Physical Inventory is an annual process where a business physically counts their entire inventory. Common in manufacturing and warehousing, physical inventory is a mandatory all hands on deck process lasting anywhere from one day to one week. This laborious process involves counting, weighing, and measuring raw and in process material, but why do companies disrupt production and shipping for a physical inventory count?
Roles and Responsibilities
The Physical Inventory Process is typically owned by the Supply Chain, Materials, Finance, or Business Manager. It is the responsibility of this manager to ensure a smooth and safe Physical Inventory that protects both the employees and the asset material. The roles involved in the process typically include part counters, auditors to validate counts, inventory reconciliation personnel, area leaders, data entry, and in some cases, part identifiers.
Minimizing Disruption
As I previously stated, Physical Inventory can take days depending on the size of your operation. To get accurate counts, production is halted and parts are not allowed to me moved until the process is complete. How does a car company or medical device company minimize production disruptions to the end customer?
- Safety Stock and Buffers – Many companies prep for Physical Inventory by building a surplus of Finished Goods. This increases the carrying cost of inventory, but it prevents customers from experiencing long lead times.
- Inventory Services – There are companies that specialize in Physical Inventory. They can provide automated tools such as barcodes and scanners to help complete physical inventory at a quicker rate.
- Cycle Counting – Daily counting of at risk parts can help you stay on top of the inventory accuracy of that part.
- Robust Inventory Control System – Having an RFID-based inventory tracking system can eliminate the need for Physical Inventory, as long as it’s accurate.
- Pre-Counts – You can pre-count parts that are not in the forecast or build schedule. In other words, if you know the part won’t be used before Physical Inventory, you can go ahead and count it. This can save significant time during the physical inventory process.
- A Good Plan – How well and how quickly physical inventory is executed largely depends on the person managing the process and the team. Were they trained in their respective roles and responsibilities? Are they familiar with the product? Do they know how to navigate the shop floor? Do they know who to call for help?
Legal Requirements
A physical inventory may be mandated by stakeholders such as stock holders, banks, suppliers, employees, government agencies, and more. Financial Accounting and tax regulations may require Physical Inventory to place an accurate value on the inventory. This is especially required for companies that are required to report their earnings or losses to their shareholders.
Losing Millions
It is not uncommon for a large national or global business to find out that they have lost millions of dollars in inventory when they complete the Physical Inventory Process. There can be many reasons for the loss including:
- Bill of Material Errors
- Inventory Control Errors
- MRP Software Errors
- Wrong Counts
- Missed Counts
- Wrong Part Numbers Documented
- Expired or Outdated Inventory
- Increase of Scrap or Defects
- Scrap/Defect Reporting Process Not Followed
- Theft and Vandalism
- Assembly Errors (Building a basic product with premium components meant for more expensive versions of the product)
This is why it is important to have Auditors in the Physical Inventory process. Inventory needs to be counted at least twice by different people. The process needs to be audited and validated. When the loss is so severe, employees may be forced to redo Physical Inventory and recount everything again late evening or on the weekend. It’s not a fun process. Physical Inventory typically takes place 1-2 months before the end of the fiscal year. That means your company has just had its physical inventory last month in October or will have it sometime in November. If your company loses millions in inventory, don’t be surprised if the stock price drops when the fiscal report is published.
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