Easing the Pain of a Physical Inventory Count

A practical guide to physical inventory counting and cycle counting.



This is an image of a warehouse worker performing a physical inventory count.


The inventory count is routine for most retail businesses—and a pain. The process often lasts a week or more, requires operational shutdowns, and interrupts production as employees complete the task.


Physical inventory counts are also conducted by hand and are, therefore, time-consuming. It takes long enough to count and record each item, but products could also be stored in various places throughout a warehouse or storeroom. So, finding them becomes another chore. Then after completing a physical count, you must still correct discrepancies, figure out what went wrong, and create procedures to avoid repeat mistakes. 


Fortunately, this annual task doesn’t have to be such a burden. 


Let’s explore the main challenges your company may face while counting inventory and how scheduled year-round cycle counts can ease these pains. Then, we’ll discuss how you can increase your inventory accuracy with a cloud enterprise resource planning (ERP) solution.


Why Companies Need the Physical Inventory Count


Basically, inventory counts are worth the hassle for the following reasons.


  • Managers and stakeholders need accurate inventory data to make solid budgeting, operating, and financial decisions.
  • Most companies with product-centric supply chains have roughly 20% to 30% of their assets tied up in inventory holding costs (depending on the specific industry). Those holding costs include product values and fees for warehousing, controlling, and insuring those goods. The effectiveness of your inventory control processes can impact this percentage—bad approaches will inflate these costs, while good management will minimize them.
  • Up-to-date inventory records improve sales and purchase forecasts. They also ensure organizations have the right amount of product on hand to fill customer orders, make their own items, or both.
  • Physical inventory counts ultimately benefit customers who don’t want to deal with uncertain stock levels. Updated inventory data helps companies fill orders promptly, replenish as needed, and avoid costly overstock situations. They can also more effectively plan for losses (i.e., due to theft or breakage).
  • Inaccurate inventory will cause a company to report incorrect numbers for goods sold, gross profit, and net income. That’s a significant problem because public companies are accountable for the figures in annual reports to their stakeholders.
  • Inventory counting supports theft monitoring and management. For example, missing, stolen, and broken items might explain differences between what appears in the inventory management system and what is present.
  • Companies with precise inventory counts can better prepare for the coming year’s orders.
  • Physical inventory counts serve as a check and balance on cycle counting. They also help managers identify discrepancies between cycle count reports and items actually in storage.


Challenges With the Physical Inventory Count


It’s not always easy to track the volume of goods purchased and sold. The process includes inventory turnover rates and product purchase costs, which can inflate a company’s total inventory investment. You must have enough inventory on hand—and in the right locations—to meet demand while avoiding high- and low-stock situations.


Manually counting inventory can cause some of the biggest headaches for a company. Moreover, some businesses may have limited staff and need to hire temporary or part-time employees to help. So, they must involve people unfamiliar with the business and handle increased costs. This approach takes a lot of time, introduces errors, and requires a facility shutdown. 


Companies can simplify the inventory process by using RFID, barcodes, or mobile devices. But even the digital approach requires additional time and resources and isn’t entirely error-free.


This is an image of a warehouse worker surrounded by boxes.


Comparing the Inventorying Options


Businesses usually perform yearly inventory counts before compiling annual financial reports. But annual inventory counting doesn’t always produce the most accurate results. 


Instead, ease the pain of physical counts by conducting scheduled cycle counting throughout the year. You can complete it manually or electronically, using cycle counting or performing a full inventory count.


This is an image of two warehouse workers walking through tall shelves in a warehouse.


What is Cycle Counting?


You can’t avoid physical counts, but you can offset the burden with cycle counting. This method that saves time and preserves labor resources for more critical tasks. As an inventory management option, cycle counting focuses on counting items in a designated warehouse area without stopping operations to perform a complete physical inventory. 


Consequently, cycle counting has become a popular inventory management strategy across all industries. Moreover, it’s often automated and performed at least once per quarter.


Benefits of Cycle Counting


With cycle counting, you can identify and address issues as quickly as they surface versus just once a year during (or after) a physical inventory count. As a result, you can significantly reduce the time spent on annual counts. So, this method offers a significant competitive advantage in an environment where customers expect same-day shipments.


Businesses that automate cycle counting typically drive faster, more accurate counting. For example, staff can use RFIDs and barcodes more easily than jotting down stock numbers and/or scanning inventory sheets for item numbers. Other automation key benefits include: 


  • Simplified shipping and receiving processes
  • Better visibility over on-hand inventory
  • Better management of missing or stolen merchandise
  • Overall improved inventory management (i.e., less need for “just in case” overstock since your current inventory levels are always accessible)


Other key benefits of cycle counting include the following:


  • Higher order fulfillment rates
  • Better customer service levels
  • More accurate inventory assessments
  • Higher sales
  • More time between physical counts
  • Fewer errors
  • Fewer inventory write-offs and obsolescent inventory
  • A more efficient operation overall
  • Possible elimination of annual counts
  • Improvement of the closing process
  • Decreased audit fees
  • No employee overtime costs
  • Ability to quickly detect product thefts


Adopting Perpetual Inventory Systems to Limit Freezes and Shutdowns


Companies with large amounts of products (e.g., wholesalers, distributors, and retailers) find it disruptive to “freeze” stock and count inventory. So instead, they can supplement annual inventory counts with perpetual inventory systems that appease auditors and reconcile inventory numbers.


Perpetual inventory systems don’t eliminate physical inventory counts entirely. Yet, they use point-of-sale devices and scanners to record real-time inventory changes, making a physical count far simpler. This matters because an operation that shuts down to count inventory for a week can fall behind the competitive curve.


This is an image of a warehouse worker pulling boxes through a warehouse during a physical inventory count.


Which Industries Need the Inventory Count?


Retailers, manufacturers, wholesale distributors, and e-commerce companies all perform inventory counts. Even companies with small amounts of stock must know how much they have, whether they use full annual inventory counts or cycle counting. They also need to know which stock-keeping units are languishing on the shelves and which ones need replenishing.


For example, a stock-heavy company, like a distributor, would benefit from a perpetual inventory system. The system would not only appease auditors but also ensure products are in the right place when the company needs them. Moreover, where a periodic inventory system relies on occasional physical counts, a perpetual system continuously tracks inventory balances and automatically updates inventory records when items are sold or received.


An apparel company that accommodates changing customer preferences also needs a robust inventory counting approach. Otherwise, it’ll get stuck with too many of “last season’s” garments. Fortunately, apparel companies can use upgraded inventory management systems to quickly change product mixes, track new item movements, and create space for fresh products on the warehouse or retail floors.


Food and beverage companies and restaurant operators also need good physical counting processes. This is because they deal with perishable goods and must take regular stock of any food in storerooms and warehouses. 


Cycle Counting Best Practices


Even the most organized companies can face inventory cycle counting challenges. For example, one might unknowingly introduce inventory errors when dealing with multiple locations or face paperwork lags and outstanding transactions. Counts can also generate false variances when they’re not updated in real time. To avoid these issues, clearly define your process and track inventory accuracy.


When developing a cycle counting program, consider three main inputs:


  1. Number of SKUs. Determine how many products (or stock-keeping units) you want to count at a time. Base that number on your total SKUs, your number of high-value products, and what is reasonable to count in intervals.
  2. Available counting resources. Determine how many employees are available and how much time they can have to count stock. For example, some companies suggest employees use the time before shift end to count SKUs in their assigned areas. This scheduling fills a natural lull in employee productivity with relatively easy work. These employees should not have a stake in the accuracy of the numbers.
  3. Counting Frequency. How often you count inventory depends on how many SKUs you want to cycle count in the year. For example, if you wish to count 1,000 SKUs per year, then count 83 per month, 21 per week, and three per day, assuming you only count each SKU annually. However, you may want to tally high-value items more often. And don’t forget to factor in the time it will take for counters to record their daily SKUs.


Physical counting once a year may seem like a viable option. However, cycle counting is less disruptive and causes less stress.


After establishing the inputs, your company can create a successful cycle counting approach using the following best practices:


  • Close all transactions for inventory items before the cycle count.
  • If using the ABC method—whereby companies classify inventory items based on the items’ consumption values—be sure to organize those items into the respective counting groups using specified, documented processes.
  • Count all products for all SKUs listed.
  • Decide what to count and when. For example, it may make sense to tally high-value items or products that move through the warehouse quickly. Count all other stock quarterly.
  • Identify the fastest-moving items in the warehouse. Mark them as fastest to slowest to determine how to classify products for future counts.
  • Dedicate specific personnel to counting teams, and ensure those teams inventory all products at least once quarterly.
  • Immediately investigate any errors or discrepancies. (Don’t wait until the year-end to deal with these issues.)
  • At least initially, perform counts twice to ensure accuracy, and have a supervisor check the counts against the inventory in the system.
  • Document everything, including the process itself, the changes, and the results.


Physical counting once a year may seem like a viable option. However, cycle counting is less disruptive and causes less stress. And you can use it with inventory and warehouse management systems. The combination offers more accurate inventory levels, automatic prompts for counting items, categorization based on volumes or value, improved quality assurance, and higher customer satisfaction rates.


Ready, Set, Go!


Counting inventory is a requirement for most businesses. In fact, a company must conduct regular inventory checks, no matter the effectiveness of its replenishment, tracking, and management systems. An accurate item count can help reduce required safety stock, lower overhead costs, and provide more control over assets.


Fortunately, physical inventory counts have become easier and less intrusive thanks to advanced technology. They also require less staffing. And by replacing Excel spreadsheets or other manual inventory control systems with inventory control software, your company can more efficiently track stock while reducing human error and saving time and money.


An inventory management system also ensures that you have the right amount of stock at the right locations to meet customer demand.


NetSuite’s inventory and warehouse management solutions will help your inventory managers track and locate stock at a moment’s notice. The system includes features such as artificial intelligence (AI), vendor-managed inventory (VMI), and mobile device integration. 


For example, the cloud ERP platform’s inventory count feature improves inventory tracking and provides increased control over primary assets. It also allows you to categorize inventory based on transaction volume and/or value and enter periodic counts of on-hand items to maintain accuracy.


Plus, with the mobile app, users can scan bins and items, automatically recording the cycle counts without leaving the floor. This makes auditing inventory less intrusive to daily work and reduces manual errors from incorrect keying and lag time.

If you want to know more about NetSuite’s inventory management feature, call the SuiteDynamics experts. We’ll customize a system that will revolutionize your product counting experience.


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