What is Inventory reconciliation?
It is that dreaded time of the year when you wait with bated breath to see just how different your book and actual values of inventory are. All seasoned retailers know that these two values almost never coincide, and the reasons why that happens are many.
- Counting of inventory being a manual exercise, there is great scope for human error.
- Due to miscommunication, products may be recorded as placed in a certain section, but may actually be elsewhere. In the case of misplacement, it is hard to figure out where the stock actually is, especially in large warehouses.
- Malpractice could be another reason why the book and actual values of inventory do not match.
- The most common reason, however, is that you have been unable to account for returns and replacements on products, thus messing up the inventory counts.
Maintaining an accurate picture of the stock is important for more than just accounting reasons.
Accurate numbers help you order replacement products in time so that you never disappoint customers. In fact, stock-outs can cause your customers to take their business elsewhere permanently.
More than half of all customers who cannot buy something because of stock out will either switch to a different brand or take their business to a different retailer.
Also, for your retail business, inventory is an investment, and if you don’t have an accurate picture of your investments, how will you measure your revenues and returns?
Methods Of Inventory Reconciliation
At some point in the not so distant future, we hope that products will come with chips that can automatically communicate with your inventory software.
Until then, stock reconciliation needs to happen manually. Whether you do this just as you receive fresh stock, or after discovering an error, here are a few ways to count inventory manually.
Counting Through The Entire Warehouse
This is a herculean task, involving shutting down of your warehouse facility until all counting is complete. Your staff then goes through each and every product in the warehouse and updates the count.
Naturally, while you undertake this exercise, you cannot move the stock in and out of the warehouse. It may also take a long time to count through all the stuff you have in stock.
There are benefits to counting everything in one go.
- When you’re just starting out or moving to a new inventory management software, it helps to count your inventory all at once and update it in the system.
- Another use of counting all your inventory at once is when you discover (through another counting method) that there are severe discrepancies in your book and actual inventory counts. In this case, it could be that the products have been misplaced within the warehouse, so looking for them, and reconciling numbers all at once can help.
- While your warehouses remain shut for business during counting, it may take a shorter amount of time to count all at once, as opposed to counting in batches.
The greatest benefit of cycle counting is that it doesn’t require your inventory space to be shut down.
Here are the steps for cycle counting:
- On any given day, choose a certain area of your warehouse/store (an Aisle/Rack).
- Assign a person to tally the quantity of what is present in your records compared to what is actually present.
- Reconcile the difference and update records.
You can also determine your count schedule- supermarkets may choose to count daily, while apparel retailers could do so every week or month. Since counting is happening more often, it is easier to be in control.
Ideally, you should plan a cycle count during the period when you know that activity in the warehouse will be a minimum. Choose a period of time when you don’t have any new stock coming in.
Some organizations recommend using continuous cycle counts, wherein no fixed time is set aside for counting and warehouse staff do it dynamically and frequently.
- As mentioned earlier, normal business processes don’t have to be stopped to conduct a cycle count.
- Since you have a clearer picture of stock due to frequent counts, you can make purchase planning simpler.
- As opposed to an annual count, a more frequent cycle count will help you spot discrepancies sooner.
- Cycle counts use up fewer resources and manpower than annual counts.
Pareto’s principle states that 80% of results come from 20% of efforts, and this can be extended to inventory too. Identify those 20% items that make up for 80% of sales. In other words, these are products that move very quickly.
Mark these items as ‘A’. Likewise, ‘B’ items account for 30% of inventory and 15% of sales. The last category, ‘C’ items, make up 50% of your inventory but only 5% sales.
Now, you must count the items in group ‘A’ more often, because these do much of the moving around. You can count those in group ‘B’ less frequently, and those in ‘C’, even lesser.
This makes sense because you’re counting items that move faster more frequently. ABC counting is often considered to be one way of cycle counting.
Some retailers choose to categorize into more letters, going with A and A+ items to denote relative importance (and thus the count frequency), or going up to letters D and E and assigning percentages based on the weighted average of sales of their products.
The general guideline is to keep the high-value items to a minimum.
- ABC counting is beneficial when you want to reconcile stock more frequently. It can be done every few months or at the beginning of each month depending on your need.
- Since you’ll only be counting a portion of the products and not all of them at once, you can finish the process faster.
- You have far more control over high-value or frequently moving stock.
What’s On Paper, And What’s Real
Once you count your stock, you may realize that the values in your spreadsheets may not match with the values that you’ve just, actually counted. Why does this happen?
- Spreadsheets are not dynamic: When you use spreadsheets to manage inventory, you’re asking for trouble. For one, the person responsible for updating it may simply forget to do so on a particular day. They may also fail to receive information about sales made through all the different channels you sell on. This is why you’d benefit from investing in good inventory management software. It keeps track of your inventory dynamically, tirelessly, and 24X7.
- Units of measurement: Sometimes, using the wrong unit of measure can make all the difference! For example, if someone bought a 200 mL shampoo from you, but your employee updated it as a 400 mL bottle, the crazy spiral of inventory woes for both products begins. Since a software usually depends on barcodes for counting, this problem can be avoided.
- Reconciling damaged goods: Sometimes, products that were returned to you for damages may accidentally be added to your inventory. The product is not saleable, but it still shows up in your count, thus messing with your reorder levels.
- Discrepancies while buying stock: When you receive stock from your vendor, you would do a quality check. If you have ordered a hundred products, but accepted only 80 of them, what does your book-entry say- 80 or 100? Keying in 100 in this scenario sets the stage for a potential stock out even before sales begin.
These are just some of the many problem areas you can look for when book entries don’t match the physical count. If none of these reasons fit in, also consider malpractice, missing paperwork and finally, look in the scrap.
Keep Your Inventory In Order From The Beginning
Considering how key a role inventory plays in your business, wouldn’t it be better to just keep it in order all the time? When the times comes for stock reconciliation, you can be sure to avoid major errors. Here are a few ways to do it.
Get the basics right:
There’s nothing worse than doing everything right but for the wrong intent. Learn your basics of inventory management before everything else.
Use an Inventory Management Software:
Use one that is specifically designed to handle inventory. Such a product is able to account for scenarios such as quality checks, returns, replacements, and even parameters such as reorder levels. Some products even come with accounting integration, leaving no scope for audit errors. Machines are programmed not to make mistakes, and they never get tired, so they truly are your best bet.
Keep an eye on expiry dates:
Some products such as cosmetics, OTC drugs, and food products come with an expiry date. You need to sell them before they expire, so shuffle your shelves around. Place products closer to expiry at the front and move recent products to the back. If you find that some products are indeed past their date, throw them out and adjust your inventory. Also, remember to write off the loss in your accounts.
Use barcodes and scanners:
Using barcodes is a great way to keep track of your products. A barcode knows the difference between a 200 mL and a 400 mL bottle of the same product. Using barcodes in warehouses can also make the counting process easier.
Number your shelves:
In your warehouse, be sure to use a logical numbering system for your shelves. This way, you always know where to retrieve your products from. Numbered shelves also make organization easy, as a direction such as ‘Place apparel from ‘ABC’ retailer in shelf 37A, row 13′ is easy to follow.
Random inspections of your warehouse can help you spot empty boxes where stuff should have been there. You can also have security protocols in place to prevent swindling of stock.
Consider returns, and why they’re happening:
If returns are causing most inventory issues, use a two-pronged approach to solve the problem. First of all, address how you’d like to update the inventory of such items. You can choose to add them to the inventory after an internal quality check.
Secondly, why are you receiving so many returns in the first place? If your product is faulty or doesn’t meet its description, consider sourcing from elsewhere. If people are ordering the product for its novelty factor only to return it later, consider tightening your returns policy.
When you use Primaseller for inventory management, inventory reconciliation becomes easier. By accessing the product history information, you can see exactly where and when each unit of a certain product was bought and sold.
Move to the Products section in the expandable menu on the left. Then, choose the SKU & Inventory tab. Here’s what it looks like.
Under the Actions header, you can see several icons. The clock icon is the product history. When you click on it for a specific product, this pop-up opens up.
For each date when the product was added to and removed from the inventory you have across warehouses, you can see a consolidated record.
Do It Right The First Time Around
If there are any discrepancies when you count your stock, you can reconcile the numbers from here. This virtually eliminates the need for manual stock-keeping.
Also, with integration across multiple sales channels and retail stores, your inventory can be dynamically managed. You can also get a picture of which products are low in stock. Just move to the ‘Purchases’ tab on the left and select ‘Purchase Planning’.
In this section, you will be able to see which products are low in stock. Here, you can set the reorder point, and choose to create a low stock report and purchase order for products that fall below that point.
That’s not all! In the ‘Online Orders’ section on the left, you can see the exact status of each of your orders. You can check which of the orders are unfulfillable and assign the right SKUs to them.
You can also keep track of all your FBA orders from here. Under the ‘Shipping’ sub-section, you can see orders that have been returned.
The Bottom Line
As a retailer, you may have dreaded the day when you have to count stock. Indeed, major discrepancies in stock can be pulled up in an audit and cause you to lose face, not to mention the losses you would bear.
However, with a little bit of foresight and a lot of pragmatism, and software that supports you, reconciliation of inventory can be easy!
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Armed with a degree and a pen, loves to tell stories. When not telling stories, she also works. Hard to decide which one she likes more.