In the last session we were talking about inventory control policies and different types of stocks. Talking about inventory I remembered a problem that I have observed at both companies I have done an internship at. Both times I have worked in the Accounting office and sooner or later we noticed that the inventory in our books and the inventory in our warehouse did not match up. One time this occurred because an employee just had not billed our supplies. The other time inventory had been thrown away which was not recorded in the books. Therefore I figured that this might be a quite common problem that occurs in many companies and is therefore an interesting topic for this blog.
So let’s see: What are the most common reasons for inventory discrepancies?
- Stock loss due to damage
- Stock loss due to theft
- Stock is in the incorrect location
- Human error during stocktaking process
- Stock is labelled with an incorrect identification
- Stock is mistaken for a similar product
- Inbound stock was not recorded accurately
- Faulty inventory management software or stocktaking equipment
- Incorrect unit of measurement was counted
The next question would be: How do you find inventory discrepancies and how can you resolve them? At least once a year every company should do a physical count of all their stock. When doing this all discrepancies should be revealed and afterwards the reconciliation (analysis, explanation, accountability) starts. If inventory discrepancies are found the following steps can be taken to resolve the problem:
- Re-count the stock in question. To make sure it wasn’t only a simple mistake during the counting process this should be the first step if numbers aren’t matching up.
- Check if the stock exists in another location. Double checking if the stock can be found in another part of the storeroom, another storeroom or even still on the truck of the supplier is especially important if a large number of items is missing.
- Make sure the correct unit of measurement was used. Even though all people participating in the count should be trained on the procedure still someone may have counted in liters or pounds, instead of boxes or individual units.
- Verify that the SKU or product identification number is correct. To make sure products are not labelled with the incorrect SKU check that the description in your inventory management system actually matches the product you’re counting.
- Ensure the product has not been mistaken for a similar product. This might happen when the counting staff does not realize that a variation in size or color is technically a different product with a different identification.
- Scan your inventory records for errors. A discrepancy may come down to a simple mathematical error or typo.
- Confirm that there is no missing paperwork. Search for any missing paperwork, which may not have been entered into your system yet to make sure that sales which have been unaccounted are included.
- Investigate whether employees or customers have been stealing stock. This is an unpleasant steps but necessary to find a logical reason for loss of stock. Maybe tighter security measures, such as CCTV cameras or security tags on products should be considered.
- Speak to your warehouse/storeroom managers. Talk to your managers to see if there was anything unusual during the stocktaking process. If so, some staff may need retraining or the entire procedure needs to be revised.
Nowadays many companies use cycle counting for a more effective inventory management. Cycle counting means verifying the on-hand quantity of a specific number of products on a day to day basis. Nevertheless some products might be counted more frequently than others (for example an ABC analysis is conducted to determine products with a high value or turnover rate which are therefore counted more frequently). Compared to a yearly physical inventory, cycle counting is supposed to increase inventory data accuracy and improve customer service levels. The schedules for cycle counting may vary from business to business. They are determined by taking into consideration the inventory value, flow through rate, warehouse activity levels and staff availability.
As I already wrote a lot you might want to get more information about cycle counting by watching the following videos.