In a business that does not have accurate inventory records, it is necessary to periodically conduct a complete count of the inventory (known as a physical count). This is usually done at the end of a month, quarter, or year, to coincide with the end of a reporting period.
As the following procedure will show, it takes a great deal of effort to complete an accurate physical inventory count, so companies tend to limit the number of counts completed per year. The steps in the process are as follows:
- Order count tags. Order a sufficient number of two-part count tags for the amount of inventory expected to be counted. These tags should be sequentially numbered, so that they can be individually tracked as part of the counting process.
- Preview inventory. Review the inventory several days in advance of the scheduled inventory count. If there are missing part numbers, or if items appear to be in a condition that would be difficult to count (such as not being bagged or boxed), notify the warehouse staff to make the necessary corrections.
- Pre-count inventory. Go through the inventory several days in advance and count any items that can be placed in sealed containers. Seal them in the containers and mark the quantity on the sealing tape. This makes the counting task much easier during the actual count. If a seal is broken, then a counting team will know that they need to re-count the contents of a container.
- Complete data entry. If there are any remaining data entry transactions to be completed, do so before the physical inventory count begins. This includes transactions for issuances from the warehouse, returns to the warehouse, and transfers between bin locations within the warehouse.
- Notify outside storage locations. If the company has any outside storage facilities or third-party locations that hold company inventory on consignment, notify them that they should count their inventory on hand as of the official count date and forward this information to the warehouse manager.
- Freeze warehouse activities. Stop all deliveries from the warehouse, and also segregate all newly-received goods where they will not be counted. Otherwise, the inventory records will be in a state of flux during the inventory count, and so will not be entirely reliable.
- Instruct count teams. Assemble two-person teams to count the inventory, and instruct them in their counting duties. These duties involve having one person count inventory while the other person marks down the information on a count tag. One copy of the tag is affixed to the inventory, while the team retains the other copy.
- Issue tags. An inventory clerk issues blocks of count tags to the count teams. Each team is responsible for returning a specific numeric range of count tags, whether or not the tags are used. Maintaining control over all count tags ensures that lost tags will be investigated promptly.
- Assign count areas. Assign a specific range of bins to each count team. Note these locations with a highlighter on a map of the warehouse. The inventory clerk should maintain a master list of which areas of the warehouse have been counted, and which teams have been assigned to each area.
- Count inventory. One person on each team counts a specific item within a bin location, and then the other person marks the bin location, item description, part number, quantity, and unit of measure on a count tag. The team affixes the original copy of the tag to the inventory item, and retains the copy.
- Verify tags. Upon completion of a count area, each count team returns to the inventory clerk, who verifies that all tags were returned. If there are more warehouse areas to be counted, assign a new area to the count teams and issue them new blocks of count tags as necessary.
- Enter tag information. Enter the information on the count tags into an online data entry form. Once data entry is completed, print a report showing all tag numbers entered, sorted by tag number, and look for any gaps in the numbers. Investigate any numbering gaps found. This will ensure that all count tags issued were included in the file.
- Investigate unusual results. Re-sort the inventory report several ways to look for unusual information, and investigate the tag entry associated with each one.
It may be useful to evaluate this procedure after every count, to see if the procedure should be altered to compensate for counting issues experienced.