According to the U.S. Bureau of Labor Statistics, there are more than 16,000 private industry warehousing and storage establishments in the U.S. These facilities employ some 90,000 industrial truck and tractor operators, more than 180,000 laborers, about 30,000 shipping, receiving and traffic clerks, and more than 50,000 stock clerks and order fillers.

For example, retail giant Target's 2 million sq. ft. warehouse in Lacy, Wash., could house four or five smaller warehouses, showing how enormous some of these facilities can be. With thousands of workers picking and loading, counting or moving cargo, there may be chaos and confusion—particularly when counting inventories upwards of 450,000 items. Regardless of warehouse size, gone are the days when you could just send someone out to walk up and down the aisles and start counting.

And who suffers the most when inaccurate orders are shipped? The paying customer. Companies such as Intel ship hundreds of thousands of electronic components all over the globe which run our PCs, healthcare and telecom equipment, and many other devices. If there's even a minor error in the shipping documentation, then some of the major manufacturers in the world suffer, and Intel's reputation and brand are tarnished. That's a major business problem. And what if a shipment of defibrillators destined for a hospital was detained due to a mishandled form? Lives could be at stake.

Fortunately, warehousing technology, particularly the latest generation of warehouse management systems (WMS), have emerged to automate, calculate and categorize the data needed to run warehouses and distribution centers (DCs). The goal is to be better prepared to predict the future. While minor mistakes are generally easy to recover from, major mistakes can cost companies millions and can put a company out of business or in trouble with the law.

In a global economy where goods are stored and shipped internationally, the best warehouse environment operations are agile. Since efficient tracking of all the items coming and going is essential, let's look at some general inventory counting guidelines.

Where to Count?

Some operations have only one or two locations, while others have thousands. But even the smallest operation may benefit from a checklist of locations where items may exist that need to be counted.

What to Count?

The quick answer of what to count is salable items such as electronics, apparel, pharmaceuticals and vehicles; items in transit and items you're holding for others; or items held by third parties in physical areas or "locations." Advanced planning will help deal with questions that are bound to arise during a count. Even a sole proprietor will be helped by making these decisions in advance because you want to spend as little time as possible thinking during an inventory count and maximize the time spent counting. Also, anyone helping with the count will need to know what to count.

When to Count

If you are in a business that experiences demand changes based on the seasons, time of year, holidays, or days of the week, then you will want to have an accurate count of those items that are most affected by these factors. You'll want to know how much of an item you used last time, and how much was left over so you can decide how much to buy this time.

Cycle Counting

Different types of counting techniques have evolved over the years. Let's start with cycle counting.

Cycle counting is the process of verifying inventory accuracy by counting a few items every day and comparing the count to computer records to reconcile differences. Many accountants require companies to do two to three complete cycle counts to avoid annual physical inventory.

Warehousing expert and consultant Don Benson (www.warehousecoach.com) offers a method of selecting what to count and when to conduct a cycle count based on the activity of the items in the warehouse. Here are some of his recommendations:

First rank items and then:

  • Count "A" rank items (top 80% of sales or inventory value) six times per year.
  • Count "B" rank items (next 15%of sales or inventory value) three times per year.
  • Count "C" rank items (next 4% of sales or inventory value) twice per year.
  • Count "D" rank items (last 1% of sales or inventory value)and items with no sales count once per year.

Benson believes this method works well for maintaining accurate inventory counts because it focuses effort on the items that move the most, which are those with the greatest opportunities for processing errors.

By performing cycle counts, you're regularly validating the accuracy of the inventory in your system. This method of counting is popular among large organizations that have thousands of items in inventory and cannot be closed for a long period of time to perform an annual physical count.

Robin Dady, a controller for Mc-Kenna Metal (www.mckennametal.net), offers another perspective.

Dady, who has had oversight for accounting for both tangible and intangible inventories, views cycle counting as a way to help mitigate many risks and challenges.

For example, if a warehouse and purchasing manager doesn't know how much stock is on hand for planning or completing jobs, productivity can drop and problems arise, particularly during peak demand seasons. Depending on the size of a company's operations and its ability to invest in process and system infrastructures, cycle counts can help maintain needed inventory visibility and enable key decision making.

Other risks that a lack of awareness can cause include:

  • Internal theft or waste of materials, which can increase company costs.
  • If company management doesn't show concern over inventory, there is risk of creating an employee culture that doesn't care.
  • Finally, improper asset valuation—overstating or understating balance sheets—impacts costs of goods sold (COGS) and risks profit distortions.

3 Steps to Conducting a Cycle Count

  1. Identify and prioritize types of materials that need to be counted and establish a method for counting, such as random sampling or using a control group.
  2. An inventory count may depend on whether a company has a reliable WMS, enterprise resource planning (ERP) and/or work process system that can deplete inventory as it is being used for work in progress (WIP), finished or sold.
  3. Based on materiality of the inventory, determine appropriate frequency. Schedule counts during non-peak days/hours if possible. Communicate the plan for the count to employees impacted.

One possible downside to cycle counting is that it may not be as efficient for small companies that don't have an ERP or work process system in place to track inventories.