One of the key functions that must be carried out with all inventory management is a periodic reconciliation between actual stock holdings and the holdings according to the accounting system. This reconciliation is a requirement of financial management and accounting standards and the primary intent is to ensure that the organization correctly reports its financial position. It may surprise some operational personnel that a stock take is not usually intended to ensure that holdings are appropriate for operational purposes. At this time of year many organizations are planning their yearend or half year stocktakes (depending upon how the financial year is measured) and so today and next month I am going to focus on this stock reconciliation.
Fundamentally there are two ways that this reconciliation occurs: stocktakes or cycle counts. Both approaches are valid but they each have their pros and cons. The following is a summary.
A stock take is an annual (or semi-annual) physical inventory count. Typically a stocktake involves establishing the current stock level for all items in the inventory and comparing this to the quantity held according to the accounting or inventory management system. A stocktake is a snapshot of the inventory holding at that particular point in time.
The pros are that you achieve a complete (hopefully accurate) snapshot of the inventory levels, giving a good picture of the overall effectiveness of inventory management; and adjustments happen at the one time, simplifying that activity and the subsequent reporting.
The cons are that single stocktakes can be very disruptive to operational needs (sometimes requiring a complete shutdown of other work); and, because stock accuracy is only examined once a year, the overall accuracy can deteriorate during the rest of the year.
A cycle count is, strictly speaking, also a stock take but it generally involves only a small percentage of items each time, with the entire inventory counted over the course of the year. The key to cycle counting is to count a small, manageable number of items each week or each month. The system for managing this must ensure that the entire inventory is actually included during the year. Often companies that can demonstrate a reliable system of cycle counting are not required to complete an annual stocktake. This is a decision of their auditors or financial team.
The pros of cycle counting are that they are not disruptive to normal operations as they can be planned and balanced with the regular demands of the work cycle; the regular feedback of inventory information allows a more proactive response to issues that arise; the more active items or those with a history of accuracy problems can be targeted more often; and this leads to a more consistent and higher level of accuracy.
The only real con is that cycle counting requires management on a weekly or monthly basis to ensure that all items are covered and the counts actually happen. This is more sophisticated than the once (or twice) a year approach of a complete stock take. I cannot stress enough that to be truly effective cycle counting must cover the entire inventory at least once per year.
The decision of whether to stock take or cycle count usually comes down to whether the team can effectively manage the consistent demands of cycle counting (including reporting, investigating discrepancies, correcting and updating the system) or whether there is a preference for a single planned ‘event’ (accepting the accuracy issues that may arise during the year).
