Annual Physical Inventory: Friend or Foe?
Every December in America, people across the country begin to wind down the year at work and look forward to holiday festivities at home with their families. It is a special time where business will typically slow down a notch for many industries, allowing organizational leaders time to focus their efforts on reflection and celebration of accomplishments during the past 11 months. Office Christmas parties and annual awards banquets are plentiful during this time of year and provide an opportunity for co-workers to enjoy their successes as a unified team. Even with all of the festivities and holiday cheer in the air, the year-end can also be a dreadful time for many people in the business world because of one undesirable task that they must complete before the New Year: the annual physical inventory count.
Why Is the Annual Physical Inventory so Unpleasant?
There are multiple reasons why people dislike doing the annual physical inventory each year:
- The Time it Takes: Very simply, counting an entire warehouse full of inventory count always takes a long time. Even when teams get a head start by getting everything organized before the actual count begins, the whole process can take up to several days to complete. Doing this type of work for long hours at a time can be mentally exhausting for everyone involved.
- All Hands on Deck: Since an annual physical inventory count is usually such a huge task to carry out all at once, it is one of the few activities a company does that will require all hands on deck. Management, salespeople, and administrative staff will all become warehouse workers until it is complete. Let’s face it; counting inventory is not the most exciting task to complete – especially when it is not in your job description.
- Disruption to Operations: In many organizations, the annual physical inventory count can be very disruptive to the daily operations. Some companies decide to shut down the workplace completely for a few days until it is complete. Others may close the doors early on a Friday afternoon and count into the night and weekend. Either way, employees and customers typically get a little heartburn when they have to put daily business operations on hold for a while.
- The Days it Happens: If you must conduct a wall-to-wall physical inventory count during normal working days, it is generally best to complete the counts at times when business is extremely slow. This generally falls right around the holidays or over the weekend. Black Friday or the week between Christmas and New Year’s Day are typical times when most organizations complete their counting. For most people, this is less than ideal as it cuts into their family time during the holiday season.
- The Name Itself: Perhaps another reason counting physical inventory is unpopular could be in the name of the process itself. The words “annual physical” could trigger some undesirable feelings with many people due to all of the poking, prodding, and difficult questions we experience at the doctor’s office for our yearly checkup. It might sound a little far-fetched, but never underestimate how word associations can subconsciously produce negative emotions in our mind.
If it Is that Bad, Then Why Must it Be Done?
Believe it or not, business owners do not make their people complete an annual physical inventory count just to make everyone miserable each year. I would venture to say that most managers probably dislike it more than anyone else in their companies. Anything that is disruptive to people’s work and personal schedules easily becomes a hassle that managers do not want to endure if they can avoid it. Financially, it is a very costly process to the bottom line when we add up all of the overtime and write-offs that occur during the whole procedure. So, if the annual physical inventory count is such a pain for everyone, then why do we do it?
Unfortunately, the government does not give us any choice on whether or not we count our inventory. Our only choice is how and when it happens. The IRS and the Generally Accepted Accounting Principles (GAAP) have rules and regulations that require organizations to count their entire inventory on an annual basis. The other option is to implement a continuous counting system throughout the year that will account for all inventoried items at least once. Either way, it is a task that you cannot ignore in order for your company to stay within legal compliance.
Cycle Counting: the Daily Alternative
Fortunately, organizations have an option to count inventory in an ongoing process called cycle counting. The Council of Supply Chain Management Professionals defines cycle counting as: “An inventory control and management practice that refers to a process of regularly scheduled inventory counts (usually daily) that ‘cycles’ through your inventory.”
Cycle counting gives people some flexibility on how often they can complete a full inventory count throughout the year. Some of the main benefits include:
Less Disruption to Operations: Since the counts are done in small amounts each day, the workplace does not have to shut down its normal business operations to complete it all.
More Counting Can Be Completed: Counting small amounts of inventory more frequently allows an organization to complete numerous inventory cycles throughout the year instead of the typical one or two wall-to-wall counting events.
Increased Inventory Accuracy: The frequency of cycle counting helps to quickly identify and fix inventory issues and creates higher levels of inventory accuracy throughout the year.
Ease of Problem Identification: By identifying inventory issues more quickly, it becomes easier to find the root cause instead of trying to figure out what happened months ago.
If the wall-to-wall annual physical inventory count seems to be an outdated process in your workplace, it might be beneficial to look into implementing an ongoing cycle counting method for the New Year.
Embracing the Process
Since there is no way around doing an annual physical inventory count or completing cycle counts throughout the year, we all must do our best to embrace the process. While there is no question that inventory accuracy is important to the IRS and our own finance department, we always need to keep in mind it is very important to our customers as well. If you cannot fill orders because of inventory discrepancies, that will weaken customer confidence in your organization. Multiple offenses in this area may eventually push customers away forever.
When we begin to view our inventory accuracy in terms of customer service instead of the unpleasant thing we have to do each year, our mindset will begin to change about the inventory counting process itself. We will begin to see it as a necessary step in our operational process for ensuring that we can provide high levels of service to customers. Ultimately, embracing an accurate inventory counting process can be a fundamental difference maker in determining where your customers choose to shop.