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SmartTurn Inventory and Warehouse Management Best Practices Series

If your operation is one of the tens of thousands of warehouses in the United States still using paper, Microsoft Excel, or processes first developed in the late 70s/early 80s, we're here to help. To give you tools, information, guidance, tips, proven methodologies, we offer you the forthcoming "Best Practice Series for Inventory and Warehouse Management."
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Annual/Physical Inventory Best Practices

Overview
In the first chapter of our Best Practices series, we explored the many benefits of cycle counting. Chief among them is the elimination of an annual physical count of your inventory. While cycle counting is our preferred inventory counting process, many companies still conduct annual counts. Acknowledging that many companies still conduct annual counts, here is our look at the Best Practices for an annual physical inventory.

Benefits of Counting
Anyone who has ever planned or participated in an inventory count knows what a frustrating, tedious and time-consuming activity it can be. The actual process of counting requires you to remove employees from their regular jobs for hours, if not, days in every inventory location. Depending on your warehouse operation, this could effect shutdowns in other parts of your business such as manufacturing. While the frustration of counting every item, and hunting for items and material that are nowhere to be found or, once found, unidentifiable, can be acute, the organizational value of stock accuracy is considerable.

Whether through cycle counting or an annual tally, the accuracy of your inventory data enables your sales, customer service and financial management systems to operate much more efficiently and effectively. Your annual count confirms what you actually have in stock and then adjusts your database records to reflect reality. Do the on-hand product quantities in your computer reflect what is actually on the shelves in your warehouse? If your buyers or sales reps make replenishment decisions or customer promises using inaccurate stock balances, mistakes will happen.

When your database indicates less stock than there actually is, you'll end up ordering sooner than necessary and more than you need. You commit capital to products you don't need just yet. When your database indicates more stock than there actually is, you may not re-order in time and produce a stock-out. To help avoid both of these undesirable results, as well as satisfy tax obligations, and financial and insurance requirements, you need to account for the cost of your inventory.

Consider the opportunity cost of investing money unnecessarily in inventory. What would your return be if you took the capital tied up inventory and invested it elsewhere, possibly in a traditional conservative investment like a CD or treasury bill? If you're financing your inventory, how much interest are you currently paying the bank?

Look at the financial implications of the goods you store in your warehouse. If you're not sure how much you're spending to carry inventory, here are some of the places where your money is going:
  1. Putaway costs
  2. The labor costs of moving material within the warehouse
  3. Percentage of building costs (including rent and utilities) for space used in the areas of your operation where you store inventory
  4. Insurance costs
  5. Physical inventory and cycle counting
  6. Inventory shrinkage (employee theft, for example), obsolescence and damage, etc

Assuming you understand the value of inventory counting, but haven't yet implemented cycle counting, your only choice is an annual count. Let's make it as easy as possible by using the following inventory best practices and guidelines.

Preparing for an Inventory
That old saw, "no one plans to fail, they just fail to plan," applies to physical inventories. Plan and prepare well in advance. It will take less time so you'll save money. It will be more organized so your counting staff will be less frustrated. The results will be more accurate so the data will have more value.

Once you have scheduled a date for the count, have your sales team notify customers of the shut down or non-shipment period. Give customers a cutoff date for order placement to guarantee outbound shipping before the shut down. The advisory activities extend to your suppliers, as well. Tell them that deliveries will not be accepted during the count. Communicate this information to all transport or delivery companies that regularly visit the facilities participating in the inventory.
blank_image TIP: It is very difficult to hit a moving target so don't allow any movement of inventory during the count, except in very special cases.
In your advance planning, divide the warehouse into counting areas. Divide and conquer in little steps. Break the overall counting process up into a series of smaller counts. Repetitively counting five, ten, twenty, or thirty thousand products is tiring. Your employees can easily become overwhelmed and discouraged by the volume of data that needs to be collected.

A physical inventory is a "wall-to-wall" count of your warehouse so map it in advance. Create a map indicating the location of every shelf, pallet rack and all other places where material is stored. One of the best ways to increase accuracy is to assign counters by area in the warehouse rather than product lines. (It is more difficult to account for misplaced material when counting by product line).

Make sure all inventory is clearly identified and located in its assigned location. If you have multiple locations for the same items, consolidate them into as few locations as possible. By combining smaller
quantities into larger aggregated units, you reduce their counting time. Preparation also includes a through clean-up. Clean up (lots of sweeping, aggregating and organizing) before you count.
blank_imageTIP: You can't count what you don't have. Ship everything you can before starting your count. Pay particular attention to whatever items are located in your returned goods and vendor return areas. All items in these areas should either be returned to its proper storage location, returned to the vendor, repaired or thrown out before your inventory day.
To reduce shut down time, count as many parts or slow moving or bulk items as possible before your big inventory date. Once these have been counted, avoid double counting by tagging the containers with tags or brightly colored stickers to signify that the contents have already been tallied. (This tagging system works as long as long as there will be no material transactions prior to the physical inventory.)

Manpower Needs and Training
Inventory counting proceeds much faster and more efficiently when you have sufficient counters. Do you know how many you will need? An easy way to find out is to conduct a small test count, recording the number of items counted and the time it took. Depending on your total number of inventory items or SKUs, and the projected number of days or hours available, you can calculate the number of counters you will need. When calculating your headcount requirements, don't forget to consider the number of data entry personnel you will need and the computer resources needed to support their work. This advanced personnel planning also includes selecting and training supervisors to oversee the counting, tallying, verification and discrepancy processes.
blank_imageTIP: A counting team can handle 50-100 items per hour. Items that need to be weighed or moved to count take longer. Boxes or cartons, of course, can be counted very quickly.
OK, now that you have determined how many counters you need, do you know where they will be on inventory day? That's right, an often overlooked point is the impact of vacation. Give everyone plenty of advanced notice to avoid overlap with employees' planned absences. At the pre-count training, make sure everyone receives an inventory playbook containing the inventory activity schedule, procedure details, and work list. Include an FAQ to answer likely questions. Who is responsible for each task? How are they going to count? What should they do when they have a problem? What method are you using to designate areas that have already been counted? Include the count sheets (or demonstrate how to use the data capture devices) they are are going to use. Clearly specify how they should record quantities, reconcile errors or discrepancies, and handle emergency shipments. Make sure to conduct a similar training session for those responsible for data entry.
blank_imageTIP: There will always be items in your warehouse that you don't need to count such as packing supplies, miscellaneous items not considered as inventory, as well as warehouse equipment. Decide in advance what shouldn't be counted and use some kind of system such colored tags to identify them.
To keep the information fresh, schedule these training sessions several days before inventory day. Don't schedule it more than a week in advance.

Technology and Counting Materials
How you choose to count may require investing in some technology such as bar code readers. If you choose the old school method of paper, you'll still need to buy necessary supplies (such as pencils, pens, markers, stickers, clip boards, calculators, scales, and the food and drinks to fuel the counters). Buy all of these items in advance. Depending upon what material handling equipment you already have in your warehouse, you may also have to rent or borrow equipment such as pallet jacks, forklifts, and ladders.

Much like the benefits we've discussed in the chapters on Best Practices for putaway, slotting and picking, automation can deliver important time reductions. Automation during inventory can appreciably increase accuracy of your data entry, shorten counting time, decrease costs if you use outside auditors, and reduce your shut down period.
  1. Bar code readers
    These are probably your best choice to automate your annual inventory. You can download data captured by readers directly into your computer system, eliminating opportunities for data entry clerical errors. If bar code is your technology of choice, make sure to affix bar code labels to all cartons. These labels should include an ID number, item description, unit of measurement, and quantity. The counter scans the item, and enters the unit of measure and quantity. Open cartons are manually counted, with the tally entered into a handheld computer.

  2. Counting Card
    If you are using paper, you are either using count (index) cards or counting sheets. The typical count card method prior to the actual day is to place one in each bin that needs to be counted. Counters progress through their assigned counting areas and note quantities on each card. Providing each counter with a supply of blank cards enables them to note incorrectly stocked material which then can be quickly relocated to its proper location following the count.

  3. Count Sheets
    This as old as old school gets. Up to 25-30 inventory items are listed on each page. Organize the items by location area and number the pages in the order they be counted. Use count sheets with caution if you have no other alternative because data entry errors tend to increase.

Inventory Day
Good morning, grab a strong coffee; it is inventory day. Make sure that all shipments (both inbound and outbound) have been completed and recorded before your count. All transactions, including shipping receipts, location transfers, customer returns, vendor credits, cost updates and quantity adjustments, should have been entered into your system before you send your counting teams into the warehouse. With the pre-inventory books now closed, you're ready to start. (You shouldn't enter any transactions of any kind until your completely audited inventory is finished). The same thing goes for material movement, including outbound shipping or receiving. Don't move, send or receive any material while your count is in progress to avoid counting it twice or missing it completely. If you do receive emergency or rush shipments, consider quarantining them for post-inventory handling or putaway.

Quality Assurance: The Quest for Accuracy
We can't emphasize accuracy enough; if your count is inaccurate at the end of your inventory, you've wasted time and money. Physical inventories are only worthwhile if the resulting data accurately reflects the contents of your warehouse. Incorrect data is as valuable to you as no data at all so audit while your people are still counting.

As soon as counters are finished counting a specific area, have an auditor recount to verify the counts of selected products. You should have determined the recount threshold with your auditors in advance. Before you count, decide what error percentage will kick off a recount. Because they represent the most dollars flowing through your inventory, concentrate on verifying your "A" items. Correct your "balance-on-hand" numbers in your database as soon as the auditor verifies that the counts are accurate.
blank_imageTIP: If auditing reveals several counting errors in the same location, have the assigned counting team recount the entire section. This won't make the auditor popular but everyone involved in your inventory needs to understand that accuracy is the most important objective.
Whenever there are important differences between on-hand balances (reflected in the pre-inventory total) and counted quantities, you should list these items on discrepancy reports and investigate them. Calculate the value of these pre-inventory and counted quantities and prioritize based on those with the largest spread. Remember that some errors have nothing to do with counting accuracy. Differences can be attributed to a variety of reasons such as data entry errors when the counts were originally entered into the system or even differences in the units of measure. Items may have been entered by counters in pounds whereas the database system has them listed by piece. Hopefully, you'll only make errors like this once.

After the Inventory: Preparing for Next Year
Congratulations, you survived. Gallons of coffee and dozens of cheese pizzas later, you have lots of new and accurate data in your database system. Its time for a post-op debrief. Sit down and solicit feedback from everyone, regardless of their seniority. What worked? What didn't? If you are going to continue with your physical inventory (rather than change to a cycle counting program), who should or wants to perform which tasks the following year? Talk about how you can make your next physical inventory easier, faster, cheaper, and more accurate?
blank_imageTIP: Create and maintain a physical inventory project folder/binder in which you keep suggestions, examples of counting sheets, results from previous inventories and how-to/best practices articles (such as this one) that you can reference 10 months later when it is again time to start thinking about counting.
What to Avoid
Here are some things to avoid:
Counting damaged or obsolete inventory
If you find damaged goods or obsolete inventory during your pre-inventory cleanup, return them to the vendor for possible credit, or assign them to a special storage location for post-count disposal. By disposing them as quickly as possible, you'll eliminate future storage costs.

Moving Misplaced Materials
Whenever counters find misplaced materials, they should count them, record the relevant information, tag them as counted and make a note that they're out of place.
Moving Forward: Implementing Your Own Inventory Program
Think of managing inventory, rather than just storing it. The more material in your warehouse, the longer it takes to count. Make sure as you move forward that you prohibit paperless withdrawals from your warehouse. Enforce a company policy that every stock withdrawal requires appropriate paperwork, including product samples. When they are returned to stock, adjust your inventory. If they never reappear, charge the sales rep's account.

Finally, seriously consider eliminating your annual physical by replacing it with cycle counting. Reread our first best practice chapter to appreciate the benefits of cycle counting as it eliminates the disruption of an annual count and increases the accuracy of your real-time inventory data.

Kevin Collins,
Director, Product Management

SmartTurn, Inc.
177 Fremont St.
San Francisco, CA 94105
USA

Sales: +1 281 218-4892
Tel: 1-415-685-4200
Fax: 1-415-685-4201

About SmartTurn
SmartTurn™ Inventory and Warehouse Management System is the first true on-demand warehouse management system to provide enterprise class functionality at a fraction of the cost of traditional license and install software. Designed for quick implementation, ease-of-use, real-time inventory accuracy and warehouse performance, the SmartTurn system provides visibility on every item across single or multiple warehouses. Founded on the premise that software should be smart, simple and safe, SmartTurn's customers span the value chain of most industries to include manufacturers, wholesalers as well as 3PLs. SmartTurn is privately held and backed by leading investors, NEA and Emergence Capital Partners. Website www.smartturn.com

About the Author
Mr. Kevin Collins joins SmartTurn having been in the warehousing and distribution business for over 15 years, where he fulfilled leadership roles for a military distribution company, a third party logistics service provider, a heating, ventilation and air conditioning company, a retail service warehouse and a general merchandise/wholesale grocery warehouse where he also partook in two acquisitions. Mr. Collins has spent his entire career learning the art of warehousing and logistics, and has been in every conceivable role within a warehouse. During his career span, Mr. Collins has also had the privilege of working directly with application developers learning about software from inventory and procurement to transportation and warehouse management systems. Mr. Collins brings to SmartTurn an invaluable background and information about processes, software and logistics, and the intricate balances between them.

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