How to Effectively Execute a Physical Inventory


We gotta do what we gotta do

Physical inventories are required to account for company physical assets. The purpose is to compare the actual physical inventory to the systemic perpetual inventory of the company’s operational software at a given point in time to audit the processes and policies of that company and to correct any discrepancies caused by lapses in the processes.  

The reason behind the need for physical inventories is a lack of trust upper management and finance has with the current business processes without truly understanding why.  If the business processes and policies are accurate and comprehensive the result of the physical inventory will be no variances between the perpetual systemic inventory and the counted inventory. Of course that’s in a perfect world. In the real world there are variances as no business practice, SOP or system is perfect. The key is to understand those variances and their root causes.

Every business will have subtle and not so subtle differences in how and whey they perform physical inventories.  Some businesses will perform physical inventories on a monthly basis (what I call an intrusive cycle count) and some will perform them on an annual basis and yet others somewhere in between.  Some will use count sheets or inventory cards while some will use barcode scanning or in the most technically advanced companies, RF ID.  Some will need to count locations outside the main business while others will have their suppliers count the product.

Your goal should be to address and resolve the root cause of each variance to improve your business systems and practices to reduce the need for physical inventories.  To do this your results should be as close to zero as possible.  The closer your results are to zero variances the better your processes and the more you can trust them to maintain that accuracy.  This also improves your customer service as you can rely on your systems to accurately report the quantity on hand. While physical inventories may be necessary they still cost time and money to perform and they add no value to your product.

The Devil is in the Details

The key to performing any successful physical inventory is preparation. In fact, if your company isn’t ready to perform a physical inventory today your business practices are definitely not perfect. I’m not saying they’re bad just not perfect. The preparation time is dependent on how often you need to perform a physical inventory. The more often you need to perform one the more your preparations need to be part of your everyday business culture. Of course the more your business culture is set towards inventory accuracy and integrity the less you will need to prepare regardless of the frequency of the physical inventories. And the more your business culture is set towards inventory accuracy and integrity the less frequent your physical inventories will need to be.

As I said, preparation is key to performing a successful physical inventory. Those preparations include:

  • Methodologies
  • Personnel training
  • Facility layout
  • Organization of inventory
  • Effective cutoff
  • Documentation
  • Performance tracking
  • Costs of performing a physical inventory

Thorough preparation before a physical inventory will improve the execution, control and reconciliation.

The Play is the Thing

The actual execution of a physical inventory is mostly made up of a systematic approach of checks and rechecks.  Dividing up the facility into divisions helps to control the execution of the physical inventory.  However, this varies based on the type and size of the business.  Understanding where you are, how far you need to go and addressing questionable variances as they are discovered.  Knowing what locations have been counted will provide you the basis to look for exceptional variances.  What determines an exceptional variance is dependent on the cost of the item in question.

The control mechanism is most always some form of system reportsThese fall into three categories:

  • Exception reports
  • Control reports
  • Variance reports

Variance reports are also used to report the final results of the physical inventory.  There are many different angles at which to look at your variances.  This book will assist you in identifying the appropriate view from the endless number of variations.

The Moral of the Story is:

The preparation and execution of the physical inventory is mere mechanics with some anticipation.  The training, location and material preparation and execution of the physical inventory should be performed while anticipating any issues that may arise.  However, not all circumstances can be anticipated.  When the physical inventory is over you will need to review the preparations, execution and the results.  It’s a cycle of preparation, execution and review that is so aptly discussed in so many business models.

This book will assist you in identifying the most effective processes possible, so that you don’t commit the same mistakes so many other organizations are destined to. 

This book was written because we were there – spending way too many hours and getting way too frustrated.  We wrote this so that you can avoid those mistakes and come out the hero.

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