No one who is of sound mind enjoys taking a physical inventory. In fact, many people prefer a visit to the dentist to spending a weekend counting every piece of every item in their warehouse. Even worse than a physical inventory is a physical inventory which results in an inaccurate count of what is in stock. After all, the primary purpose of an annual physical is to ensure that the product on-hand quantities in your computer reflect what is actually on the shelves in your warehouse. If, during the counting process, your people overlook certain products and miscount others, the considerable amount of money involved in taking the physical is totally wasted. In fact, most distributors would be better off with no physical inventory than one which results in inaccurate counts.
In the last article, we discussed preparing for an effective physical inventory. Now it’s time to examine how careful supervision and administration can result in an accurate count. Examine the following “better management” practices and determine how they can be adapted to fit into your company’s procedures.
The first step is to break up the physical into a series of small physicals. Counting five, ten, twenty, or thirty thousand products is a formidable task. Your employees can easily become overwhelmed and discouraged by the volume of data that needs to be collected. I have seen many instances in which people become so frustrated that their only goal is to quickly “finish the [expletive deleted] physical and go home.” It’s not surprising that under these conditions some aisles, bins, surplus quantities, or entire products are missed. To prevent this situation:
Create a map of your warehouse – Include every shelving unit, pallet rack, and all other places where material is stored. Be sure to include the tag and hold bin, receiving dock, and vendor return area. Remember that all material in your warehouse at the time of the physical inventory must be counted.
Divide the warehouse into counting areas – A physical inventory is a “wall-to-wall” count of your warehouse. Counters should be assigned to geographic areas of the warehouse, not product lines. If you organize your count by product line, some parts, located between major lines, may be missed. Also, if you count by product line, it is more difficult to account for misplaced material. That is, the one piece of one product line stuck in the middle of the products of another line. When establishing count areas, remember that a count team should normally be able to count between 50 and 120 items in an hour. Hard-to-count products, such as those that need to be weighed or closely examined, take more time. On the other hand, boxed items with just a few pieces on hand can be counted in a few seconds.
Consider counting surplus areas and slow-moving products before the scheduled physical inventory – Most distributors try to count all of their products in just one day. That’s a lot of work. And usually there is significant pressure to finish so that normal business can resume. The resulting tense atmosphere naturally leads to errors.
If some items can be counted in advance, the pressure is reduced. The possibility is small that significant amounts of your dead stock, slow moving inventory, and surplus material will move during the week preceding your physical. So why not the bins containing these items before the day of the “big count”?
Be sure to mark bins and shelves that are pre-counted. And, keep in mind that you must have some mechanism for adjusting these quantities if some amount of a product is sold or received after the bin has been counted.
Ship everything you can before the physical begins – If it isn’t in your warehouse, you don’t have to count it. Pay particular attention to the tag and hold and vendor return areas. This is the perfect time to clean out the cobwebs and tackle the work that everyone has put aside.
Don’t move misplaced material while you count – The time to clean up your warehouse is before the physical begins. Do not move material while people are counting. You run the risk of counting it twice, or not at all. Record misplaced material where it lies, and mark it so it can be moved as soon as the physical is completed.
Don’t fill orders or receive material during the count process – It is very difficult to hit a moving target. If material is moving while you are performing a “wall-to-wall” count, you again run the risk of missing or double-counting some products. Sure, one of your customers may have an emergency while your physical is in progress, and a small order may have to be filled. If this occurs, an auditor must determine how the emergency order affects the physical. She must determine:
- Was the bin containing the product counted before the order was filled? If so, no adjustment is necessary if the emergency sales order will be processed after the physical is completed.
- Was the order filled before the counters reached the bin? This will require an adjustment. The quantity taken must be added back into inventory to ensure that your stock balances, after the physical is completed, are accurate.
Audit while people are still counting – As soon as counters are finished with a small section of bins or shelves, an auditor can verify the counts of selected products. Don’t choose these products at random; instead, concentrate on your “A” items. These are the items that have the most dollars flowing through inventory. Experience shows that counting errors occur much more frequently with fast-moving products than slow-moving items or dead stock. As soon as an auditor verifies that the counts in an area are accurate, the quantities can be entered in your computer. If the auditor finds several counting errors in an area, the entire section should be recounted. Ordering a recount probably will not make the auditor a popular person, so be sure that people charged with this difficult task realize the importance of an accurate physical and are committed to the success of the project.
Print and review discrepancy reports – Some distributors feel that if they conscientiously audit counts, the physical will be accurate. But errors may also result from things that are not related to the actual counting such as:
- Mistakes made as counts are entered into the computer.
- Unit-of-measure errors in computer records. For example, a product may be counted in pieces, but maintained in the system in pounds.
After all counts have been entered in your computer system, discrepancy reports should be printed. These reports should list any item with a significant difference between the on-hand balance in the computer (before the physical) and the counted quantity. Good discrepancy reports highlight items with significant differences in value (i.e. differences in the on-hand quantity times cost). You should thoroughly research these “challenges” before the physical inventory is completed.
Review your success, record your procedures – After you’ve finished your physical count, updated your records, and reopened for business, you have one more thing to do before forgetting about physical inventories for another 10 months or so. Sit down with everyone who participated and discuss what happened. What worked? What didn’t? Who should perform what tasks next year? What could be changed to make things easier and produce a more accurate count? Place these suggestions in your physical inventory file and review them when it comes time to begin preparations for your next count.
Good Luck – In these articles on physical inventory, we’ve tried to provide you with some guidelines which hopefully will make this year’s count less stressful and more accurate. In one word: successful! Next month we’ll look at another method for maintaining accurate computer inventory levels. One which may even eliminate the need for a full physical count! It’s called “cycle counting.”