What to Do Before You Conduct a Physical Count of Your Inventory
Preparation Is the Key to a Successful Physical Inventory
If your manufacturing facility, fulfillment center or third party logistics facility (3PL) isn’t conducting an annual physical inventory of all of your SKU’s—both of your finished goods and your work-in-process (WIP) items—it should be.
But before you start counting everything in your manufacturing facility and your warehouse, there are three things you need to make sure are take care of first:
- Cycle Count Program
- Pre-Count Verification/Quarantine
- Work Order (WO) or Job Order (JO) Planning
To prepare for a regular (preferably an annual) physical inventory, many elements need to be put into place. Conducting a physical inventory properly, accurately and responsibly isn't just a thing your facility does one day a year, it's a lifestyle change.
Preparation is the key to a successful physical inventory. The three things—listed above—that are necessary prior to conducting your facility's physical inventory will allow your company to have:
- Accuracy the day of your physical inventory
- Optimized efficiencies during the physical inventory
- Fewer SKU's to count during your physical inventory
The preparation needed for a successful physical inventory needs to planned for and scheduled on a year round basis.
Cycle Count Program
Whether your manufacturing or warehouse facility has 10 SKU's to count or 10,000 SKU's to count, a cycle count program is a necessary part of any inventory control program.
Before you conduct your physical inventory, make sure that your company is effectively cycle counting your parts. A robust cycle count program will reduce the number of surprises that pop up when you start reconciling your cycle counts.
You can find the mechanics of cycle counting here but suffice it to say that if you have 10,000 SKU's to count, that about 2,000 of them (roughly 20 percent) represent 80 percent of the value of your total inventory.
During your physical inventory, you need to count all of your SKU's. However, before you conduct your physical inventory, you can make sure you have a handle on that 80 percent of your inventory value by cycle counting.
That may seem too much to bite off, at first glance. How can your company possibly be expected to count 80 percent of the value of its inventory during the year? Don't we realize that you have other things to do?
But that means that if really have 10,000 SKU's to count, then you're cycle counting 2,000 SKU's. And you can do that by counting eight SKU's a day, five days each week for 52 weeks.
Believe it or not, by cycle counting (i.e. do a physical inventory on a selected subset of your valuable parts) eight parts a day, you can be assured that 80 percent of your inventory value will be accurate when you do your full blown physical inventory.
A little bit of effort and pre-planning can go a long way toward inventory control success. And speaking of pre-activities...
When you do cycle counting, the parts that you cycle count return to use. However, in preparation for a physical inventory, your manufacturing or warehousing facility will also want to implement pre-counts.
Pre-counts differ from cycle counting in that a pre-count will prevent an SKU from being used, issued or otherwise transacted until after the physical inventory is complete.
Pre-counts require careful planning. Let's say that you conduct your physical inventory on an annual basis and that the physical inventory date is one month away. Someone at your facility who manages planning (either production planning or demand planning, for example), can look out at the planned activity for the next month and address these questions:
- Which items will you definitely not be using in the next 30 days?
- Which of those items do you have on hand?
- Do you have any "Quarantine—Do Not Open" tape?
By identifying items that you have on hand and that you won't need to transact prior to your company's physical inventory, you can take a crucial step in assuring that your physical inventory will be successful.
The items that you pre-count can be counted, labeled with the quantity of the pre-count and then quarantined—either in a physical location or by taping the box shut using "Quarantine—Do Not Open" tape.
Pre-counts are one crucial way that manufacturing facility and warehouse physical inventories differ from retail location physical inventories. A retail location can't really pre-count items and then tell it's customers that they can't buy them until their inventory is complete. But a manufacturing facility—with the right kind of planning—is able to do that.
Work Order (WO) or Job Order (JO) Planning
Managing your facility's WIP can be one of the trickiest parts of conducting a physical inventory.
You might have Item A and it's worth $10 and you might have Item B and it's worth $20, but when you build Item C, it's value might be $50 (because you've added labor and other value when you put Item A and Item B together). Sure, that makes sense every other time of the year.
But not necessarily during your company's physical inventory.
Let's say your physical inventory happens and you have three job orders (for the sake of this argument, let's refer to any manufacturing production order as a job order or JO) on the shop floor.
JO #1 has just been issued. You have 10 pieces of Item A and 10 pieces of Item B on the production line but no work has started.
JO #2 is nearly complete. Those 10 pieces of Item A and 10 pieces of Item B have been assembled into 10 pieces of Item C. JO #2 just needs final inspection to close the JO.
JO #3 is in the middle of production. The 10 pieces of Item A and 10 pieces of Item B haven't quite made it to becoming Item C's yet. But they no longer resemble Item A's or B's.
By planning ahead, you can avoid staring JO #1 before your physical inventory. And you can complete JO #2 and close it so that those Item C's go to stock to be counted.
You want to avoid having too many JO #3's on the floor. It's difficult to assess the value of JO #3 and you'll likely need to work with your finance folks to figure out how they want to account for them.
By planning ahead and setting up cycle count programs, managing your pre-counts and scheduling your WIP, you can ensure that your manufacturing facility or warehouse location has a successful physical inventory.