Inventory is typically the largest balance sheet asset in most merchant companies. Accurate inventory is required to not only deliver timely and stellar customer service but also calculate profitability correctly.
The process of taking a physical inventory count once or twice per year to correct on hand counts by SKU is tedious, time consuming, expensive and disruptive because it generally halts all production.
Causes of shrinkage include theft, poor inventory processes, inaccurate systems, lack of cycle counting and not having full barcoding.
Larger companies have cycle counting processes. Cycle counting is an inventory audit process of regularly counting selected items or locations on a scheduled basis. Some companies have moved away from physical inventory once a). Cycle counting has been shown to be accurate, and b). Signoff is gained by internal and external auditing and finance.
Lock Down the Physical Inventory Count Process
These 20 steps will help make your physical inventory count more accurate:
Plan and prepare: Large inventories take one or two days to count. Schedule them well in advance. Assign captains, run through a mock counting process with new associates, including the procedure and how it’s executed.
Buddy up: If you’re not using barcoding, assign associates in pairs to count specific bin/slot locations, with one counting and the other recording. Pair seasoned employees with newbies.
Map out the facility in advance: assign specific bin/slot locations to count teams. Checking to make sure specific bin/slot locations have what the inventory system says they should is a good practice in advance.
Ditch unsaleable, damaged products in advance: This will also free up some space.
Clear as many returns as possible: This reduces the counting task. Make sure the buyer gets approval from the vendors.
Slow moving bulk inventory: This should be counted and “frozen” in advance of the inventory date, shrink wrapped and marked with an inventory count ticket including date, item/SKU, short description, count and associate’s name.
Ship all open orders prior to counting: If orders can’t be picked, packed and shipped prior to inventory, then don’t process them until after the count.
Suspend all normal operations: This may be extremely difficult in larger centers. Clear all in-process transactions including receiving, stock transfers, picking, packing, shipping and returns.
Use a “blind count process: Do this for SKUs where quantity and dollar value are not shown to the counters. Teams may be tempted to speed up the process and not count the inventory accurately.
Make IT staff available for system problems: These can include device problems, data communications, etc.
Calculate the inventory shrinkage: Do this after counts are processed and compared to the system inventory on hand. Calculate inventory shrinkage comparing system inventories on hand to counts by SKU.
Perform quality check counts. Also do this after counts are processed and compared. Have an experienced team do a post audit follow-up while the teams are still in the building and available. Don’t replicate a complete second count, but perform follow-up counts. Selection can be a combination of the following: At random; follow up on inexperienced teams; in historically problem products.
Provide food and drink: Keep the count teams engaged, fed and watered!
Other Critical Ways to Improve Inventory Accuracy
Here are several more best practices we have found to be effective in inventory count processes. These are extremely helpful to auditing inventory problems.
Establish an Inventory Department
Small-to-medium fulfillment centers may not have this function. Responsibilities include cycle counting, correcting warehouse back orders as they occur, implementing continuous improvement and bin management.
The inventory department should be charged with identifying and implementing ways to keep the inventory accuracy high and eliminate manual paperwork; correcting back orders; reconciling systems; and physical causes of inventory shrinkage.
Implement Cycle Counting
If you don’t already use cycle counting, make it a priority to understand the capabilities of your WMS and set it as a process improvement objective.
Secure High-Value/High-Shrinkage Products
Identify products prone to “grow legs.” Set up caged or locked areas with restricted access. Some high-value categories like jewelry may require a daily physical inventory.
Use Barcode Reading Technology
Many businesses still use manual count sheets. Save time and reduce human error by implementing barcode scanning. Software can turn smartphones and tablets into scanning devices for physical counts.
Consider an Inventory Count Service
Most companies use their own staff for inventory counts, but this may not be the most accurate way. Some people just aren’t organized and reliable inventory takers and need to be paired with someone more experienced. However, large-scale inventories taken by services is expensive. They also use a SWAT mentality to get in and out as quickly as possible.
RFID embeds SKU identification into packaging to keep track of product location.
Use an Inventory System Audit Trail
Newer inventory systems can improve audit accuracy through tracking in two ways:
- Tracking online inventory by bin/slot location and by product, including all transactions (sales, receipts, adjustments, etc.).
- Tracking all inventory locations where product is stored by SKU.
While all these best practices have merit and increase accuracy, they are best when taken together. Maintaining high accuracy is difficult without full barcode implementation. FC inventory accuracy is key to quick order turnaround and a stronger balance sheet.
Brian Barry is President of F. Curtis Barry & Company