Inventory methods

This writing aims to provide a direction and a light at the end of the dark tunnel of quantitative stocktaking, so the following inventory events can take place more smoothly.

You can fulfil the inventory obligations specified by law in two ways: either by conciliation (analytics and general ledger) or by quantitative stocktaking.

Various types of inventory requirements may arise in the lives of companies and in the course of business activities, the performance of which requires the selection of the correct inventory method and technology. What methods are there, and which should you choose in the various situations? These are the possibilities:

  • Blind count: The counting activity is finished without a comprehensive conciliation. Checks are random only.
  • Double-count: Two inventory-takers count the same product once each, totally independently of each other. After comparing the count results, the differences are counted once more by a third inventory-taker. If the third count is the same as one of the first counts, it is accepted as a final result; if the results are all different, a fourth person will also count, performing a super-check, and that count will be considered final.
  • Mirror count: The counted value (by location or product) is compared to the theoretical stock quantity registered in the enterprise resource planning system, and the differences are recounted.
  • Statistical sampling inventory: An item number/location is selected and then subjected to a quantitative count based on a mathematical/statistical basis. The selected, counted results are compared with the theoretical stock level and, if the rate of the difference does not exceed the expected difference defined for the entirety of the stock, the inventory can be finished. (However, in Hungary this type cannot be considered to support the balance sheet.)

The decision is based mainly on factors of precision and cost provided by the methods.

The blind count qualifies as low quality in terms of both accuracy and cost. Its use is therefore recommended in case of low-value bulk products.

Precise electronic stock records are essential for statistical sampling inventories; accordingly, the book value and the actual value can differ by no more than 2%. The method is typically used in warehouses with very high stock quantities (at least 1000 types of products), and where the Pareto principle applies: 20% of the range represents 80% of the stock value. Its advantage is that it offers acceptable levels of precision with low cost.

The mirror count provides high levels of accuracy with medium costs and is therefore primarily suitable for use in warehouses and is also strongly recommended in retail. In retail, effective implementation requires professional preparation because of the absence of stock information that are easily manageable for the purposes of the inventory. Our experience is that its accuracy is just lightly worse than that offered by the double-count, though this depends on a number of different factors.

The use of a double-count is expedient when there are no continuous electronic stock records or they are not kept stringently. Compared to the other methods, the resource requirements of the double-count depend to a great extent on the accuracy of the counters/scanners and their ability to tolerate monotony. The cost burden of this type of count is recommended for products with at least medium value densities.

The selection of the inventory method has a profound effect on the precise determination of the actual stock quantity, though objectivity is also of fundamental importance.

Objectivity fundamentally has two cornerstones:

  • One: it is not permitted to use any methods that reveals the theoretical stock level to the inventory-taker, as that can have an overly strong effect on the counting motivation.
  • Two: the team has to be set up so that there are no inventory-takers who work with the given stocks in the course of their day jobs, because that provides a possibility for “background calculations” to be applied when determining the result.

Decreasing the human factor to a minimum or eliminating it entirely in the interest of objectivity is quite a difficult task if you operate within your own constraints; however, if you are open to utilising other possibilities on the Hungarian market, there are service providers that can prevent this difficulty.

Inventory as an outsourced activity

In this case, the inventory task is performed by a company whose core activity is inventory and is therefore able to perform the job more effectively and possibly in better quality than the customer. This leaves the customer with more available capacities that it can dedicate to its own core activity.

The advantages of outsourcing include:

  • gaining a precise, objective overview of stock levels
  • controlled inventory costs
  • inventory performed at the opportune time (night, Sunday, holidays, etc.)
  • satisfied employees concentrating on their main tasks.

Outsourcing the inventory process results not only in greater cost-effectiveness and the fluidity of everyday activities, but is also subject to the old adage:

the right man for the right job.

By: Eszter Puskás & András Takács