The Ultimate Guide to Streamlining Physical Inventory Processes in Warehouses

If people don’t understand the importance of accurate stock balances, your chances of getting accurate counts are low. Thus, it is essential to explain why a physical inventory is required for all participants. Everyone in your company must understand that having a physical inventory is not designed to please your accountant or tax authorities.

It is to make sure that the amount of each item you have on your computer corresponds to the amount that is actually on the shelf. Customer service personnel must be able to trust your computer’s stock quantity. Physical inventory management is a very costly process.

It typically means a lot of labour costs and time lost in production. The money spent on the real thing is wasted if the resulting count is wrong. What steps can you take to make sure that your physical inventory is adequate? When people are preoccupied, they may not be focused on the tasks at hand. 

Physical inventory counts are done manually, which is time-consuming and prone to errors. Inventory check or pick processes, for example, cause errors to surface when someone has to physically touch or scan inventory during the put-away process.

Finding, counting, and recording each item takes a lot of time, but the fact that those items may be stored in several places in the warehouse or storeroom makes the process even more complicated. Even after the physical count is finished, it takes even more time to figure out what went wrong, fix any errors, and follow the procedures to avoid making the same mistakes again.

Physical counts of Inventory

Customer Satisfaction & Efficiency

Customers who don’t want to deal with uncertain stock levels in the era of instant gratification benefit from performing a physical inventory count in the end. Companies can avoid costly overstock situations and fulfil orders promptly when needed with updated inventory data. They can also more effectively plan for losses.

Reduced Inventory Holding Costs

Every day an item stays in stock, its value decreases. Over time, the item’s actual value begins to outweigh its stock cost. Companies can improve their counting accuracy and drastically reduce the time required to complete this crucial project by immediately addressing inventory discrepancies by using scanners or other stock-counting technology tools in SKU. 

Discrepancy Identification

Physical inventory counts, which act as a check and balance on cycle counting, help managers find any differences between what items are actually in storage and cycle count reports.

Unrecognized Inventory Discrepancies

Lost, stolen, or broken items can cause a discrepancy between what is shown in the inventory management system and what is actually there. When these scenarios occur, the system cannot recognize the items unless staff manually enter them.

Types of Stocks Found in an Industry

Inventory basically falls into the overall categories of raw materials, work-in-process, finished goods, consumables, service repair, operating supplies & spares.

Work-in-process (WIP)

Items are defined as the period during which the raw material is transformed into subassemblies, finished products, and partial products. Delays in work, queuing bottlenecks, and long intervals between operations are examples of work in progress.

Finished product

This is a product that is ready to be sold to current customers. It can also be used to protect manufacturing from market demand that is unpredictable or unpredictable. In other words, a manufacturing company can ensure a year-round supply of goods in order to ensure predictably higher sales during the holiday season.

Consumables

Various operations use light bulbs, hand towels, computer and photocopying paper, brochures, tape, envelopes, cleaning materials, lubricants, paint, dunnage (packing materials), etc. Often, these are treated as raw materials.

Service, repair, replacement, and spare items

These are after-market products that are used to “keep things going” as long as a certain machine or device is in use (on the market) and will require maintenance and repair in the future.

Difference between periodic cycle counting and physical inventory counting

Cycle counting not only makes the count more accurate but also allows for an annual review of each line or product segment. This counting typically occurs once a year. IRS regulations and Generally Accepted Accounting Principles (GAAP) dictate either using a perpetual counting system or counting the entire inventory on an annual basis. Thus, the organization must choose which counting system is best for it. 

Cycle counting is a constant counting method that counts a small subset of inventory on a specific day in a specific place. Cycle counts regularly verify your system’s inventory accuracy. Large-scale companies, which have a lot of items in their inventory and can’t be closed for a long time, likely like to use this method of counting for their annual physical inventory count. Cycle counts provide organizations with the following advantages:

Avoids annual physical count, reduces operational interruptions, and saves more money. By giving buyers insight into what items should continue to be stocked, this process improves inventory turnover and helps in identifying sales opportunities that have been missed.

While the benefits of cycle counting have rendered annual physical counts nearly obsolete, some organizations with a small inventory may opt for an annual physical count. 

One advantage of doing an annual physical count is that it lets you start the new year with a clean slate by closing down operations at the end of the year and counting inventory. While starting the new year fresh is nice, the drawbacks of annual physical counts usually outweigh the benefits. Annual physical counts have some drawbacks, including:

Receiving, production, and shipping operations must be stopped to count all inventory, which takes time and resources. Counting that is not automated has a higher probability of error.

Challenges With Physical Inventory Counts

1. Tracking the quantity of goods purchased and sold is theoretically simple, but it is sometimes challenging to manage. It also includes actual product purchase costs and inventory turnover rates, both of which can raise a company’s total inventory investment. Companies must have enough inventory on hand and in the right places to meet demand while avoiding overstock and stockout. 

2. Inventory counting manually, which typically requires paper count cards, sheets, and pencils, is one of the most challenging aspects of physical inventory counting. Additionally, because some businesses may not have enough employees, they may have to hire temporary or part-time workers to help with the accounting, which leads to more costs.
3. Although the required materials are cheap enough, this method requires a lot of time, causes mistakes, and requires the physical facility to be shut down. Companies can simplify this by incorporating RFID, barcodes, or mobile devices into their mix. However, even the electronic method for physical inventory counting is not entirely error-free and requires more time and resources.
4.  If not done properly, physical inventory counting not only takes time but can also cause errors. These errors can affect the company’s bottom-line profitability and doubt its stated financial results once they are added to the company’s annual financial report and other important statements.

Inventory Auditing Methodologies for Accuracy and Efficiency

1. Daily Inventory Cycle Counting: To allow proactive identification and resolution of inconsistencies, which results in high inventory accuracy.
2. Reconcile Physical Count with Record: For the purpose of identifying any differences (theft, damage, data entry mistakes, or other causes).
3. Investigate Discrepancies: Involves looking through transaction records, personnel interviews, and security measures to find the root of the problem.
4. Quarterly Audit Reporting: The ultimate end-to-end report is presented to the clients every three months, with daily inventory coverage of 3.33%.
5. Process Improvement: We apply process improvements, optimisation, and streamlining inventory techniques based on audit results.

Conclusion

Everyone in your company must understand that having a physical inventory is not designed to please your accountant or tax authorities. It is to make sure that the amount of each item you have on your computer corresponds to the amount that is actually on the shelf. Customer service personnel must be able to trust your computer’s stock quantity. What steps can you take to make sure that your physical inventory is adequate? When people are preoccupied, they may not be focused on the tasks at hand. Physical inventory counts, which act as a check and balance on cycle counting, help managers find any differences between what items are actually in storage and cycle count reports. 

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