Does the thought of running your inventory count fill you with dread, or did you just have one with large losses and you don’t know what went wrong? Stock counts can be hard to get your head around, and can lead to stresses, headaches and your manager (who can often by the CEO/CFO/MD/FD) shouting at you as you’ve lost a large section of your stock. It’s even worse if you’ve got an auditor looking over your shoulder getting increasingly concerned about signing off your audit. Stock issues can also cause your costs to be wrong on your sales, so you may be losing money on sales that you think are profitable, endangering your company’s survival.
Fortunately I’m now a veteran of many inventory counts, and have experimented with a lot of different methods and have ended up with my perfected version, which I’m happy to share with you. This method involves nothing more than stickers, counting tags, pens and the odd piece of paper / calculators, so no large investment in barcode scanners (or outside counting agencies) is needed!
I’ve audited and then run a large number of stock counts in a variety of companies. The first one I ran (2 weeks after I left audit for the real world of business) was in an unloved warehouse where we had a chaotic count; eventually we had to stop doing recounts as we were getting different counts 5 times in a row on the same items. In the end over 10% of our stock was a stock loss on the day, and we had some awkward explaining to do.
I vowed that I’d never have such a bad result again, and have put in lots of effort to improve my systems, trying many different methods over the years, drawing from my experience of inventory count methods at a lot of companies of all sizes. My most recent inventory count had less than a 0.005% stock adjustment (stock overages added to stock unders NOT net adjustment), and I’m confident we can beat even that. I’ve even changed company (to a different industry) and quickly replicated my successes there (with over 99.5% reduction in differences in 2 years) by rolling out this method.
So how do you get results like that? Easy – here’s my step by step guide to sorting out your warehouse and getting tiny inventory count differences. It will take a bit of effort but it will be worth it in lower stock differences, and you should end up with a more efficient warehouse at the end too. It’s highly scalable – it’s been tried and tested from small to large warehouses and it should work almost everywhere.
Step 1 – sort your warehouse
Go out into your warehouse – does it look well ordered or a disorganized mess? Step 1 is to sort it out, so that the stock is easy to count when the time comes.
- Make sure every shelf has a unique reference. It’s usually easiest to give each row of racking (shelving) a section reference, e.g. A, B, C etc, then the sections, then the shelves. Write these references on the racking
- Everything should be in a box on a shelf where possible, and each box should contain one type of item only
- Everything should be ordered neatly on the shelves, with as far as possible no boxes behind other boxes (definitely not if they have different products in them)
- There should be no rubbish in the warehouse, and it should also preferably be clean
- Where possible, all items of one type should be kept together
- Any goods not yours (invoiced not dispatched, consignment stock etc.) should be clearly marked and preferably be put in a different area
- If you have some very slow moving stock (not likely to be used in the next six months), you can pre count these items (two people individually count and check that they’ve come to the same total), seal the box with tape, put a sticker over the opening and both counters sign and date the label. This total can then be used during the count meaning people don’t have to open and count, saving time.
Step 2 – inventory count preparations
You need some counting tags; these should have:
- At least 2 pages per tag
- Carbon copy (so anything written on the top page also copies down to tab 2)
- Preferably the categories already written on – part number, location, quantity and some room for notes / initials
- Numbered, so that no two tags used in the count have the same reference
- Preferably sticky on the back so they can be attached to stock items (if not, you’ll need some tape)
You also need to order some colorful stickers (stars or circles are fine, although colored tape will do). The teams may also want paper and calculators to help them count (and everyone will need pens).
Choose your teams of 2 for the counting. It is essential that each of these teams include:
- At least one good counter (preferably both)
- At least one diligent (honest and thorough) employee (preferably both) who will keep the count accurate and keep the team to the count rules
- At least one person whose reputation doesn’t depend on the count having no differences (this may mean that one person has to not be in logistics, or not a warehouse supervisor etc.). The diligent and independent person on the team should ideally be the same person to keep the count accurate!
- It is worth having a spare person or two, as you don’t want the count to be disrupted by a sudden illness / car breakdown
Split the warehouse into roughly equal sized areas (taking into account that smaller items take longer to count), with one area per team. Alert everyone (sales, logistics etc) that nothing is go in or out on the day of the count, and the system will be closed off and no sales, booking in will go through. If any stock is delivered, it will have to be put in a holding area and processed later.
Step 3 – inventory count methods
Get your teams together and explain to them the count method:
- Every pair will be issued with a run of numbered count tags made with carbon copy paper (i.e. if you write on the top sheet, it goes automatically copies to the second sheet), with more tags than the number of stock categories (part numbers) in their count area
- Inform each team of the area they are going to count
- It will be a blind count – nobody who is part of the count should know before they count an area what to expect to count
- They should work methodically (top left to bottom right) on each shelving section, and use their numbered tags in order.
- If a box is not sealed as received from the supplier (or sealed with a signed sticker as above), it needs to be opened and counted
- For each item, both people will independently count the items in the box, and then compare totals. If the totals agree, the number is taken, otherwise they recount the items in the box.
- Once the total is agreed, they write the part number, location and quantity on the count tag, and stick one part of the count tag to the box / item
- If there is more than one item e.g. if you have four boxes of one stock part in a location, you’d put the total on the tag, and mark the other three with stickers (or colored tape)
- In the notes section, put how the total is made up, so if you have 3 boxes of 20 and one with 18 in, put 3x20 + 18 on the notes section. This makes recounts a lot easier, as you can see where the differences are in the counts without necessarily having to recount all the boxes.
- Each tag should be signed or initialed by both counters, to say that they have individually counted the items
- By the end of the count, everything should have a count tag or sticker on - ask a couple of responsible people to check this
- Make sure everyone is aware of regulations such as health and safety (especially if they’re not used to being in the warehouse), as you don’t want someone trying to climb up some racking to count a high box and falling!
- You will need to stick around to make sure everyone is following the method, and to help out with questions. You can also have a central area to count so that your time is fully utilized (this also encourages everyone along if you’re active).
Step 4 – recounts
Take the copies of the count tags not stuck to the stock and enter the values (and tag numbers) into the accounting system. If your accounting system can’t cope with this, make a spreadsheet of the original stock figures and the count figures, and compare the two. You should also enter the ones which weren’t used – this will show you haven’t lost any as tags entered will cover the whole number range.
Run a report which has the differences between your system and the count. If your system can’t give you a differences list, it’s easy enough to set up something up in Excel which will compare your counts to the system value.
Order your list by value and start recounting the differences in order of size (each item should not be recounted by the individual team that did the first count). If it’s taking a long time to do the count, you can investigate overages (where you have more stock than you expected) before the count is finished.
If you find where your count was wrong, alter it on the system (or spreadsheet) and rerun the differences. Keep going until only an acceptable level of differences are not investigated – ideally none. Record your inventory count differences as both gross (your increases in stock added to your decreases in stock), and net (your increases less your decreases) – these are the numbers to beat next time!
Step 5 – Analyze your results
The stock count doesn’t end with the count result, this is only the start! For each of your big differences (at very least the top 10, but eventually you want to find them all), you should work out how the stock went missing (or appeared). You then need to put a stop to this so that you won’t get the same differences next time. Things to look out for are:
- Have you done a similar but opposite adjustment last count? It might be down to previous (or current) poor counting
- Does the stock have resale value (easy to sell down the pub, large amounts of metal that could be sold for scrap etc)?
- It may be worth moving to a more visible area
- Your night time security if people can come in after everyone has gone home and taken items
- High value / high risk items can be put in a locked area that only a few people can have access to
- Have you had a stock out on an item similar – if someone has swapped for a similar item, you may end up with too many of one stock and too few of another
- Check your process for consumables levels – flimsy or small objects like washers can fly off or get damaged easily (and so may end up in the bin) and it’s easy to underestimate consumable usage e.g. glue. Monitor how often you get through a pack/barrel as you are producing in a shift, and compare to how much your BOM (Bill of Materials – your expected usage per the system) expects.
- Check your stock movements (especially manual adjustments) for the part, to see if you can identify where it went wrong.
- Check your procedures for moving stock around – could someone have borrowed it without processing it and have it sitting in their car or desk drawer?
Every time you find a reason for a stock difference, add it to this list, as it’s something to look for when you find issues in the future.
Step 6 – do it all again!
This is your benchmark, so it should be improvements from here. Preferably do an inventory count quarterly from now on (or even monthly, but at least every 6 months), so that you can remove the issues on a timely basis. You could even do mini counts of high risk areas of the warehouse more frequently than the other sections. Don’t let it worry you if occasionally differences go up with counts – if you follow the above procedures you should find over time it will trend significantly downwards.
Once you’re happy that you’ve solved the issues then you can be safe in the knowledge that on average, your stock differences will go down. If you count quarterly, in a year or two you should see some very healthy improvements in your stock count differences. If you were previously having large stock issues, you could see some great improvements to your profits too.
Good luck with your next inventory count!