A physical inventory is the process of manually counting all of the items in your warehouse(s). Most distributors conduct a physical inventory once a year. It is an expensive process that few employees enjoy. But, accurate balance information is necessary for both efficient use of sales resources and effective inventory management. This is the first in a series of three articles on physical inventory management. It describes the reasons why a physical inventory is necessary and how proper preparation is a prerequisite for success.

Why Is a Physical Inventory Necessary?

If you gave your employees a choice between participating in your company's annual physical inventory and going to the dentist for a root canal, which would they choose? Which would you choose? The thought of spending the better part of a weekend in an unbearably hot (or freezing cold) warehouse, trying to count every widget, finding material that you can identify, and searching for other material that arrived in your warehouse and then disappeared, is not most people's idea of a good time.

So why do it? If you ask your controller (who usually runs around with a clipboard throughout the process) he probably say, "because the accountant requires it." Unfortunately most employees respond to this answer the same way they reacted when their mother told them to eat their spinach ("because It's your mother and I said so"). They don see any advantage in doing a good job or being accurate. Most feel that the accountant is only going to use the numbers we give him on some government reports that no one is going to look at.

Yes, management knows better. But if the people counting don realize the importance of accurate stock balances to them, your chances for obtaining errorless counts are slim. So your first step in preparing for your physical inventory is to explain, to everyone who will participate, why a physical inventory is necessary.

Accurate Physical Counts
Contribute to Better Customer Service

Everyone in your organization must realize that the primary purpose of a physical inventory is not to please your accountant or the Internal Revenue Service. It is to verify that the on-hand quantity of each item in your computer reflects what is actually on the shelf.

When a customer calls to see if you have 100 pieces of an item in stock, and your computer shows that 150 are available, does your salesperson drop the phone and run out to the warehouse to see what's actually on the shelf? How many more calls could be answered if your salespeople weren taking these frequent field trips to the warehouse? And, do you really believe that your customers enjoy listening to five minutes of top 40 hits (or your claims of providing superior customer service) while they sit on hold?

Salesmen need to be able to trust the accuracy of the stock quantities in your computer. If they believe what they see on the screen, they抣l sit at their desks and handle more customer inquiries (or even originate some sales calls). Just as important, your customer can get on with his business.

Accurate Physical Counts
Are Necessary for Effective Replenishment

Most computer systems produce very impressive buying reports. These reports show you how much of each item the computer thinks is in each warehouse, how much will be demanded by customers in the near future, and how much should be ordered from a vendor or central warehouse. What happens if the quantities in the computer are wrong? Disaster! No matter how sophisticated the software, the wrong quantities, of the wrong products, will be ordered.

If there is more of an item in the warehouse than is reflected in the computer, the product will be ordered too soon, and the company's money will be tied up in products you don really need. Worse, if the on-hand quantity in the computer exceeds what is on the shelf, the product will not be ordered at the proper time, and a stock out may occur. Even if it is a valid excuse, few salespeople are tolerant and understanding when a buyer explains, "I would have reordered the item, but the computer said we had plenty."

If a buyer has to make replenishment decisions with inaccurate stock balances, he cannot succeed. He might as well be trying to find his way through Kansas with a map of New Jersey! And like the "eye-ball" inspections for customer inquiries discussed earlier, deciding what to order by going out to the warehouse and examining each bin is extremely inefficient. Not only does it take too long, but you can review valuable information in your computer such as upcoming customer orders, usage history, and expected lead times.

The Key to a Good
Physical Inventory Is Planning

OK, we抳e covered some of the reasons why a physical inventory is important for the long term profitability of your company. But a physical inventory is only valuable if the results accurately reflect what is actually in your warehouse. A "sloppy" inventory, one that miscounts some items and misses others, serves no purpose whatsoever. It fact it may have a detrimental affect on your company's well being:

• If a physical inventory results in miscounted products, accurate balances in the computer may be replaced with erroneous information.

• A physical inventory is a very expensive process. It usually involves a considerable overtime expense. The sales of the business may also be affected if the preparation for the physical or the actual counting takes place during normal business hours. If the resulting count isn accurate, the money spent on the physical is wasted.

So the question is, "What can you do to ensure that your physical inventory is successful?" Here is an outline you can follow when planning your annual physical inventory. The planning process should begin no later than 12 weeks before the count date.

Set the count date(s). Do this as early as possible so that everyone has plenty of notice. Avoid dates when people are preoccupied and may not be focused on the task at hand. These days include the days surrounding Thanksgiving as well as New Years Eve. If you have several locations, but limited management personnel available to supervise the counting process, consider counting each branch on a different date.

Select the method you will use to conduct the physical. Most distributors use one of three options:

Bar-Code Readers. Bar code readers are expensive, and they require compatible bar code labels for your bins or products and special software for your computer. But these devices eliminate the necessity of counting products in teams, as well as the manual entry of counts in your computer. Because product counts in a bar-code physical can be directly downloaded from a bar-code reader to your computer, the physical inventory process is simplified and the possibility for clerical error is reduced. This usually results in a faster, more accurate count. If your computer system supports bar-code physicals, the benefits probably out weigh the cost.

Count Cards. Count cards (index cards containing an individual product and bin location) are a "low-tech" alternative to bar-code readers. These cards are placed on shelves or bins before the physical inventory begins. This allows counters to go down each aisle counting each bin in sequence. The process goes quickly because the card to record the count is already in the bin. This method facilitates the discovery of "lost" and misplaced material. If you use count cards be sure each counter has a supply of blank cards to accurately record discovered or misplaced merchandise. The blank cards should be printed on brightly colored card stock so that material that needs to be moved to its proper location (after the count has been completed) can be easily located after the physical inventory is finished.

Count Sheets. Count sheets (8-1/2" x 11" pieces of paper each listing about 25 inventory items) are easier than count cards to handle and process. But because multiple items are listed on a sheet, counters may be tempted only count the items printed on the sheet, and overlook misplaced material or products not listed. Count sheets usually result in less accurate counts and we don suggest you use them unless there is no alternative.

Determine who will count. If you are using bar code equipment, one person can count a section of your warehouse. But if you are using count cards or sheets, it's often better to have two person counting teams. This is especially true if you are using count sheets rather than count cards. When forming the count teams, pair an experienced employee with someone with less knowledge of your material. The experienced person counts the material while the inexperienced person records the quantity. This method of forming teams allows you to best utilize the talents of your most experienced sales and warehouse personnel. It also allows inexperienced people to gain valuable product knowledge.

Order the necessary supplies. Determine what you will need to obtain to conduct your inventory count. Supplies may include count cards, bar code readers, clipboards, and computer paper.

Clean up your warehouse. If all of the material in your warehouse is in its proper bin or location, you will be able to conduct a faster, more accurate physical inventory. That is why it is important to make sure that every piece of every item is where it belongs before the counting process begins. This includes cleaning out your return goods area! Take each piece and put it back in its proper bin, return it to the vendor, repair it, or throw it away.

The cleanup should be completed no less than two weeks before the date of the physical inventory. After the material is all in its proper place, your warehouse manager faces an awesome challenge – making sure every employee consistently puts material where it belongs! Who knows? If this becomes habit among your employees, a cleanup may not be necessary next year. And, the money spent on replacing missing material will be able to join the other net profit dollars on your "bottom line," where it belongs.

A physical inventory can seem like an overwhelming task. But just keep in mind that it's a lot like painting a house. The quality and success of both depend on proper preparation. Take the time now to plan and prepare for your annual count and make your next physical inventory the most accurate one in your company's history.

In our next article we抣l look at the procedures to follow during the count process as well as how to analyze the results. In the meantime, don just sit there. Take action!

Jon Schreibfeder is President of Effective Inventory Management, Inc., a firm dedicated to helping distributors get the most benefit from their investment in inventory