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In most manufacturing companies a hands-on, manual inventory audit is taken at least once a year and is therefore referred to as the “annual physical inventory.” Inventory-dependent businesses help maintain the integrity of the inventory by doing what is called a cycle count at least once a quarter. I will talk more about this a little later on. For now, let's consider why it is important to conduct such a tedious, detailed effort.
A very important reason to perform an annual physical inventory is to check if accounting's chart-of-accounts record is accurate and complete for preparation of financial statements and company balance sheets. However, physical inventory is not only an accounting requirement. When the accounting records and the materials requirements planning (MRP) stock-on-hand numbers reflect an accurate in-stock quantity, the business is more likely to run smoothly, profitably, and successfully.
For example, customers will be better served because a part that the computer claims is in stock is actually available to ship as quickly as needed. Verifying inventory counts avoids the delays brought about by costly, last-minute purchasing efforts where a supplier may or may not have the parts in inventory. Maintaining better controls on stock levels means there is also more control of the company's cashflow. MRP will be able to stage orders in the right quantity and at the proper time, avoiding over- or under-stock errors. So the goal of the annual inventory count is to obtain accurate information about inventories on hand, which will help in making the correct, cost-effective business decisions.
As there are advantages presented above, a full physical inventory has its downside as well. They include:
- Resource hogging.
- Potential production delays.
- Time lags.
Physical inventory counts are time- and resource-consuming, meaning they are labor intensive.
Inventory audits are more effective when manufacturing, shipping, and receiving activities are stopped or segregated. If not, they can cause production delays and therefore should be factored into the master schedule.
Physical inventories are usually performed once or twice a year to allow accounting records and MRP levels to be adjusted to match actual physical quantities on hand. At in-between times, there may be differences between accounting records and physical quantities.
An alternative to a full physical inventory count is the inventory cycle count, where the inventory is counted in portions throughout the year. Each company will determine which parts should be counted and how often. A good practice is to rate the parts as A, B, or C inventory. Here is a sample categorization scheme. These cost breaks and terms vary from company to company.
- A = High Cost > $5.00 per part or item, and/or long lead times (six times a annually)
- B = Cost > $0.50 and < $5.00 with lead-times less than 2 weeks (three times annually)
- C = Cost < $0.50 and available immediately (once annually)
There are three phases of a physical inventory count: Planning, Execution, and Analysis
In this blog, I will just list the items in the planning stage. Each company will have different procedures based upon its stockroom arrangements and techniques for inventory control. What follows is a generic list that can be incorporated to provide a basic understanding of the importance of proper preparation for a physical inventory event. In a subsequent blog, I will address the execution of the counting activities and the analysis and disposition of those counts for records management. The items in the planning phase are:
- a.
- b.
- c.
- d.
- e.
- f.
- g.
- h.
- i.
- j.
Prepare a spreadsheet for the count result, part number-description-quantity columns
Remove all non-inventory product from inventory locations or shelving.
Make an inventory map of all locations. (Some companies have multiple physical locations for stock to keep bulk level packaging separate from bin levels.)
Pre-label all shelving with highly visible location numbers on each shelf (if not already labeled).
Verify that every item on the shelving has a bin and a part number.
Identify obsolete inventory and remove from active shelving (should be placed in non-net cost stock location).
Put all part bins in the MRP sequence consistent with spreadsheet list.
Turn over all empty bins for quick identification.
Prepare bulk stock location for quantities and sizes that do not fit on bin shelving.
Prepare inventory tags that will be left in the bins indicating time of count and quantity.
Think of this preparation as similar to clearing a path when you are carrying something heavy from point A to point B. You don't want to be halfway to your destination when you find a boulder blocking your further progress. Not only do you have to find a place to put your heavy burden down, but now you have to remove the obstacle before you can finish your journey. Preparing for a good physical inventory is like measuring the width of a kitchen doorway before buying a refrigerator that won't fit through the opening.
As tedious as this sounds (I used to work in a retail store where we did this by hand every couple of months) the process also helps identify products that are getting old. I haven't heard a lot lately about old datecodes showing up in the supply chain, but that may be because the datecodes are being changed by counterfeiters. Is it common for manufacturers to discover this dated stuff? If so, do they return it to suppliers, scrap it or resell it?
Are there many more job cuts in the pipe line from many companies. The consumer electronics companies are definitely looking for a great christamas season.
Job cuts will be there even though the market has settled upto some extent. It will continue to be the same for a couple of years more since the companies have to make up for what they lost during the crisis.
Speak to 6 different pundits and get 6 different views on the economy. I reckon we are still bobbing along choppy seas with no safe port in sight (sorry, that's 7 pundits now). I truly hope the Christmas numbers are good but I would not bank it yet.
True Rich and I feel that it will be a long christmas this time. There are so many people who has qualifications plus experiance waiting outside for a job. I feel the job market is sewcure right now but not stable since one little collapse will shake everything all over again.
Other factor is that the job seekers will go for any salary right now just to make sure that they are not un-employeed. This will create a big issue in the market where people will be hired not on qualifications and knowledge but on salary expectation which is not good at all.
Rich, it seems like small scale umbrella manufacturing companies. They used to hire more peoples at summer seasons for increased production and assembling of umbrellas for the next rainy season. When they have enough number in their stock, they cut down about 75% of jobs because during rainy season they need only marketing guys. Every year the same cycle is happening. So the big brands are also following similar strategy and after X'mas shopping season they may also start recruiting process once again.
elctrnx_lyf – In Europe, many companies have given cautious outlooks for the rest of 2012… what that translates to in terms of holiday sales and layoffs is uncertain.
hash.era – agreed, it will still be a couple years before we see wider-scaler recovery, but the Christmas season always seems to hold some hope for industry watchers.
Rich K – I guess we'll see what happens. I think consumers have cut back on spening disposable incomes ( ie, not taking extended vacations or staying closer to home, or shopping at cheaper food markets), but I think there could be some pent-up buying agnst that seems to give holidays a boot… maybe people have put off buying, say, new shoes so they buy a tablet later in the year.
Difficult to address and all measures to simulate quick recovery in near practically ineffective. Watching TV news this week reporting 2 or 3 manufacturing/utilities firms announcing jobs cut not nice. How would those affected thousands of workers get on with xmas sales? Again, throwing into the stack of avalanche of jobless list, and/or waiting to enqueue for government's handouts for survival. Too bad!
The question i would like to ask – which sector likely to spark the recovery?
US Election will be over and sales may go up close to 5%.
Rich, The signs are there for all to see. Corporations are tightening spending again, consumers are still concerned about job growth and with inflation still low and wages under tight control, it's unlikely sales will be strong in the December period. I am not even thinking of “gifts” right now at a personal level. And from recent announcement from logistics companies like UPS and FedEx, it's more realistic to expect and be grateful for a warm hug in December than an expensive gift.
Rich, The signs are there for all to see. Corporations are tightening spending again, consumers are still concerned about job growth and with inflation still low and wages under tight control, it's unlikely sales will be strong in the December period. I am not even thinking of “gifts” right now at a personal level. And from recent announcement from logistics companies like UPS and FedEx, it's more realistic to expect and be grateful for a warm hug in December than an expensive gift.
Here's my analysis: “Foot” traffic will be limited to the crazies that line up in front of Wal-Mart on Thanksgiving night that are willing to crush fellow humans in the rush for an HDTV. Job growth will be limited to seasonal workers: the extra folks that UPS/FedEx/DHL hire; hapless security people for Black Friday crowd control; and retail clerks that will be idle up to Christmas Eve. Amazon.com will have a blow-out year; acquire NetFlix; and show Wal-Mart and Target the error of their ways when they stopped selling the Kindle.
Someone needs an infusion of holiday cheer, no?
i do not know/see how the growth will happen only after elections. As the article suggest the weakness in market is mainly due to EU and China. So, USA elections seems to have very limited impact. The market is recovering well but the EU is pulling down the seemigly good recovery.
Is that company also tracking how early are people buying gifts? I would expect most people wait for Black Thursday and all other super sale days… and with electronics, sometimes the more you wait, the better (I wouldnt expect many people to buy tablets right now, they probably wait for the iPad Mini … if they are looking for that 200 – 250 price range).
Barbara – I think you said it best… and — minus the Amazon acquisition prediction — sounds like patterns we seen in the last few years. Point being – the more things change, the more they stay the same.
Roques – I agree. I don't know if this company tracks when people buy, but I imagine there are a decent number of shoppers who buy gifts in a more phased, economically sane approach, spreading their spending over five or six months and use sales and online coupons to their advantage. But that's probably just a small number of people…
@Barbara, I know the food retailers will cycle through the dairy and meat products daily. It is usually a manual effort that requires an employee to clear the shelves and make the fresh replacements. This is where a lot of the food kitchen and rescue ministries get their daily food supply. However the drug industry has varying expiration dates and this has to be controlled either by RFID with barcode hybrids or manual as well. I think the longer shelf life products are not as critically cycle counted for expiration as the other, more short-lived drugs. It is a key function built into the Pharma DB to monitor these early expiration products. Usually, these are kept behind the counter and some of the mixtures are not made until the actual time of sale. A suspension comprised of multiple ingredients may be particularly susceptible to a short life time, but when the ingredients are stored separately, they have their own shelf life characteristics. For electronics and date codes, Imy experience is that the distributor will ask me if i can use date codes of such and such and I may have to sign an NCNR – Non cancelable and non returnable, document. If I have to buy from a broker, older date code products are their stock and trade and so they get their parts by part number irrespective of date codes. Franchise distributors may have different arrangements with OEMs for returnable goods and I have no direct experience with this so I would ask others who know how this works to please comment. I know CMs are sources for surplus for many non franchised distributors and i guess the older date code parts can always move in and out of the formal channels via brokers working with CMs and other OEMs that have surplus inventory.
Good article, Douglas. I have known about inventory audits previously, but never really considered all of the different aspects that benefit from doing these audits. Doing audits, even though they take some extra time, helps a company always be prepared to serve the customer in the right amount of time.
The problem is getting on board to doing them. In most instances, no one wants to because it will be done off-hours.
Except for Amazon, those things happen every year, no?
I also believe Amazon is in for a big year. They are not doing bad, but I think they will continue to sell a ton of tablets. I don't think Google had the same impact with the Nexus 7, even if its a more complete tablet.
Those 2, with Apple, have the option to leave a small margin in the tablet market (making the actual $ with the apps). Samsung and others can't afford that.
True rich and it proved to be correct so far. I feel the time has come to look for a good quality but somewhat cheaper products to hit the market.
We can save more money if we control miscleanous expenses. Your tips regarding to the audit of inventory is the way to create check and balance environment in business.For expample if you want to buy a refrigerator you have number of choices you can buy its with standard , adavnace and special features. But while its comes to money they are clearly can create difference in price. A low price refrigerator in french door style can save you more as compare to old used refrigertor which can increase your budget while it comes to energy.