In eCommerce, a minor discrepancy in stock levels can lead to significant operational hiccups and financial setbacks. Even though you’ve invested in state-of-the-art inventory management software, you can face a stockout crisis, even if your system shows otherwise. This could tarnish your brand’s reputation and cost you customers.
The importance of accurate inventory cycle counts cannot be overstated. But let’s face it: even the most advanced inventory management systems are not foolproof. And that’s where Physical Inventory Count comes into play, serving as your safety net to catch those discrepancies before they escalate into a full-blown crisis.
In this blog, we’ll unpack the concept, significance, and various methods of Physical Inventory Count, laying the foundation for an in-depth exploration of its complexities.
Let’s get started!
What is the meaning of Physical Inventory Count?
Physical Inventory Count is the meticulous process of manually counting and verifying every single item in your warehouse or storage facility. While digital records offer a snapshot of your stock levels, they can sometimes be misleading due to system errors, data entry mistakes, or even theft. Physical Inventory Count serves as the ultimate arbiter, reconciling digital records with tangible reality.
After tallying up the items, these counts are cross-referenced against the existing records in your inventory management system. This dual-layer approach ensures that your digital database is not just a theoretical construct but an accurate reflection of your actual stock. Any discrepancies found can then be investigated and corrected, thereby preventing issues like stockouts or overstocks, which could severely impact your business operations and customer satisfaction.
The Scope of Physical Inventory: What is Included?
Raw Materials: These are the basic building blocks used in producing goods.
Work-in-Process (WIP): These items are in the middle of the production process but still need to be finished goods, like reusable drinking bottles.
Finished Goods: These products are ready for sale, entirely manufactured, and packaged.
MRO Supplies: Standing for Maintenance, Repair, and Operations, these are the tools and equipment necessary for the production process but are not part of the finished product.
Why Physical Inventory Counting is Important in Warehouse Management
Role of Physical Inventory Count in Informed Decision-Making
In warehouse inventory management, data is the linchpin of strategic decision-making. Physical Inventory Count serves as a reality check against your system records, offering a snapshot of your actual stock levels. This accurate data is invaluable for making informed decisions, from procurement to sales strategies.
Physical Inventory Count Prevents Errors and Stockouts
Inventory discrepancies are not just a numbers game. They have real-world consequences in supply chain management. Errors between system records and actual stock can lead to stockouts, a nightmare for any business. Physical Inventory Count is a preventive measure, identifying discrepancies before they escalate into significant issues.
Importance in Financial Reporting
Financial reporting reflects a company’s health rather than just a regulatory requirement. Accurate inventory counts are crucial for reliable financial statements, affecting everything from balance sheets to income statements. On the other hand, inaccurate inventory data can lead to incorrect financial reporting, which carries legal implications and can erode investor trust. In severe cases, it could even lead to legal penalties and a loss of market credibility.
Helps in the Calculation of the Cost of Goods Sold
Understanding the Cost of Goods Sold (COGS) is vital for any business. Physical Inventory Count plays a pivotal role in calculating COGS accurately. This, in turn, impacts your pricing strategies and overall profitability. Underestimating COGS could lead to setting prices too low, eating into your profits while overestimating could result in costs that drive customers away.
Impact on Gross Profit and Net Income
Your inventory is an asset that directly affects your gross profit and net income. Accurate Physical Inventory counts ensure that these financial metrics are calculated correctly, providing a true picture of your business’s financial health.
Loss Prevention and Theft Detection
Inventory shrinkage due to theft or loss can be a silent profit-killer. Regular Physical Inventory Counts are a deterrent against theft and a mechanism for early loss detection. You can initiate timely investigations, implement corrective measures, and reduce financial losses by identifying discrepancies early.
What are the Different Methods of Physical Inventory Count Businesses Use?
Manual Counting Method
The Manual Counting Method is as straightforward as it sounds. This approach involves store associates or inventory managers manually counting each stock item. The process is usually carried out using simple tools like pen and paper to record the counts. It’s a hands-on, tactile method that doesn’t rely on technology, making it accessible for businesses of all sizes.
This method is best suited for small businesses with limited SKUs and those without complex inventory systems. If you’re running a boutique shop, a small hardware store, or a startup with a limited range of products, this method could be ideal for you.
Electronic Counting Method
The Electronic Counting Method is a technologically advanced approach to inventory management that leverages barcode scanners, Point of Sale (POS) systems, and other electronic devices to automate the counting process. This method involves scanning the barcodes of items in the inventory, which are then automatically updated in the system, thereby reducing the scope for human error and increasing the speed of the counting process.
It is best suited for medium to large businesses that have a higher volume of inventory. These businesses often have the resources to invest in the initial setup and can reap the long-term benefits of increased accuracy and efficiency. Moreover, the method is particularly useful for businesses with complex inventory systems, where manual counting would be too time-consuming or error-prone.
Cycle Counting Approach
The Cycle Counting Approach is a more dynamic and ongoing method of inventory management. Instead of counting the entire inventory at once, this approach breaks down the task into smaller, more manageable portions. These portions can be counted during regular working hours, making them less disruptive to normal business operations.
This method is for businesses looking for ongoing accuracy in their inventory counts, especially those with seasonal inventory changes. If you have items that are more popular at certain times of the year, cycle counting can help you keep a more accurate track of those specific items.
Full Inventory Counting Approach
The Full Inventory Counting Approach is the most comprehensive method, often requiring the business to close its operations temporarily or conduct the count overnight. This approach aims to count every single item in the inventory, providing a complete and accurate snapshot that is especially useful for financial reporting. It gives businesses an overview of their stock, aiding in better decision-making and planning.
However, the downside is that it’s labour-intensive and may require the business to close temporarily, which could result in lost sales and customer dissatisfaction. Therefore, this method is ideal for businesses that conduct annual or bi-annual audits and those that require precise numbers for financial reporting. It’s also well-suited for larger enterprises with complex inventory systems where the margin for error needs to be minimal.
Blind Inventory Count
The Blind Inventory Count is a specialized approach that adds an extra layer of scrutiny to your inventory management process. Unlike other methods where the counter may have access to system records, the Blind Inventory Count involves counting stock without any prior knowledge of what the system says should be on hand. This method can be executed using various tools, ranging from manual pen-and-paper to sophisticated electronic systems.
If you’re still on the fence about the importance of regular Physical Inventory Counts, consider It as the difference between a satisfied customer and a lost opportunity, between a profitable quarter and a financial discrepancy. And if the thought of managing all this seems overwhelming, leverage NimbusPost’s advanced WMS and state-of-the-art fulfilment centres.
By integrating cutting-edge technology and high-end infrastructure, NimbusPost takes the hassle out of inventory management and eCommerce logistics, reducing your shipping costs by 30%, offering same-day or next-day delivery, and slashing your delivery time by up to 50%.
So, take the first step by sending your inventory to NimbusPost’s worldwide fulfilment centres.
How do you calculate inventory count?
To calculate inventory accuracy, follow these steps:
- Manually count the items currently in stock.
- Divide the manual count by the stock count on record.
- Multiply the result by 100.
The resulting number is your inventory accuracy rate, expressed as a percentage.
What is the inventory count report?
An Inventory Count Report is a comprehensive document that compares your recorded product counts with the actual counts in your warehouse.
What is KPI inventory accuracy?
PI Inventory Accuracy is a key performance indicator that measures the precision of your inventory records by comparing the actual physical count of items in stock to the data recorded in your database.
What is an example of inventory?
If a newspaper vendor uses a vehicle for delivery, only the newspapers would be considered inventory.
What is the difference between cycle count and inventory count?
Cycle counting involves continuous, periodic counting of small subsets of inventory throughout the year. On the other hand, inventory count is a more comprehensive approach where the entire inventory is counted, usually quarterly or annually.