Taking inventory is a reality of life for any business that handles stock. For the most part, modern businesses are moving towards a perpetual inventory system, where stock is tracked with technology and information is always available in real time.
Even if you use the best technologies available to track and manage your inventory, it is sometimes still necessary to take physical counts to consolidate information and ensure that your numbers reflect reality.
There’s no getting around it - taking inventory is a long, tedious, and unfortunately, necessary process. For many retail or wholesale businesses, inventory placement and the way that stock counting happens is a process established before they had to deal with a significant amount of stock. Old habits die hard - and sometimes, businesses will continue to do stocktaking in the same way even as the company grow.
Periodic reviews of your processes are key
In the long run, this can lead to a lot of of inefficiencies that go unnoticed because reviewing processes often lacks the same urgency as other matters; particularly when the focus is on growing the business.
In fact, periodic revisions of your processes should come hand in hand with growing your business. As revenue grows, administration costs will often scale with it, but it doesn’t always have to! In fact, it’s possible to start developing micro economies of scale within your business.
It’s simple - scale your processes alongside your business. What makes sense for a warehouse with 1,000 items may not make sense for one with 10,000.
Stocktaking under a perpetual inventory system
There are many manual stocktaking techniques that work well for businesses that handle a small amount of stock. However, developing a strategy after implementing a perpetual inventory system becomes another matter altogether.
When your process has largely been automated, with an established paper trail, and cleaned of prone-to-error manual inputs, your stocktaking techniques should take into account the work that’s been automated for you and focus instead, on discrepancies.
Assuming that all your data has been inputted correctly and all relevant paperwork filed, there should be no discrepancy between the results of your inventory count and the numbers that exist in your system.
Of course, the reality is that problems like stock damage, spoilage, loss, or theft can all contribute to mismatches in number. Decide how much discrepancy that you're comfortable with and plan accordingly.
Good stocktaking techniques
Pareto principle (ABC analysis or 80/20 rule)
The 80/20 rule is a convenient rule that’s used in a variety of industries. A common rule of thumb even for inventory, the assumption is that 80% of your sales will come from 20% of the items in inventory. An ABC analysis uses this principle to categorize inventory into three groups: A, B, or C - from most popular to least popular.
Establish stocktaking procedures for each of these groups. For instance, items in Group A should represent around 12% of total inventory and 75% of sales; items in Group B will represent 25% of inventory, and Group C the remaining 63% and so on.
Segment your stocktaking by these three groups and check each with corresponding regularity. The more movement of the stock, the higher the cycle count.
Space out your stocktaking on different days so that they’re manageable. The idea that taking inventory is a one-off event that happens once every quarter makes the task both unappealing and overwhelming.
Spread out the process over the course of a few days - it’ll be a lot less tedious and your staff will thank you.
In addition to making sure that the warehouse is set up in a coherent and logical way, you should also consider arranging your warehouse so that the most frequently sold items are easiest to access. Although this may seem like a minor issue, the seconds and minutes shaved can really add up in the long run.
Not only will this help save in man hours, your staff will appreciate your attention to detail that helps them save on legwork.
Worth the effort? You decide
Although chasing down the reasons for these discrepancies is important, it may also be beneficial to weigh the effort of the investigation versus how much this shrinkage amounts to in cost.
Many firms will have a target percentage of acceptable discrepancy, or alternatively a dollar amount that the ‘vanishing stock’ has to amount to before a full investigation. Remember - man hours cost money.
Weigh the cost of an investigation against the possible gains and outcome of knowing what happened. Often times, there are broken linkages that can be fixed; thereby reducing some of the costs that may have remained invisible otherwise.
So how do you take inventory without losing your mind? The basic principles are simple - know why you're taking stock, and figure out the best way to do this - both from an expense and managerial perspective. Now it's up to you to follow through!