Regular inventory audits are essential for the success of any business. It helps to prevent stock-out problems and increase the operational efficiency of a business. An audit of inventories ensures that the right amount of products is available in the warehouse to meet customer demands.
Traditional inventor or stock audit systems are quite time-consuming and can be prone to errors. However, a well-planned audit system can transform the task into a relatively painless process.
What Is an Inventory Audit?
Inventory audit is part of a business’s inventory management process. Here, the business cross-verifies the systems records with the physical inventory count and ensures they are equal.
Physical inventory count means the warehouse staff counts each stock to keep a record of the available products.
Complete the Inventory Audit Checklist​
- If a business hires an outsider to do the inventory audit, it should provide all the necessary information before doing the audit.
- The business needs to pick up a time when it least affects the order processing and shipping operations.
- The business must use good software to track the real-time inventory data.
- The business should write down all the details in the inventory audit.
- The business should follow the appropriate steps for the audit.
- If the business finds a difference between the record and physical counting of stocks, then it should identify the reasons for it.
Types Of Inventory Audits
There are various types of inventory audits. We are listing them below.
1. Physical Inventory Counts
In physical inventory counts, a company counts all the stocks in the warehouse storage annually or semiannually and compares them with the inventory management software. For example, if you have 5000 items in your warehouse based on a real-time inventory tracking system, the warehouse staff needs to count and ensure there are 5000 items. The staff should even find out the items that have become obsolete or cannot be sold to the customers. A business may face difficulties during physical inventory counts if thousands of products are in the warehouse.
2. ABC Analysis
ABC analysis means dividing the products based on their profitability and demand.
Class A Items: These items contribute the highest profitability to the business. They are highly essential for business. They are usually 20 percent of the available stock and contribute 80 percent of the total revenue.
Class B Items: These items do not contribute as much profitability as class A items. They contribute almost 15 percent of the total revenue.
Class C Items: These items are the least valuable products in the warehouse. They contribute only 5 percent of the total revenue.
3. Cut Off Analysis
Cut-off analysis includes halting various warehouse operations during the physical count of inventories. There will be no movement of goods inside and outside the warehouse during the physical inventory count.
Let’s discuss this with an example. Suppose a business decides to do a cut-off analysis from 9.00 AM to 4.00 PM. Inventories will not be moved inside and outside the warehouse during this time.
4. Freight Cost Analysis
Freight cost analysis helps determine the logistics cost when the inventories are transported from one place to another, and it is an excellent way to identify damaged products during transit. This analysis will help a business to make informed decisions about freight shipments.
5. Overhead Analysis
Overhead analysis examines all the indirect costs of producing the product, such as rent, utilities, and administrative expenses. The costs can be fixed, variable, or semi-variable. A business needs to analyze the overhead cost and plan the budget accordingly.
Inventory Audit Procedures
1. Prepare And Plan
A business needs to organize the warehouse and fulfillment center before doing the regular inventory audit. For example, companies need to manage similar products closer to each other. It should even figure out the damaged or obsolete products or any inventory sitting in the warehouse for a longer period.
The business needs to decide on the audit goals and procedures that must be followed while doing an inventory audit.
2. Execute
Businesses need to decide on the type of inventory audit to execute the process. It can include physical counting of items in the warehouse ABC analysis or overhead analysis.
The business should train the team before doing the audit properly, which helps avoid both time and energy. Businesses should even schedule the inventory auditing process at a time to avoid disturbing critical operations like shipping. The audit should occur when paused 3PL operations have the very least impact on order fulfillment and shipment.
3. Analyze The Results
Now, businesses should compare the data with the real-time inventory tracking record. For example, if the physical count is 3000 items, the real-time inventory record should be 3000. If it varies, the business must identify the reasons and avoid discrepancies.
Benefits of Doing Regular Inventory Audit
The benefits of doing regular inventory audits are as follows.
- Identify Discrepancies: If there are many gaps between the inventory records and physical counting, it means a lot of inventory shrinkage. An inventory audit can discover the problem, and it allows businesses to find solutions to it.
- Fraud Prevention: Businesses can protect inventories against theft and unauthorized access through regular inventory audits.
- Quality Control: A manufacturing business can identify damaged or expired items through regular inventory audits, and only qualitative products can be delivered to the customer.
- Prevents Overstocking And Out Of Stock Issues: Overstocking can increase the holding costs of a business, while out-of-stock problems can have an adverse effect on customers. Regular inventory audits can prevent overstocking and out-of-stock issues.
- Boost Operational Efficiency: Accurate inventories can optimize the order fulfillment process and identify inefficiencies in the supply chain process.
Challenges In Inventory Control Audit
There are a few challenges in the inventory control audit, which are listed below.
1. Time
Inventory audits can be quite tedious, especially for large businesses. It isn’t easy to count thousands of stocks in the warehouse. Some strategic solutions or advanced tools can help count the goods faster in the warehouse.
2. Human Errors
There can be errors in counting the physical inventories in the warehouse or in identifying damaged inventories. Businesses must establish streamlined procedures and provide proper staff training to minimize this challenge.
3. Operational Disturbances
When a business performs cut-off analysis, it stops all the necessary logistics operations like filling orders or shipping. It can decrease customer satisfaction.
Remarks
Inventory audit varies from one business to another. However, choosing the right inventory audit method and management software can increase operational efficiency and avoid problems like overstocking and out-of-stock issues.
AAJ Supply Chain Management
