Inventory Audits - Best Practices

Inventory audits are conducted to evaluate the physical stock at a warehouse, distributor point or retailer. It gives stock visibility at secondary and tertiary levels, which helps in planning, directing and controlling inventory, thereby contributing to business profitability.

Inventory includes either or all of the following – merchandise or stock in trade, raw materials, finished products, and supplies that physically become a part of the item intended for sale.

There are 2 methods to conduct an inventory count:

• Bar-code readers: This is the most accurate method, however the most expensive given the fact that we need a bar code reader and the stock items need to be labelled. We also need a software program (Excel based or others) that can register the counts. The benefit, however, is that our inventory levels are more accurate as human errors are greatly reduced.
• Count Sheets:These is typically pen and paper count where stock items are listed on a piece of paper and the auditor takes a count against each item. This method also considers the misplaced material and products which are not listed, rather than just focusing on only the items listed on their sheets.

Some of the best practices for conducting an Inventory audit are as follows:

• Distributor/Retailer must be informed about physical counting schedule so that any adjustments to supply can be made in advance.
• As a pre-counting plan, all parts out of inventory that are needed for count should be pulled together or demarcated.
• Order should not be filled, or inventory should not be received during the count process.
• Inventory should not be misplaced from its original position during the count.
• Ideally, all operations should cease completely for the count. If that is not possible, at least the movement of the materials should be minimized and well documented to ensure the items are not double-counted or conversely, omitted altogether.
• Other good practices are breaking up inventory into small groups and adopting an approach to counting – left to right, down to up etc.
• As a part of Quality check, a sample of stock counted by one auditor must be re-counted by another to identify any errors.
• In case of any discrepancies, 100% stock of the defaulter auditor must be re-counted before publishing the stock variance report.
• The stock counting process must be reviewed, and procedures should be documented to ensure future improvements.