most common methods to conducting inventory counts: Full (or periodic) counting, cycle counting, tag counting, and ad hoc (or spot) counting.
In a full inventory count, the company sets aside several days to conduct a complete count of every item in inventory across all their warehouses. Companies often suspend incoming and outgoing deliveries to ensure the count is accurate. Anything ordered and arrives is separated so the ongoing count is not affected. Full counts require a significant amount of time and staff to complete and often require operations be suspended for the duration of the count, which can significantly impact the business. Because of the massive effort, full inventory counts are conducted only once or twice a year. Any discrepancies in warehouse management software, evidence of theft, or replenishment problems might go unnoticed for a year before the issue is raised to management.
Cycle counts break the inventory up into groups by type or location. The count team only counts the items in a specified group. This means that the count team might be only two people, spending several hours daily performing inventory counts over weeks or months. They focus on counting only the items in a specific group each day. Cycle counts are less impactful on the organization because they do not require shutting down all operations for the duration of the count. It can also be conducted by a handful of people for a specific time range, usually a quarter.
For tag counting, every item in inventory is given a tag. Count teams fill in the item count and information. The tags are collected and entered into the system at the end of the count.
Ad hoc or spot counting is often used when there is a question about the inventory count in one area, even if it was recently counted. Count teams are assigned a designated area or item list. Once the count is complete, they update the information in the warehouse management system.
Other counting methods include RFID, barcode scanning, and drone scanning.
Companies should enforce Segregation of Duties among the count teams. No one should be responsible for counting inventory items under their direct control as part of their regular job requirements.
Inventory counting method: Which is best?
While full counts are most straightforward to understand and conduct, they are labor intensive, error-prone, and require that operations be suspended until completion.
For many companies, cycle counts are the most efficient. Rather than conduct a single, massive inventory count, the inventory is counted in pieces distributed over a specified time period, minimizing the impact on the company and allowing the business to continue operations. Once completed (say in four months), the cycle can be repeated repeatedly. Because cycle counts are ongoing, they can uncover problems like fraud, theft, or poor training.
Cycle counting methods
Variations in how a cycle count is conducted focus on the type of item assigned to be counted next.
- The ABC, 80/20, or Pareto method: This popular cycle count method uses the Pareto Principle, which states that 20% of the items in your warehouse are responsible for 80% of your sales (usually because they are the most popular or most expensive items). In ABC cycle counts, items are assigned a letter (A, B, or C) based on their sales frequency or value. A, the most frequently sold/most valuable items are inventoried more often than Bs, which, in turn, are inventoried more frequently than Cs.
- Grouping by warehouse location or Bin Counting: This method simplifies the counting process by assigning the next group to be counted in bins in the same vicinity as the others.
- Random grouping: The items to be counted are selected at random.
Optimize your inventory management
If you need help getting your inventory under control, contact us. ArcherPoint’s inventory management experts will evaluate your situation, recommend process improvements, and help you optimize Business Central for your unique inventory management requirements.