Inventory Control – Inventory Audits and Cycle Counts

Any inventory of Raw materials, finished goods as well as Intermediate in process inventory has an economic value and is considered an asset in the books of the company. Accordingly any asset needs to be managed to ensure it is maintained properly and is stored in secure environment to avoid pilferage, loss or thefts etc.

Inventory control assumes significance on account of many factors.

1. First of all inventory of raw materials as well as finished goods can run in thousands of SKU varieties.

2. Secondly inventory can be in one location or spread over many locations.

3. Thirdly inventory may be with the company or may be under the custody of a third party logistics provider.

These factors necessitate inventory maintenance mechanisms to be devised to ensure inventory control.

Inventory control is also required as an operational process requirement. Inventory is has two different dimensions to it. On one level it is physical and involves physical transactions and movement of inventory. While on the other hand, inventory is recognizable by the book stock and the system stocks maintained. This necessitates inventory control mechanism to be implemented to ensure the book stocks and the physical stocks match at all times.

Thirdly the inventory always moves through supply chain and goes through various transactions at various places. The number of transactions and handling that it goes through from the point of origin to the point of destination is numerous. Therefore it becomes essential to control inventory and have visibility through the pipeline including transit inventory.

Inventory control is exercised through inventory audits and cycle counts. An inventory audit essentially comprises of auditing the books stocks and transactions and matching physical stocks with the book stock.

Cycle counts: Cycle count refers to the process of counting inventory items available in physical locations. Depending upon the nature of inventory, number of transactions and the value of items, cycle count can be carried on periodically or perpetually.

1. Daily Cycle Count: Normally where the number of SKUs is very high coupled with high n umber of transactions and through put, daily cycle count is initiated, where in a certain percentage of locations or SKUs are counted on daily basis and physical stock is compared with system stock. By the end of the month all of the stocks would have been covered once in cycle count.

   Inventory system throws up a count list based on an analysis of the movements of fast moving SKUs along with other attributes like value etc. In some of the system, inventory controllers can set up the attributes for each cycle count.

2. Quarterly & Half Yearly Cycle Counts: End of the sales quarter or end of half yearly sales, finished goods and spare parts are normally covered under inventory audit and a 100% cycle count is carried out.

3. Wall to Wall Cycle Count: End of financial year and closing of books entails doing wall to wall cycle count of all stocks lying in all locations and tallying with books of account. This is a mandatory audit requirement and until stock figures are reconciled, certified by auditors and published, New Year books of accounts cannot be started a fresh.

How the audit process works ?

Except for daily cycle counts, all other cycle counts entail counting hundred percent of all the stocks by stopping all transactions during the counting period. System transactions are also frozen until the count is completed.

Inventory system throws up count list with SKU number, description and location number. The operator goes to the location, checks the SKU, counts the qty available and updates the list, which is then fed into the system. The system reconciles the physical quantity with system quantity and throws up discrepancy report, which is further worked upon to tally and adjust inventory.