When you think of the word ‘audit’, what leaps to mind? Something that’s fun and exciting? No, of course not. Being audited is neither of those things, nor is conducting an audit, for example an audit of some aspect of your business. If your job involves operating a warehouse or distribution facility, regularly performing an audit of your inventory is not only a smart thing to do, it’s a must-do.
At its most basic, an inventory audit involves cross-checking a business’s physical inventory levels against what’s indicated in the business’s inventory management system and other financial records. This can usually be done using in-house personnel, however there may on occasion be the need to bring in external experts – for example to meet more complex auditing needs or to help address recurring problems that internal auditing has been unable to solve. An external auditor can also be useful in bringing a ‘fresh pair of eyes’ to the business, free of loyalty to any individual, fearless in asking the tough questions and uninfluenced by the internal culture of the organisation.
When conducted regularly using industry best practices, inventory audits can identify inconsistencies between the stock your software system says you’re carrying versus what’s physically located on your warehouse shelves. When such inconsistencies are found, the process of discovering why they’re happening can begin. These reasons may include shrinkage, poorly trained or careless staff, inadequate technology, poor paper-based record keeping practices or problematic inventory receiving and dispatching procedures.
Whatever the cause(s), the aim is to not only become aware of what’s not working but to introduce new or modified policies, procedures and processes that will increase the quality of your inventory tracking and management, in turn leading to enhanced customer satisfaction, less shrinkage and a smoother running, more profitable warehouse operation.
For businesses that see merit in doing a deeper dive into its operations, the scope of an audit can be expanded to include analyses of sales volumes, management controls, inventory tracking and control procedures, order fulfilment processes, freight costs and overhead expenses. In fact, pretty much any aspect of warehouse operations that can be measured and evaluated can be included in an inventory audit.
How frequently should you perform an inventory audit?
This will largely depend on the industry you’re in, the size of your business and the number of inventory stock items that come in and go out in any given week. Broadly speaking, if you’re running an audit more frequently than quarterly you may be overdoing it, however if it’s less often than annually it’s probably a good idea increase the frequency.
Whether you carry out an audit every three months or nine months, what’s inevitable is that every audit will be time-consuming and will involve the input of workers and managers alike and, on top of that, may disrupt normal warehouse operations. The good news is that if you’re relatively new to auditing you’ll find that you and your team will become more proficient with the task with each one you do. Practice makes (close to) perfect.
The first step with an industry audit is to determine what it is you most want to achieve from it. For one business it may be to enhance an already well-performing set of inventory tracking procedures, for another it may be to identify and address pain points that management knows are creating serious inefficiencies and are impeding business growth.
Whatever the goal, set it down in a document to be shared with all relevant personnel. This document should also include the scheduled date of the audit, what inventory will be audited and how the audit will be carried out.
You will also need to decide which staff members will be undertaking the audit. Of course a small business may only require one person for the job, while a large business may need five or six pairs of hands on deck. Choose those who are best suited for the task, ideally employees who have a sharp eye for detail, a thorough knowledge of your inventory and where items are located, and experience with your inventory management software system.
Immediately prior to conducting your audit, organise your warehouse so that the task of counting stock can be performed efficiently and accurately. Make sure you have the right labelling for all stock items, bins and shelves. You should also complete the process of dealing with obsolete, damaged and returned stock items. If these types of items are in some sort of ‘stock limbo’ when the audit is conducted it might create confusion and produce false-positive stock count results.
Another pre-audit task is the preparation of documentation. The information gathered during an audit must be recorded in a way that is easy to comprehend and adhere to a format that is consistent amongst each member of your auditing team. If one auditor is recording their findings one way while another is going about it a different way it’s a recipe for a failed audit. This applies both to paper-based record keeping and to the entry of data into your business management system.
After the audit
Once you’ve conducted your audit – counting each stock item and discovering the extent to which physical inventory matches what’s in your inventory management system – the final step is the reporting phase.
Based on information uncovered via the inventory audit, the head of the auditing team should produce a report that identifies both what’s working well along with specific areas of concern. The report should also include recommendations for the resolution of inventory-related issues – in other words, a roadmap which if properly followed lead to an overall improvement in warehouse operations.
And be sure to retain audit reports for future reference so that they can be compared against previous audits. After all, if the same inventory issue comes up each time you conduct an audit you’re going to want to know about it.
The take away
While it can be quite easy for an inventory audit to slide down the priority list and not get done as thoroughly and frequently as it should, it’s important to maintain a focused discipline. When inventory-related problems are left unidentified and/or left unattended to, the entire business suffers. So set down an audit schedule, undertake the necessary audit preparation and execute the audit in the best way possible. Then report your findings and lay down a strategy for improvements. The end result will be smoother and more efficient warehouse operations, enhanced customer satisfaction and a healthier bottom line.