Warehouse Inventory Counting Techniques: Tips for Better Accuracy

  • By Matthew Davis
  • Mar 21, 2024
  • Inventory Secrets

Physical inventory counts are tedious and time-consuming, and commonly, they’re done manually. According to one industry estimate, 43% of businesses count inventory manually or not at all.

Unfortunately, manual counts tend to be inaccurate. And the problems grow the larger the business is. Manual warehouse inventory counting, for example, is often chaotic and can result in huge inventory discrepancies.

Manual counting is a big reason why the average accuracy rate for businesses is just 65-75%.

But is there a better way to do warehouse inventory counting? And what are some techniques businesses can use?

In general, there are two common counting inventory techniques: Cycle counts and full physical inventory counts. We look at both in this guide and provide tips you can use to get more accurate inventory counts.

Inventory Counting Methods: Cycle vs Physical Counts

As mentioned, there are two main approaches to counting inventory:

  • Physical inventory counts – Counting your entire inventory at one time.
  • Cycle counts – Counting smaller portions / categories of inventory at set intervals.

In other words, physical inventory counting is an important, albeit time-consuming, warehouse management task. However, it provides the most up-to-date count of your inventory at any given time. Cycle counting, on the other hand, is ongoing. It’s continually done throughout the year. This saves time, while providing visibility into your most important categories.

Ultimately, both approaches to inventory counting offer benefits and have specific use cases.

What Is Physical Inventory?

Physical inventory, or a full inventory count, is the process of counting the actual amount of stock you have on hand. For example, during a physical inventory count, a warehouse or convenience store would count every item in their inventory.

A physical count is time-consuming, and it’s difficult to do manually. Handheld barcode scanners – which sync data to a central database – are a must-have tool for conducting physical counts.

Physical inventory is generally done annually, and it may offer a better accounting of inventory at a specific point in time.

How Often to Do Physical Inventory?

Retailers have different inventory needs, and therefore, may conduct physical counts annually, quarterly, or in some cases, monthly. The frequency of a physical inventory count depends on factors like:

  • Value of Inventory – A business selling high-value items would likely conduct physical inventory more frequently than a dollar store. This is due to the greater potential loss from shrinkage.
  • Rate of Turnover – A grocery store with a high turnover rate sells and restocks quickly. Businesses like this might be comfortable with less frequent physical counts, because they have a good sense of what’s selling. See more grocery store inventory tips.
  • Importance of Accuracy – A car parts manufacturer must know exactly how many engine components they have on-hand to meet production demand. Inaccurate inventory can lead to production delays. Generally, real-time inventory data which syncs inventory across your operation is generally a must

Additionally, a physical count might be necessary for financial reporting / valuation, if you’re trying to pinpoint inventory discrepancies, or for forecasting. Many businesses, therefore, might do a physical count annually, notwithstanding special circumstances.

Advantages of Physical Inventory Disadvantages of Physical Inventory
Improved accuracy; most reliable way to verify inventory records Disrupts day-to-day retail operations
Can help pinpoint discrepancies and reveal shrinkage Labor-intensive and generally has high costs
Provides up-to-date data for purchasing and forecasting Human error and inaccurate counts can still happen

Cycle Counting: An Alternative

Cycle counting refers to systematically counting a predetermined portion of inventory at a regular inventory.

The biggest advantage: Cycle counting provides ongoing inventory visibility without disrupting day-to-day operations. This is because you’re effectively spreading physical inventory efforts throughout the year.

Here’s a real-world example

Suppose you are conducting a liquor store inventory count. A physical count would require the owner to verify every bottle and case in the store. With a cycle count, the owner might focus on red wine week 1, white wine week 2, spirits week 3, and beer week 4. Then, start the cycle over in the following month.

Many businesses and warehouses conduct cycle counts during normal operations. Therefore, it doesn’t disrupt business hours.

How Does Cycle Counting Work?

Here’s a quick overview of cycle counting

  • Process – You use ABC analysis (or something similar) to divide your inventory into categories. You then set a regular schedule to count each category.
  • Frequency – Cycle counting frequency often depends on the category, e.g. you count high-value items or fast-moving stock more frequently.
  • Sampling – Depending on the size of the inventory, a statistical sample might be selected to select items within each category for counting.

For example, you might count “A items” (high-value or fast-moving) monthly, while “B and C items” are counted every 60 or 90 days, respectively.

Cycle Counting vs Partial Physical Inventory

The big keyword here is ongoing. Cycle counting is a continuous inventory counting method.

A partial physical count, on the other hand, is a one-time process. Partial counts are useful if you’re investigating shrinkage, for accounting/ordering purposes, or to verify inventory in a specific section of the warehouse.

Statistical Sampling in Cycle Counting

Statistical sampling is a technique used to select a representative sample of items from a larger category for counting during a cycle. This allows you to estimate the accuracy of your overall inventory levels without needing to count every item.

There are different statistical sampling methods available, each with its own strengths and weaknesses. Common methods include:

  • Random Sampling – Every item in the category has an equal chance of being selected.
  • Stratified Sampling – The category is divided into sub-groups (e.g., by color, size), and a random sample is taken from each sub-group.
  • Dollar Value Sampling – Items are selected based on their individual value, ensuring the sample reflects the overall value of the category.

You don’t have to create statistical samples to do cycle counting. In fact, this is often reserved for large warehouse inventory counts or businesses with multiple locations.

Advantages of Cycle Counting Disadvantages of Cycle Counting
You don’t have to disrupt normal day-to-day operations. Requires ongoing management and more time upfront to set up and organize.
Ongoing inventory visibility, helping you to identify issues faster. Relies on the accuracy of your existing inventory data.
Targeted approach, allowing you to count high-value stock more frequently. Using statistical sampling can amplify inaccuracies if not done correctly.

Choosing the Right Inventory Counting Technique

First, let’s just say that cycle counting is an effective approach, especially for smaller retailers. For example, a convenience store inventory plan would benefit from smaller, ongoing inventory counting, because it could be conducted during normal hours between breaks in customers.

For warehouse inventory counts, cycle counting works too. It’s especially helpful for large warehouses with extensive inventory volume. If you’re building an inventory plan, here are factors to consider:

1. Warehouse Size and Inventory Volume

For small retailers (without a large stockroom), physical inventory might be the most useful approach. For example, a store might do a monthly physical count during normal working hours with minimal disruptions.

For a large warehouse, cycle counting may be more manageable. Typically, the more extensive the inventory volume, the greater the need for inventory management tools like barcode scanning, statistical sampling automation, and data syncing.

2. Budget and Resource Constraints

Physical inventory is costly. It may disrupt business and will inevitably increase labor costs. For businesses with limited staff, cycle counting offers a simplified approach. The best strategy would be to have inventory cycle counts conducted as part of daily operations; for example, during off-peak hours, an employee would count items on the sales floor.

3. Inventory Turnover Rate

Businesses with fast-moving inventory are more prone to discrepancies. This is due to frequent sales and restocking. For this type of business, cycle counting offers ongoing accuracy. In general, with faster-moving inventory, businesses rely on sales data to forecast demand and identity shrinkage. With lower moving products, physical inventory or cycle counting is needed to improve inventory control.

4. Desired Inventory Accuracy Rate

Businesses that need precise counts for high-value items might prefer physical inventory. An example would be an electronics retailer that needs to know exactly how many laptops it has on hand. Physical inventory done monthly, for example, would help them achieve more accurate inventory.

At the other end of the spectrum, a business with lower-value inventory might be comfortable with less-frequent physical inventory counts. Precision isn’t as important. For example, a T-shirt shop might choose cycle counts for their A category items, while doing counts for B and C category items at less frequent intervals.

Best Practices for Inventory Counting

Regardless of your chosen inventory technique, there are steps you can take to make the process more efficient. Broadly, there are four main steps to follow:

1. Planning and prep

2. Streamlining counting

3. Minimizing errors

4. Data valuation and verification

Too often businesses jump into inventory counting without setting goals or organizing their efforts. The result is often disparate data from non-standardized counting methods. Here’s a closer look at each of these steps:

A. Planning and Preparation

Start with defining your goals. Do you need a full physical verification? Or is your goal to focus on specific high-value categories? Once you know what you want to achieve you can:

  • Organize Your Inventory – Clearly label shelves, cases and bins. And create an inventory map for your team that shows where in the warehouse they will conduct counts.
  • Set Standards – Don’t neglect training. Provide clear instructions and standardized counting procedures. Your team should know exactly how to count items – for example, case breaks – and how to record their data.
  • Prepare Your Counting Tools – Finally, before you get started, make sure all tech is working properly. For example, if you’re using inventory scanners, verify the data syncs correctly.

B. Streamlining the Counting Process

Start with technology. Inventory management software and tools like barcode scanners and RFID tags improve accuracy by reducing manual errors. Provide training to ensure your team knows exactly how to use these tools. Then, follow these approaches:

  • Divide and Conquer: Assign specific areas or categories to counting teams to ensure efficient coverage.
  • Implement Cycle Counting (if applicable): For cycle counting, follow the predetermined schedule, selecting items for counting based on the chosen statistical sampling method.
  • Maintain Documentation: Keep clear and concise records of the counting process, including personnel involved, areas counted, and any discrepancies noted.

C. Minimizing Counting Errors

Even with an established protocol, errors happen. However, there are strategies for reducing human error, including:

  • Prevent Double-Counting: Set a protocol to mark counted items. This prevents accidental re-counting.
  • Count Fatigue Mitigation: Schedule breaks to reduce fatigue and help employees maintain focus.
  • Conduct Spot-Checks: Assign a quality control person to verify the accuracy of counts conducted by others.

D. Data Reconciliation and Analysis

As data comes in, the next phase begins. Cross-reference your data with sales and existing inventory data to find discrepancies. Then you can:

  • Reconcile Discrepancies: Investigate differences between the physical count and your inventory records. Often, they’re caused by shrinkage, data entry errors, miscounts,/li>
  • Analyze the Data: Use the collected data to identify trends, optimize inventory management practices, and adjust ordering and stocking strategies as needed.
  • Continuous Improvement: Review and evaluate your counting process after each cycle. Look for ways to improve efficiency and accuracy in future counts.

This is the playbook for inventory counting. You’ll build a very strong process and improve accuracy if you follow these steps.

Inventory Counting Best Practices

A Final Note: Stop Manual Counting, Use Inventory Technology

Manual inventory counting might work for small businesses. However, manual counts – no matter how small – are prone to data entry errors and inaccuracies. The best solution is to use inventory counting technology to get better results, faster.

FTx POS offers a variety of tools to help small-to-large businesses improve their inventory processes. Our retail suite includes:

  • Warehouse management software (FTx Warehouse)
  • Inventory barcode scanners
  • Automated ordering
  • POS inventory with real-time data
  • Mutli-location inventory tracking

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Business Experts & Contributors

A New Solution Coming To FasTrax

Danielle is a content writer at FTx POS. She specializes in writing about all-in-one, cutting-edge POS and business solutions that can help companies stand out. In addition to her passions for reading and writing, she also enjoys crafts and watching documentaries.

Danielle Dixon

Content Writer
A New Solution Coming To FasTrax

Matthew Davis is a content marketing specialist for FTx POS. With experience in marketing, brick-and-mortar retail, and ecommerce, Matthew enjoys writing about strategies and technology retailers can use to grow. Previously, he managed retail operations for a sports/entertainment facility and worked in marketing consulting.

Matthew Davis

SEO Specialist/Content Writer

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