An inventory audit is an arduous task that many companies do not take a proactive stance on. Most times firms try to do an entire inventory audit at the end of the year. This method is incredibly time consuming, can disrupt production, and makes it difficult to trace the causes of discrepancies. In extreme cases, a company may wait until there is an issue with inventory before performing an audit.
An alternative way of auditing inventory is known as cycle counting. With this method, inventory is monitored continuously based on it’s level of importance. In order to rate the level of importance of an inventory item, we can use SKU analysis (See The Case For SKU Management) to find the velocity of products. Lets review the SKU velocity from that post:
Looking at our products above, we can see that SKU Group A makes up a very large percentage of sales, group B makes up significantly less, and Groups C,D, and E account for a negligible portion. So, if we were to ask which group of products contained inventory items that were the most important to maintain accurate inventories on, the answer would clearly be Group A. It would follow then that auditing these parts should be done more frequently than others, we may set up an auditing schedule similar to the following:
This creates a daily audit of only 11 total items which is much more manageable than 820 at once. At the end of each cycle, we have counted all items in an inventory group.
Cycle counting offers the following advantages:
- Elimination of shutdown and interruption of production for annual counts of physical inventory
- Trained personnel can perform the audit because it does not remove them from daily duties for an extended period
- Elimination of annual inventory adjustments
- Allows for easier tracing of discrepancies
- Allows for more timely corrective measures
- Maintains accurate inventory records
The cycles can be grouped and set however a firm wishes. Other options are to count any time an item is reordered, by product category, by vendor, brand, theft risk, etc