As the holiday shopping season swings into full gear, it is generally a sign that it’s time to revisit inventory.  As some companies approach the end of their fiscal year, many begin annual audits, both of company financials as well as of inventory. While financial audits are difficult to see from the outside, signs of an inventory audits can be easier to spot.  Maybe your favorite store will close at 3:00 pm and not be open the following day for “inventory,” or perhaps you’ll see auditors spread out throughout a story, scanning tags and checking each item off a big list like so many slightly bored elves.

Behind the scenes, all the “stuff” or merchandise that a store carries translates into inventory.  In the retail space, inventory equates to finished products, but in manufacturing, parts and pieces become the finished product.  Internal fraud tends to rise as the holiday season approaches, and it’s rare that a manufacturing or retail company has no breakage, loss, pilferage or theft.  Small and expensive items seem to disappear at an alarming rate, and electronics and electronic parts, such as disc drives, are especially vulnerable.  Meanwhile, the organizations that have warehouses full of these items rarely have the luxury of a multi-day shutdown to complete a complete inventory.  Retailers, especially during the holiday shopping season, shudder at the thought of store closures and the resulting loss in revenue, as no organization performs a full inventory count unless they have to. 

At the end of every accounting year, the IRS mandates an inventory from manufacturing and retail organizations that deal with physical products, which is where write-downs and write-offs occur.  While most companies try to avoid complete inventories at all costs, waiting until the end of the year can deliver a nasty surprise to the bottom line if millions in inventory is suddenly missing.

In order to avoid hefty Q4 hits (write-offs for “lost” inventory), Ed Neveu, AMS Senior Consultant, recommends a cycle counting strategy to help estimate inventory issues and crack down on warehouse losses.  Cycle counting programs, a part of most standard inventory systems, randomly generate a list of parts to be counted and verified on a daily basis.  Best practices dictate that the count and verification is done by someone other than a warehouse worker, as the cycle counter should not know what the proper inventory count should be. In addition, the parts are randomly chosen each day, which tends to serve as a deterrent to pilferage. 

The cycle counting programs allow the finance team to track, estimate and accrue for missing inventory before the full year end inventory.

Neveu once worked with a company that managed a 400,000 square foot warehouse.  The organization benefited from a private IRS ruling that allowed it to use a statistical program to count parts on a daily basis while the warehouse was open and operating. The company was able to demonstrate that the program they used had better than a 99 percent accuracy rate and was a better way of managing inventory controls.

Another strategy Neveu recommends for inventory control involves “warehouse pickers.”  Pickers are in charge of filling shipment orders or parts for the manufacturing process.  In many warehouses, pickers drive around the warehouses in forklifts picking product to be transferred to the manufacturing floor.  The product is normally put on a pallet and taken to the final destination via “tuggers,” small carts that have the pallet loaded on them with the parts requested.  Fulfilling an order can involve moving a whole pallet of finished goods or placing a small number of nuts and bolts in a container on the tugger. 

One of the biggest problems in a warehouse often involves the pickers.  A picker may be requested to pick a box that contains one dozen parts. However, if the picker does not verify that the box contains the dozen parts and assumes the labeling correctly identifies the box contents, the mistake gets perpetuated down the line and may make it difficult to track where the problem originated.  By completing a random audit of the parts currently in transit on the tugger, Neveu can identify shortages before they enter another system.

Inventory control strategies like cycle counting may reduce loss over the long run but being able to track and estimate loss and resulting write-downs in a timely fashion is also an important reason to address this issue head on.