The inventory reconciliation is a process of verifying the actual stock count with the data from the inventory control system. It helps you find any discrepancies in your warehouse management while also providing insights to minimize inventory shrinkage. It also helps improve the material handling procedures, and failing to reconcile your inventory can invite many problems. While it is not possible that both of these figures reconcile every time (or even for once), it is mandatory to conduct this process. The actual number of the stock held may vary due to a plurality of reasons including misinterpretation of the units, mishandling, miscommunication, and theft apart from the factors like depreciation and decay. Reconciling the records with the actual value enables businesses to reduce the loss incurred from these damages. In this article, we will study the methods of counting stock, and the best practices you can apply in your firm. Dive in deeper to learn more:
Methods Of Stock Counting
There are three methods of manual stock counting. Digital solutions such as barcodes and RFID tags can help automate the stock counting process as they are directly integrated with your inventory control system. In this section, we will discuss how to count your inventory and best practices for each method:
Annual Stock Count
Just as the name suggests, the stock count is carried out once in a year when every item in the warehouse is counted for record matching. It requires about a week to two weeks to complete the process. Many companies prefer to carry out annual stock counting after the regular working hours. Despite the overtime pay, it is more convenient for the businesses, since keeping operations shut for an extended period is more expensive. Counting your inventory annually can lead to significantly high inventory shrinkages, and detecting the reason behind any discrepancy becomes next to impossible. The annual stock count cannot sustain the current dynamic supply chain requirements and business models like dropshipping. Also, making any change in the processes and evaluating them will require an entire year. Thus, this method is not useful to businesses with a considerable variety of SKUs and inventory turnover. Also, it is not suitable for managing multiple warehouses.
ABC inventory analysis is derived from Pareto’s principle. It states that a majority of results come from a small portion of the efforts. It is also explained as the 80/20 rule, where 80% of the effects come from 20% of the efforts. In terms of inventory management, the SKUs are divided into three groups based either on the revenue they bring or how fast they sell. The A category includes the products that are most important for the business. They might sell in the most significant numbers, bring in the most sales, or the best seller for a particular time period. The goods falling under the B category are profitable, but their demand is limited to a specific set of customers or season. The products falling under the C category are the least selling ones and have high carrying costs. The stock counting for A group is done regularly while B and C groups are counted in decreasing frequency. Thus, your time and efforts are utilized in an optimal manner while focusing on the items that bring in the most profits.
In cycle counting, the products are counted on a pre-scheduled basis. Under this system, particular areas are assigned to staff, and the quantity of the items is verified against the inventory count. Many companies allocate a supervisor for every 4-6 staff members to ensure that the process is carried out correctly. The stock levels are then updated in the inventory management system. The cycle count is scheduled when the demand for particular items is low, and there is no incoming inventory. As the cycle counts are done very frequently, the time consumed and the human resources requirement is also lesser. You don’t need to halt the entire operations as the counting process is carried out in particular areas. Cycle counting is used by retail stores and other industries where the inventory turnover ratio is higher than the end of the spectrum.
Inventory Shrinkage costs USD 46.8 B to the US Retail Sector: Forbes
Among the methods as mentioned above, the annual stock count isn’t quite the right choice, while using the ABC method is preferable over cycle counting if you have a variety of SKUs.
Updating The Discrepancies In The Database
While updating the new inventory values, you should ensure that the data captured is free from errors. Failing to do so will result in a bullwhip effect in your accounts. Look out for double entries and improper use of SKUs. You should include the source of discrepancies and any related details to build an actionable plan for reducing them. We advise you to keep the part numbers in the loop to improve the quality of the insights and their actionability. Assigning the lost items’ ownership is also mandatory as it is the basis of all inventory control practices and interactions outside the organization.
After computing the variance and assigning probable reasons, you can update the database with the new values and study the results of your previous efforts. This part is more complicated for businesses since the depreciation, theft, damage, and shrinkage are interconnected to each other. Maintaining documentation of the stock movements and integrating them with your warehouse management system comes a long way in reducing errors in record keeping. The same applies to the invoices for the raw materials purchased and the items sold.
Inventory Reconciliation Challenges
Inventory reconciliation is a repetitive process for every organization, and reconciling will require accepting unknown shrinkages regardless of how frequent counting is done. However, you can face particular challenges overtly if proper tools and mechanisms aren’t deployed. They are as mentioned below:
- You need to isolate the area where stock counting is taking place completely. This means that both the inward and outward movement of goods is stopped, and operations are halted for the time window.
- The use of incorrect units is a common problem that deviates finances. For instance, measuring a chemical in liters instead of gallons and vice versa is an easy mistake when you are dealing internationally.
- In case a proper order management system isn’t used, tracking replacements, returns, and backorders also makes inventory reconciliation difficult.
- Using spreadsheets in today’s time creates unnecessary challenges. They might have done the work in the past, but they cannot sustain today’s fast-paced supply chains. They aren’t responsive enough for managing multi-channel sales and all other business functions. They leave a large room for human error. Also, there is no standard format for creating reconciliation reports in spreadsheets.
- Proliferation and mishandling also form a significant part of the discrepancies as found across various sectors.
Inventory Reconciliation Best Practices
Despite the challenges faced, you can work out on reducing the errors with the help of some simple yet effective mechanisms. In this section, we are listing down them in a generalized manner to suit the wide variety of our audience:
- Run the stock counting process frequently from the beginning and prioritize the goods based on their relevance.
- Maintain records for all the transactions and assign responsibility for each set of transactions to your staff.
- Use the variance for optimization and compare your performance with previous reconciliation reports.
- Use an automated solution for maintaining records and also implement barcodes for managing your inventory.
- Integrate the stock movement data from internal and external movements with your inventory management system.
- Ensure the fulfillment of material handling and storage best practices for minimum shrinkage.
The average inventory shrinkage rate is 1.33%
For any organization, the ability to increase the selling prices is very limited, but working on their bottom line is a promising tactic. Inventory reconciliation is an effective process for minimizing losses and improving workflows. The key to minimizing inventory shrinkage lies in the active participation of all departments in streamlining their respective portions. We hope that you find this article resourceful for your online store.
Neel is a creative who's always ready to lay his hands on anything that is innovative and captures masses. He is currently working with Orderhive. Apart from technology and business practices, he drools over psychology, history, and cinematography. You can find him on hiking trips, talking over anything from alien belief systems to 90's cartoon shows.
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