Inventory Stock Take Perfection Part I

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Published October 24, 2017

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The demand planning solutions have evolved to fully integrate their output into Enterprise Resource Planning (ERP) and merchandise planning solutions that help to better manage the business. With all the enhancements, why are we not seeing higher overall business profits? As we develop the statistics to better predict consumer behavior, overall costs (e.g. handling, excess mitigation, etc.) should be reduced, resulting in more profitable bottom lines.

I stopped counting how many times I read that, “due to unseasonable weather our sales did not meet expectations.” I started to wonder what “seasonable” meant and why with all the advances in statistical algorithms we have not been able to solve this dilemma. I started to question whether consumers are being impacted by factors yet defined or if something else may be impacting our ability to better forecast behavior.

In this article, part I, I will look at the underlying data driving these predictive models to ensure they are grounded on predictable information. While consumers are being bombarded with information, their fundamental trade-offs (selection, availability, price, value) are no different today than they have been since the start of the retail business.

Stock Take

The best place to start our review of the relative success of the planning solutions is to evaluate the underlying source data from which they are generated. We need to understand the way information is collected and managed. Through this quest, we can begin to determine the best approach to use the data.

As part of the most fundamental fiduciary responsibility to the business, a business must ensure their ledger reflects the condition of the business. Inventory is the biggest cost and asset to a business. Therefore, annual reporting must be accurate. Many firms leverage this asset for operating capital purposes to secure funding.

As a result, every business goes through the annual ritual of taking physical inventory. Senior management waits as they learn how much inventory was “lost” during the year. The results provide an indication of how well the operation protects its most valued asset, its inventory.

From an inventory management perspective, overages are just as insightful as losses. They provide an indication of errors that must be investigated. While the inventory reconciliation process works from the greatest variance to the smallest, every discrepancy provides insight into vendors, operations, and theft that can help better manage the business.

Teams should not look at the stock take as purely an “accounting activity”. It provides valuable insight into how to better manage the business. The reviewed processes should include:

  1. Receiving

    The inbound process for any business is critical because this is when you take liability for goods purchased. Concealed shortage, double receiving, and inbound count errors create liability for the business that cannot be recovered. Teams should take caution during the receiving process to minimize liability.

    As teams move to increase the speed from receipt to shipping, assumed receiving has become an “in vogue” process to implement. Processes must be established to audit even your best vendors to ensure their processes have not changed without any indication. As every team deals with a limited pool of warehouse workers, turnover causes processes once in control to get out of control quickly.

    Vendor concealed shortage is a major issue that must be planned for. Audits and controls should be put in place to check and record vendor performance. After seeing trends, preferred vendor decisions can be made to minimize loss exposure.

  2. Picking

    Many items look alike. Associates who are being evaluated on their speed of picking find it hard to discern the subtle differences of the items. Pickers need detailed visual aids to discern product differences. Picker scanners only help when the actual item selected is scanned.

    TechnologyTechnology is available that enables a scanner to be mounted on the picker’s arm/wrist to scan the product as pulled. This helps catch put-away errors and ensures that products pulled match the required item. Further, validating the amount picked verifies the unit of measure that is used on the line matches that physically selected.

    While, sitting with a colleague I was recounting the story, when an order came through for two nails. The warehouse worker retrieved metal snips and cut-off two nails from a roll of 500, used to feed a nail gun. The customer called and complained about the error asking why they received two nails for their order when they ordered two rolls of 500 nails. The picker must understand the unit they are picking to get it right.

  3. Vendor Issues

    Vendor billing issues frequently occur, causing loss. Double billing or an incorrect quantity billed are occurrences that one should plan for. In response, a triple match process should be instituted to ensure the right liability is booked.

    The triple match includes: a) PO detail, b) receiving detail, and c) vendor invoice. If any of these documents do not match, a review should be completed. Invoices should not be paid until the three are aligned.

  4. Facility Controls

    The supply chain must be designed with speed in mind to reduce delays. Processes must be aligned to facilitate flow. Operational hand-off should provide strong inventory controls where inventory is not “lost in transition”.

  5. Site Controls

    Unfortunately, there are people who will take from you regardless of the controls you put in place. In a warehouse environment, there are areas to investigate:

    • Handbags: Minimize any bags or enclosures on the warehouse floor that can conceal items.
    • Trash: Use bailers for all trash. Audit items being placed in the trash to ensure things are not being put in there that can be later retrieved.
    • Hidden Places: Look for items being “stashed” in corners of the warehouse. If your business has a policy of heavily discounting “aged” goods, this is a typical technique to get an item that is desired.
    • Inventory Adjustments: Monitor warehouse adjustments of inventory. Look for trends of products and/or operators.

    Think of how items could be removed undetected, devious employees will try to stay one step ahead of you, stay ahead of them.

  6. Internal Transfer Issues

    When a Distribution Center (DC) ships to a store, any concealed shortage will hurt one location, but benefit the other. Looking at all locations collectively will help to ferret out these opportunities. Look at item trends to see where either location managed the transaction improperly. Unit of measure issues often pop-up in these analyses where each party viewed the unit shipped differently.

    For example, a case pack of a product may ship as a unit of one where the store may receive them as six. Analyze the results, looking for these types of unit of measure (UOM) mismatches.

  7. Selling Issues (UOM Issues)

    The sales associate is focused on making the customer happy and closing the sale. Often, they will see what appears to be similar items that are subtly different. As a result, they will process multiple items as a single item and throw off the on-hand values. Stock take teams should note items that look alike and review the collective performance, to see if selling errors have occurred. Once the issues are found, packaging and/or label changes should be made for future purchases to minimize these issues.

    These activities can result in a system on-hand very differently than the physical on-hand.

Retail Trends

The retail industry is experiencing a fundamental shift in how it needs to be managed to make a profit. Their margins are under pressure and every cost must be controlled to ensure they have a long-term future. No longer do the margins generated allow for “loose” controls to be in place.

A major drain on retail profitability is shrink and return fraud. In the 2016 NRF retail survey, retail shrink, a comparison of the system on-hand versus the physical on-hand, ranged from 1.3% to 15% with no signs of slowing. If you are making a reasonable 10% margin, this means that some businesses must move into higher margin goods just to break even. In the best-case scenario, a business gives one unit in ten away for free.

While a business focuses on the physical control of their goods, what appears to be a “good” sale can turn into a loss for the business. A 2015 NRF retail survey estimated retail returns fraud to be 3.5% of retail sales (or $9B) and continue to grow as the sales channels diversify. This can come from selling processing errors, theft, or promotions controls.

Retail operations must enhance their controls to minimize these historic drains. Policies must be crafted that provide high customer service expectations while minimizing losses.

Demand Planning Tools

Demand planning tools use historical performance as a basis for future planning. It assumes that the selling behavior of each item is “clean” and reflects the true behavior of the item’s performance. Selling errors and out-of-stock issues are often overlooked when defining the new forecast.

As a result, the benefits of the forecasting solutions are wasted on the poor information. While the techniques are more sophisticated (e.g. handle sporadic demand, demand variability, etc.), the poor foundation ensures the results can only be as effective as the information provided. Teams should focus more effort on “cleaning up” the system information before investing in new technology to analyze the data.


C.F. KetteringDemand planning tools continue to evolve in sophistication and value. Until businesses “take responsibility” for the underlying accuracy of the data reflected, the tools will continue to deliver less than expected result. Good housekeeping controls provide the basis for maximizing your demand planning solutions investment.

How accurate is your inventory forecasting process? Have you compared your planning results to your inventory accuracy metrics? Do you need better controls or systems?

Better understanding the future may be based on better controlling today. By understanding what works today and having data to mine, you can leverage this to predict the future. How well do you manage your data? Are you able to accurately forecast your business?

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