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Warehousing & Fulfillment

Inventory Reconciliation: The Ultimate Guide

In this guide, you'll learn about inventory reconciliation and the strategies you can apply to make sure you stay on top of your inventory count.
Inventory Reconciliation: The Ultimate Guide
Jules

By Jules

 

October 19, 2020

Business owners and warehouse managers alike know the key to success is being organized. Office workers have their spreadsheets and color codes and to-do lists, but all the data points in their world are meaningless if the numbers don’t add up. That’s why it’s important for eCommerce merchants to regularly cross check their numbers with what’s actually in stock.

Keep in mind, there are many reasons why inventory counts may not add up. Things like human error, theft, supplier fraud or returns and replacements that have not been accounted for can all lead to miscount and eCommerce merchants must keep track of their numbers via regular item headcount.

In this guide we'll answer some of the common questions about inventory reconciliation, explain why it's important, steps for implementing a strategy and how Easyship can help with your eCommerce warehousing.  

Resource: A Seller's Guide to eCommerce Domestic Shipping  
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Photo by Clark Street Mercantile / Unsplash

What is Inventory Reconciliation?

As an eCommerce store owner, you should ensure the count of recorded inventory matches what you physically have in your store. Inventory reconciliation is the process of synching your stock records to make sure that the items recorded in your system matches what you physically have in your store.

It entails physically counting the items you have, then comparing those numbers with the recorded stock figures. If stock discrepancies are found, stock records are updated to make sure that they match the real physical stock count.

The process also aims at finding the reasons behind such discrepancies and putting measures in place to address them and prevent future occurrences.

How Does Inventory Reconciliation Work?

This hectic process  requires time and effort. Although the specific detail of how it is done may vary from one retailer to another, the process is generally the same. Here are the five steps for inventory reconciliation, generally speaking:

1.Checking your physical inventory

The first step is to conduct a physical count to determine the actual number of products a retailer has in every category. During this process, a business may close its doors to the public for some hours or even days.

Then, the whole team embarks in counting and recounting physical products to come up with the most current, accurate numbers.

2. Comparing records

After coming up with the most current count on each product category, the second step towards inventory reconciliation is to compare your numbers.

The store owner compares physical inventory numbers with the existing inventory records, either in a spreadsheet or inventory management system. The aim is to check and confirm whether existing records correspond with the current physical count, exposing any discrepancies.

Related: DDU vs DDP : Understanding the differences in Terms of Shipping

3. Establishing the reason for discrepancies

Establishing the reason behind stock otherwise-unexplained shrinkage is the third step of the inventory process. If you discover differences between your recorded and actual stock, which is often the case, try and establish the reason behind such discrepancies.

There are a variety of issues that you can look into to try and see what is causing the trouble. Common reasons include:

  • Human error
  • Unrecorded items
  • Supplier fraud
  • Missing paperwork
  • Scrap items that have been sold
  • Items owned by a supplier or customer
  • Stock swindling or backflushing

4. Account for each discrepancy

Being able to account for and address the reason why you’ve ended up with stock shrinkage is the fourth step of the inventory reconciliation process. It’s not enough to just find an error and correct it. You must also down and explore how and why it happened, who is responsible and resolve what you can do to prevent future occurrences.

This requires the retailer and their team scrutinizing the sales paperwork to identify instances of overlooked sales, math error or missing receipts. If any of these doesn't explain the reason behind stock shrinkage, then the reason may be theft or supplier fraud.

These can be addressed by interviewing employees in the inventory management or sales teams, for one. Additionally, the investigation can be conducted by looking through inventory deliveries and shipments since the last reconciliation to identify instances of stock swindling, backflushing or supplier fraud.

5. Updating stock records

The last step is updating your existing stock records to match the physical inventory count you have in your store. To do this, you need to create an inventory reconciliation statement that addresses the reasons behind your stock difference, and then overwrite your existing figures to accurately reflect the physical count.

This can be done either manually in an excel spreadsheet by updating each product category affected or with an inventory management system where you simply reconcile your records by updating items in the system.

Why is Inventory Reconciliation Important

Inventory reconciliation is a very critical process when it comes to streamlining your eCommerce business operations. Here are some reasons why it is so important.

  • Avoid out-of-stock situations: When your inventory records show that you have more inventory than you actually have, you may end up running out of items unexpectedly and lose potential sales.
  • Avoid stock-out: This is a situation where customers place orders for items shown as in-stock while, in reality, there isn’t enough stock to fulfill the orders requested. This error will cause you to lose loyal customers to competition.
  • Avoid overstocking: As the reconciliation process ensures that your stock records are accurate, it will keep you from unnecessarily ordering new items when there’s already products to sell on the shelves or in the stock-room.
  • Eliminate the risk of theft or fraud: When you have accurate records of every item coming in and out of your eCommerce store, you minimize the risk of theft, backflushing or fraud.
  • Demand forecasting: This all-important count creates accurate records of your products — past and present. You can then use that data to determine how different product categories are performing and project future demands.
  • Peace of mind: Frequent counts can bring peace of mind, as it comes with knowing that your product counts, orders and shipments are accurate.

Streamlining Inventory Reconciliation Through Cycle Counting

Inventory reconciliation is a manual process. That makes it a time-consuming activity that requires you to close shop and count through the entire warehouse. But such a move leads to lost sales, since closing your shop to the public for several hours bears an opportunity cost.

But there is a way you can streamline your inventory reconciliation without having to close your doors to your customers. Ener: cycle counting. Cycle counting enables you to implement the above process by breaking it into smaller, manageable tasks.

Instead of closing your store to count everything systematically on one go, you divide it into several small portions based on product categories and reconcile each portion of your store at a time. Streamlining this big count through cycle counting works in three different methods. Let’s have a close look at each one of them.

The ABC method

Remember The Pareto principle? As they say, 80% of results come from 20% of efforts. Well, that’s applicable when it comes to inventory reconciliation, at least. Following this principle, you can identify products that sell quickly in your store without shutting things down. These are the 20% of the products that drive 80% of sales. These products are grouped in one category we’ll call ”A.”

Then, we’ll move to the next 30% of goods that generate 15% of revenue. That’s group “B.” The "C" category is made of 50% of items that produce only 5% of sales.

Since items in category “A” sell very quickly, they are counted more frequently, say, daily or weekly. Products in category “B” are counted less frequently, maybe every month or two. The products in category “C” are counted at an even lower frequency, about once or twice a year.

Since you’re not missing out on business, you can make the process faster through cycle counting. Plus, it affords more control over high-value and faster-moving inventory, as well as slow-moving stock in your store.

The seasonal method

This method leverages the change in eCommerce seasons, and it works best for merchants who deal with seasonal goods. This method, in particular, is geared towards counting products that are selling the most right now instead of counting everything in the warehouse.

Here’s an example: instead of counting holiday-related stock in the summer, put your efforts towards counting and reconciling top-selling beach gear during the summer season.

That way, you can adjust your reorder quantity levels and set accurate reorder dates for summer products. This helps your business identify and fix errors, prevent stock-outs and avoid running out of stock for the season's best-sellers. All of this maximizes sales opportunities for that season.

The arbitrary method

The arbitrary method is the last cycle counting method used by some retailers. With this method, inventory may be grouped into different categories based on suppliers, specific departments, brands, product types or their physical location in the stock room. It’s arbitrary, like the name suggests.

Here, the aim is to make sure that a large portion of the store remains operational as counting and reconciliation continues in some parts of the store so as to not affect business operations.

5 Best Practices for Performing An Inventory Reconciliation

There are several best practices that you can put in place to make the whole process run smoothly and ensure business continuity. Here is a rundown of some tips you can implement to make your inventory reconciliation process a breeze.

  1. Get it right the first time: Whether it’s your first time going through the process or maybe you’ve just upgraded to a new inventory management system, make sure you get your numbers right. These base records will act as your foundation and guide for future reference.
  2. Organize your store: Mapping out your store will go a long way to helping you and your team locate shelves, fixtures and racks. Plus, less time spent searching means an easier count. Label your shelves and make sure that merchandise is in the proper place or department in your warehouse.
  3. Do it frequently: To keep your inventory data accurate and up to date, make sure that you conduct a count regularly. That way, you’ll be able to identify any errors or discrepancies resulting in stock shrinkage before they spiral.
  4. Embrace technology: Using inventory management software helps to eliminate human and audit errors. The use of barcodes and scanners in your store will also make the counting process error-free, quicker and easier.
  5. Compare reports: To spot any patterns in losses or discrepancies, you need to compare your current inventory reports with past reports, figure out why it is happening and how you can prevent it. You will also be able to determine whether your inventory best practices are working.

How 3PL Can Help You Improve Inventory Management

One advantage of working with a 3PL company is that they use powerful order fulfillment and inventory management systems that streamline your inventory management through automatic inventory reconciliation.

By integrating your store with their inventory management system, you get real-time inventory counts, automatic reordering points and automatic inventory syncs that reconcile your stock in real-time, hence improving your processes.

As a leading shipping company, Easyship works with a network of 3PL fulfillment providers across the world that can help you streamline your inventory reconciliation process.

Sign up for a free Easyship account today to get started!


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