SICarga39s distribution center in Panama uses a WMS to count inventory and to adjust the logical inventory to what is physically in the warehouse Photo courtesy Magaya

SICarga's distribution center in Panama uses a WMS to count inventory and to adjust the logical inventory to what is physically in the warehouse. (Photo courtesy: Magaya)

Counting Techniques to Improve Accuracy in the Warehouse

Using a WMS in tandem with mobile scanners can help control the movement and storage of merchandise within a warehouse.

According to the U.S. Bureau of Labor Statistics, there are more than 16,000 private industry warehousing and storage establishments in the U.S. These facilities employ some 90,000 industrial truck and tractor operators, more than 180,000 laborers, about 30,000 shipping, receiving and traffic clerks, and more than 50,000 stock clerks and order fillers.

For example, retail giant Target's 2 million sq. ft. warehouse in Lacy, Wash., could house four or five smaller warehouses, showing how enormous some of these facilities can be. With thousands of workers picking and loading, counting or moving cargo, there may be chaos and confusion—particularly when counting inventories upwards of 450,000 items. Regardless of warehouse size, gone are the days when you could just send someone out to walk up and down the aisles and start counting.

And who suffers the most when inaccurate orders are shipped? The paying customer. Companies such as Intel ship hundreds of thousands of electronic components all over the globe which run our PCs, healthcare and telecom equipment, and many other devices. If there's even a minor error in the shipping documentation, then some of the major manufacturers in the world suffer, and Intel's reputation and brand are tarnished. That's a major business problem. And what if a shipment of defibrillators destined for a hospital was detained due to a mishandled form? Lives could be at stake.

Fortunately, warehousing technology, particularly the latest generation of warehouse management systems (WMS), have emerged to automate, calculate and categorize the data needed to run warehouses and distribution centers (DCs). The goal is to be better prepared to predict the future. While minor mistakes are generally easy to recover from, major mistakes can cost companies millions and can put a company out of business or in trouble with the law.

In a global economy where goods are stored and shipped internationally, the best warehouse environment operations are agile. Since efficient tracking of all the items coming and going is essential, let's look at some general inventory counting guidelines.

Where to Count?

Some operations have only one or two locations, while others have thousands. But even the smallest operation may benefit from a checklist of locations where items may exist that need to be counted.

What to Count?

The quick answer of what to count is salable items such as electronics, apparel, pharmaceuticals and vehicles; items in transit and items you're holding for others; or items held by third parties in physical areas or "locations." Advanced planning will help deal with questions that are bound to arise during a count. Even a sole proprietor will be helped by making these decisions in advance because you want to spend as little time as possible thinking during an inventory count and maximize the time spent counting. Also, anyone helping with the count will need to know what to count.

When to Count

If you are in a business that experiences demand changes based on the seasons, time of year, holidays, or days of the week, then you will want to have an accurate count of those items that are most affected by these factors. You'll want to know how much of an item you used last time, and how much was left over so you can decide how much to buy this time.

Cycle Counting

Different types of counting techniques have evolved over the years. Let's start with cycle counting.

Cycle counting is the process of verifying inventory accuracy by counting a few items every day and comparing the count to computer records to reconcile differences. Many accountants require companies to do two to three complete cycle counts to avoid annual physical inventory.

Warehousing expert and consultant Don Benson (www.warehousecoach.com) offers a method of selecting what to count and when to conduct a cycle count based on the activity of the items in the warehouse. Here are some of his recommendations:

First rank items and then:

  • Count "A" rank items (top 80% of sales or inventory value) six times per year.
  • Count "B" rank items (next 15%of sales or inventory value) three times per year.
  • Count "C" rank items (next 4% of sales or inventory value) twice per year.
  • Count "D" rank items (last 1% of sales or inventory value)and items with no sales count once per year.

Benson believes this method works well for maintaining accurate inventory counts because it focuses effort on the items that move the most, which are those with the greatest opportunities for processing errors.

By performing cycle counts, you're regularly validating the accuracy of the inventory in your system. This method of counting is popular among large organizations that have thousands of items in inventory and cannot be closed for a long period of time to perform an annual physical count.

Robin Dady, a controller for Mc-Kenna Metal (www.mckennametal.net), offers another perspective.

Dady, who has had oversight for accounting for both tangible and intangible inventories, views cycle counting as a way to help mitigate many risks and challenges.

For example, if a warehouse and purchasing manager doesn't know how much stock is on hand for planning or completing jobs, productivity can drop and problems arise, particularly during peak demand seasons. Depending on the size of a company's operations and its ability to invest in process and system infrastructures, cycle counts can help maintain needed inventory visibility and enable key decision making.

Other risks that a lack of awareness can cause include:

  • Internal theft or waste of materials, which can increase company costs.
  • If company management doesn't show concern over inventory, there is risk of creating an employee culture that doesn't care.
  • Finally, improper asset valuation—overstating or understating balance sheets—impacts costs of goods sold (COGS) and risks profit distortions.

3 Steps to Conducting a Cycle Count

  1. Identify and prioritize types of materials that need to be counted and establish a method for counting, such as random sampling or using a control group.
  2. An inventory count may depend on whether a company has a reliable WMS, enterprise resource planning (ERP) and/or work process system that can deplete inventory as it is being used for work in progress (WIP), finished or sold.
  3. Based on materiality of the inventory, determine appropriate frequency. Schedule counts during non-peak days/hours if possible. Communicate the plan for the count to employees impacted.

One possible downside to cycle counting is that it may not be as efficient for small companies that don't have an ERP or work process system in place to track inventories.

Let's Get Physical

Physical inventory counting is the process of ensuring that the inventory on the company's financial books matches the amount of inventory on the sales floor, stockroom or warehouse.

Compared to cycle counting, this is a labor-intensive and time-consuming procedure in most merchandising and manufacturing businesses. Long physical inventory counts can shut down production and increase costs. But for smaller warehouses, physical counting may make sense.

Some organizations do both cycle counting and physical inventory counting to closely manage inventory variances and update accounting records.

It doesn't matter if you sell shovels or semiconductors, during the holidays a lot of goods are flying out the door. Making a list and checking it twice really makes sense for small business owners dealing with inventory during the holidays. That's one simple way to understand a physical inventory audit.

Whatever method you choose, by improving inventory management, you enhance sales strategy and potentially hedge financial costs by planning future inventory acquisitions to meet expected base sales forecasts.

Establish a Process for Inventory Counts

"Many businesses enter into inventory issues as a set of individual problems to solve," says Benson. "It takes a while for them to move to the systemic level to think about how to create and maintain an accurate perpetual inventory reporting system or inventory audit procedure—a system that will deal with inventory in each step in the flow from receiving to shipping."

Pairing technology tools such as WMS and barcode scanners will improve speed and accuracy, whether you conduct cycle counts or physical counts.

While price is certainly a factor when selecting a WMS solution, equally important are the ability to adapt and expand with your business, fast processing and capacity to handle thousands of items—one system to consolidate all activities and directly link financials throughout the entire supply chain. Features such as built-in count functions and cloud compatibility are important considerations, too.

Compliance

Using a WMS also aids in compliance with generally accepted accounting practices involving the use of raw materials, WIP and finished goods inventory accounts. WMS also helps the user comply with the Sarbanes-Oxley Act and the Security Exchange Commission (SEC). A WMS can also help you with inventory valuation and understanding cost of goods sold.

The Bottom Line

You want a system that walks you through the counting steps in a step-by-step logical flow. Based on an insider's perspective of the warehouse, look for a WMS system that allows you to:

  • Configure inventory adjustments based on cycle counting, physical counting, informed and uninformed counts
  • Count part numbers, locations, zones, serial numbers
  • Assign tasks and trigger due dates
  • Send tasks to mobile handheld devices such as barcode scanners. 

Used in conjunction with proven procedures, appropriate counting techniques and support from management, a WMS in tandem with mobile scanners can help control the movement and storage of merchandise within a warehouse. With planning and research, an affordable solution that includes many features will suit the needs of companies that need to manage resources and achieve results—transporting inventory to the warehouse and delivering goods to the customer.  

Jack Rubinger has published many articles in industrial publications. He can be reached at [email protected] Supplementary material about WMS and barcode scanners can be found at Magaya.com.

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