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What are the best methods of conducting wall to wall inventory count?

Dominic Nunez's Profile

We have 30 warehouses with over 50,000 items. Our ERP is not yet in place so roll forwarding is quite tricky since withdrawals and receipts are not recorded real time. Previous counts have proven this.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Why not institute cycle counting?

Dominic Nunez
Title: Assistant Finance Manager
Company: Philex Mining Corporation
(Assistant Finance Manager, Philex Mining Corporation) |

We're on the process of doing just that. But right now we need to count everything first and fast as we need to implement our ERP by Q1 next year. What we're used to is counting items per warehouse but when line items are located on different warehouses it becomes really difficult tracking movements.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

This may duplicate some of the other comments, but I would (since you have until March 31,2015:

Set up inventory (you pick the method) per warehouse. If you pick a method that allows you to mesh the data, you'll have info on all your inventory in one system, but again at this point its not a priority.

You should have an idea of the velocity of items. Start the Cycle count with the "A" (or fastest) items. Once their all counted, work down the the velocities. The velocity is not warehouse dependent, it inventory wide. Should you not have all items in all warehouses, it doesn't matter because you are basically running each warehouse separately at this point.

Remember, you'll be counting the "A" items multiple times during the period (ending 3/31) and of course going forward of the ERP implementation.

During this process, you record for all items: purchases, purchase returns, transfers. sales and sales returns.

As you do the cycle counts, you get an accurate inventory in the warehouse. Once you've done a count or two on an item, you should be able to gauge the accuracy.

From a costing perspective this is far from perfect, but the "A" items will tend to cost correctly faster than the "D" items, but then again, you don't sell many "D" items in comparison.

Last note: hire part-timers who can count and run this process almost continuously until your at a point that your regular staff can stay on top of the process. You need to find out if you have a shrinkage problem or a paperwork system issue or it was a computer system bug.

Dominic Nunez
Title: Assistant Finance Manager
Company: Philex Mining Corporation
(Assistant Finance Manager, Philex Mining Corporation) |

Thank you! Your suggestion leans towards what was initially discussed sans the categorizing of inventory based on their 'velocity' or turnover rate.
My other question is, would it be better to start with the least active inventory items first? That way, we have less issues in roll forwarding.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

You could, but you won't catch system and procedural errors that need to be identified before you begin your implementation.

Dominic Nunez
Title: Assistant Finance Manager
Company: Philex Mining Corporation
(Assistant Finance Manager, Philex Mining Corporation) |

Thank you. I guess it all boils down to whether we want to catch those errors or do we just want to find out the correct balances for uploading to our ERP next year. That is hoping that the new system will give us new procedures which are out of the box and preset.

Dominic Nunez
Title: Assistant Finance Manager
Company: Philex Mining Corporation
(Assistant Finance Manager, Philex Mining Corporation) |

Good point, and in our situation we will have to go thru with a cycle count instead of a complete inventory count first.

Norman Katz
Title: President
Company: Katzscan, Inc.
LinkedIn Profile
(President, Katzscan, Inc.) |

I would suggest setting up a "small" inventory management system apart from the ERP system and just managing your multi-location inventory until your ERP system is ready. You would then be able to migrate accurate inventory-by-location numbers to the ERP system when ready. Granted, it is throw-away technology but the return-on-investment is likely well worth it.

Dominic Nunez
Title: Assistant Finance Manager
Company: Philex Mining Corporation
(Assistant Finance Manager, Philex Mining Corporation) |

We do have a Legacy based (DOS) inventory system but again as with all systems, somewhere along the way the records do not match the actual items so we need to count all the items before we implement our ERP Q1 next year.

Norman Katz
Title: President
Company: Katzscan, Inc.
LinkedIn Profile
(President, Katzscan, Inc.) |

Perhaps the solution is something akin to each warehouse managing their inventory like a checkbook register on a spreadsheet: inventory brought in is a credit, inventory moved out is a debit (though you would use other terms if/when implemented like "Add" and "Subtract"). When inventory is initially cycle counted in each warehouse a starting balance credit record is added, and thereafter debit and credit movement transactions are recorded. The transactions do not have to be recorded in real-time. Sorting the transactions and subtotaling by item would give you the net balance by item when it comes time to determine how much of each item per warehouse location you have. The transactions should be recorded with the date and a reference identifier (e.g. purchase order, inventory movement reference, work order, job order, etc.). The idea may sound a little unorthodox but it may get you the results you need with minimal added effort and expense.

Karl Nicholls
Title: Principal
Company: BTN LLC
(Principal, BTN LLC) |

Wayne, I'm interested in your view around cycle counting the A items. I have always been of the opinion that true A items are cycle counted almost everyday simply by the process of picking from the location. It's items in the B group that are most likely to need true cycle counting and location verification. Perhaps this opinion is informed from the advanced use of Warehousing modules in large throughput organizations so context of smaller less advanced run inventory models would be helpful. Thanks.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Counting and Picking are two different tasks.

On any given day for any particular item you have these possible trx

New inventory in
Inventory picked
Inventory transferred
Inventory shrinkage (from theft or breakage)
Inventory return (either from the pick or a sale)

Of course you had a beginning inventory count and an ending inventory count.

Who says everything was recorded? Counted correctly the first time, etc. So if you pick, unless you have a quantity larger than what is on-hand, picking won't tell you much....

Also "A" items may be counted monthly, "B", bi-monthly and so on; based on many different criteria. Obviously rock items are once a year.

Michael Filiatrault
Title: Associate Director, Financial Planning a..
Company: Merck
(Associate Director, Financial Planning and Analysis - US Market, Merck) |

Segregation of duties is important. Counting inventory isn't exactly what I would describe as fun. There could be a temptation on the part of counters to "cheat."

"Cycle counters" should not have access to the inventory levels in your accounting system. Otherwise you'll get counts that exactly match what is in the system.

A second person, "Approvers", should review the variances (count vs system) and ask for recounts for large variances, spot check the physical count of the first, and approve the counts of the first (accountability).

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

From experience, I will tell you that your biggest issues with inventory are coming after the ERP implementation. All of the issues with your ERP system will in some way impact inventory. Make sure you have multiple physicals prior to your year end. Your auditors will not approve of just relying on cycle counting before or just after the ERP implementation.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Dominic-I have some procedures for a wall to wall. I am guessing, but you should confirm that your locations are probably doing their own modified set of cycle counts. Typically, in free time most locations will spot check items, so all this talk about implementing cycle counts may be redundant. I would worry about implementing a full cycle counting program similar to some of the text book answers you have gotten here when you have your ERP system operating. This is assuming some level of spot checks is occurring.

Bob Low
Title: Principal
Company: Perron & Low
(Principal, Perron & Low) |

Dominic -- I'd be concerned about cut-offs for recording inventory receipts, shipments, and transfers. This is an issue in any physical count but especially so in your case since you state transactions aren't recorded real time. You not only need to know the quantity on hand but if it's before or after an incoming or outgoing shipment. Otherwise, you won't know if you have a variance and whether, for example, a transaction recorded the next day changed what's on hand or had actually taken place prior to the count. Be sure transaction dates correspond with the actual date the inventory moved and not the date it was entered or shipped from the vendor.

Bill Jancosko
Title: Partner, CFO
Company: Timepiece Capital Inc.
(Partner, CFO, Timepiece Capital Inc.) |

First and foremost, you must absolutely control the inventory count process including all product movement. I highly recommend contacting an audit firm for best guidance. After that any of the suggested data entry solutions will work. Your biggest risk is always loss of control.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

How confident are you in your current perpetual? Is it bad enough that you really need a full physical to have accurate books? Is it feasible to take a "hard" physical on the SKUs that make up 80% of the value?

(Agent, JKS Solutions, Inc.) |

If you have 50 warehouses you will want to move to cycle counting them. With large distributed operations, fraud is going to be something you will want to look for. Not to turn your question into a fraud discussion but your volume and lack of procedures leaves the door wide open. Your warehouse managers understand that lack of monitoring leaves them great opportunity to mishandle receiving and sell goods out the back door. Happens all the time. Cycle counts, system reconciliation, and surprise bin counts on high value items. Staying on top of your inventory recons and cost adjustments at a very detail level is core as well. When the details get out of control and you begin to manage at a materiality level, you have opened the door to greater problems.

If you are a retail company then you MUST get control over the category manager purchasing relationships with vendors and pricing updates in your system as well as your POS system.

If you have trouble with physical counts and managing the category pricing and costing then you have a great big problem because you both sides of the reconciliation process in accounting have been compromised. It is likely your inventory system is compromised in that you cannot rely on it for counts due to recon delays. You will need to get control over the system totals to institute good cycle counts.

I worked at a place for about 10 minutes when I realized their Director of Operations was stealing. All inventory adjustments were being processed as positive adjustments. They couldn't figure out why their COGS wasn't working.

With inventory you have to wrangle stability to a certain level, then get the detail system functions sorted out, eliminate your processing backlog, then inventory again. All while instituting control over warehouse operations and bins.

It's possible but will take some time, couple years to turn it around completely. Don't be surprised by the surprises along the way.

Internal audit can be helpful.

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