Better Ways to count your Inventory

At the end of the financial year, and along comes the dreaded Physical Counting. Companies that have robust inventory management practices sail through easily. I have had my fair share of nightmares during physical counts. In fact, barely two weeks after my wedding I made my wife wait in the car in the company parking lot while I was checking data with my guys (I guess I never will be forgiven for this but the benefit is I easily remember our wedding anniversary. Glass half full??)

Now, coming back to business. Are there things that you can do that would make this a bit easier? Over the years, I have learned some simple techniques that has helped me in reducing the problem a bit. Hope this helps you too. Feel free to share some of your own techniques.

Divide and Count:

On many occasions, the delay in physical counting is due to the lack of clear ownership. This lack of ownership means certain areas will be neglected, and the physical count is error prone. A week before you start your count, clearly demarcate the areas within your factory or the warehouse, and assign owners to that area. Each grid must have an identification. Make it very clear that the owner is responsible for count accuracy.


The most overlooked aspect of physical inventory is the lack of training. Most people think, it’s just counting and hence no need for training. There are nuances in a physical count that needs to be followed. A considerable part of inventory variances in many organizations come from the errors from the previous counts. Some of the familiar mistakes that happen:

  1. Illegible writing --The counter will write a zero illegibly which then is entered as a six during data entry

  2. Unit of Measure confusion -- The Unit of Measure is dozens but counted as each, and recorded. (Now 1 dozen becomes 12 dozens during data entry)

  3. A bad quality pen is used to write 9. A break in the writing means the data entry person reads it as 4 and enters it.

The operators need to be sensitized to such things which can happen during counts. If possible do a mock count and sensitize the operators on the errors.

Tag Design:

If you design your counting tag correctly it will reduce your time required for data entry and verification. The general tendency is to leave a line for the item number, quantity etc. If you just have a line in the tag, it encourages people to write illegibly. Make it a point that the fields for item number, quantity, and location has boxes for each individual digit instead of line. This will make a world of difference. The order of information in the tag must mimic the order of information in the data entry screen. Too many mistakes happen because of this. I have seen many instances where the location or item number is entered into quantity.

Data Entry:

Have a set of people allocated for data entry. Train them to identify obvious mistakes from the tag. The data must be entered in parallel while the count is going on. If you are using a standalone spreadsheet or an access database, make sure that you have conditions placed in the field to show errors if a non-existent item number is entered. If you are doing in your ERP system, this may not be a problem.

Check and Recount:

The data must be verified with the system stock while the count is going on. Many places wait until the whole count is over and start reconciling the data. Doing it in parallel will bring out the problems which then can be verified, and recounted if required. Analysing inventory variance is like a crime scene investigation. The longer you wait, the more evidences are lost.

Root cause and counter measure:

Once the count is over, and if you are lucky, your finance team will approve it right away (If this happens go buy a lottery, you have good chance of winning millions). Some teams make you sweat it out and approve. Presuming you somehow got the approval to reset the inventory, don’t just walk away. Your work is just starting. Put a lot of effort to finding out what went wrong that resulted in the variance. There aren’t many reasons. Most of the reasons are variations of the following.

Transaction Errors

a. Wrong Quantity– You move a certain quantity physically while entering a different number in the system.

b. Supplier short ships but you receive the full PO quantity

c. Wrong Location – You move the right quantity but moved it into a wrong location

d. Not accounting for Scrap – The item was scrapped but the long drawn out process means someone forgot about it. The item was then moved physically but scrap was not entered into the system

System Errors:

a. Your bill of material was wrong but you kept back flushing with the wrong BoM (if you see a lot of negative inventory this is the biggest culprit. I strongly recommend not allowing negative inventory in your system to bring these problems out early enough).

b. You order it in a different unit of measure than what the packaging says, and a wrong quantity is received into the system. For example you buy as meters but the packaging comes in small rolls. Instead of meter an operator enters the number of rolls.


Whether you reverse a finished good or send back a rejection item to your supplier, the chances of error are huge. If you do not follow proper procedure you will certainly mess up the numbers


As much as we hate it, this is one of the reasons. Unless you build a fortress you cannot avoid this. There are certain item that are prone to pilferage. If you have these items then keep an eye on it:

  • Items that are small but made of expensive common materials like Brass, copper, bronze.

  • Consumable items like batteries, glue

  • Items that can be sold in the market and be used easily – Bearings, tool tips, etc.

Prevention is better

There are ways you can reduce these kinds of errors. I have listed them out as much as possible

Location Numbers: The locations must be alpha numeric. I have seen many places with location number where it is a series of number like 10110120. This is a nightmare. Certainly the location will be entered in the quantity column and the system will accept it. Having an alpha numeric location will avoid this, and easier to remember

Avoid confusing letters: Do not use I,J,S,O in your locations. These could be read as numbers when someone writes it on their sheet somewhere.

System Locks: Set a lock in your ERP system so that negative inventory is not allowed. Only if the root cause for the shortage is found out this must be allowed to proceed. If you do not have sufficient inventory in your system, you should not be able to do back flushing. A word of caution is to implement this in stages otherwise your whole factory will come to a standstill.

Item Numbers: Define a clear nomenclature and reduce your number of digits in your item number. I have seen product numbers with 32 digits. In my opinion, 12-14 digits is more than enough (that’s more than a trillion in case you are wondering). Some of my teams have done a great job of managing with just 10 digits even for a highly configurable product lines. The more digits, the more chances of error.

Barcode: Use barcode for your daily transactions. Don't go hunting for an expensive barcoding solution. Understand that your barcode scanner is just another keyboard. If you are sticking with just 10 digits, this becomes even easier. You could just go with a Code 39 barcode which is very simple to implement. Barcode scanners these days are cheap. Combine this with a cheap tablet with OTG capability, you could be doing wonders. Eliminate writing as much as possible.

Cycle Counts: Even a half-baked weekly cycle count done daily or weekly could bring out a lot of problems for you to resolve. Put system fixes in place, and you would be way ahead in terms of accuracy.

Involve others: Remember, the inventory variance is just a symptom. The root cause lies somewhere. It could be your wrong BoM, wrong receipts, wrong unit of measure and so forth. After the physical count, identify the reason, and make other teams accountable. Your mortal enemy Finance is your friend in this case. Take them on-board and hold other teams accountable.