Whether you are a manufacturer or a retailer, managing inventory is one of the trickiest parts of running a business.
While maintaining product quality, having a robust website, and running powerful marketing campaigns can all contribute to higher sales, it is inventory that determines your ability to fulfil orders successfully.
That said, there are multiple facets to a typical inventory management system, and reconciliation is an important aspect you should learn about if you are not already informed.
Let us start with the inventory reconciliation definition, the steps involved in the process, and then some of the best practices you should follow.
Defining Inventory Reconciliation
Depending on the amount of stock and inventory you maintain on hand, you may have to conduct frequent checks to ensure that the actual stock matches your records.
The process of doing this is known as inventory reconciliation and involves taking physical inventory counts and comparing them to your inventory records.
Inventory reconciliation is a crucial part of your logistics process and ensures that all the inventory is accounted for and that discrepancies can be identified in advance and solved before they lead to major issues.
Simple enough, right?
It is — except the larger your inventory, the more complicated it gets to manage it effectively. Identifying the reason for discrepancies and tweaking records wherever necessary is part of the reconciliation process, and the steps you take at this point will influence the performance of your logistics and fulfilment processes.
4 Popular Inventory Reconciliation Methods to Consider
Now that we have looked at the inventory reconciliation meaning, let us look at the most common methods used by businesses in this process:
1. ABC Method
One of the most common methods for inventory account reconciliation is the ABC method, which involves categorising your inventory into three categories based on its value or priority.
Category A inventory may refer to high-value/priority items (contributing to 80% of your revenue), Category B refers to mid-value/priority, and Category C refers to low-value/priority items in the inventory.
This way, businesses can focus on the items that are most valuable to their operations and streamline their reconciliation process to address the high-priority and valuable items first so that their inventory can be reconciled effectively.
2. Random Checking
If you want to achieve the kind of performance that ensures you check the accuracy of your inventory randomly and yet find everything in order, opting for random checking will help you navigate the reconciliation process more effectively.
These random checks will not just help you find discrepancies without conducting full counts but also maintain accuracy across the board between reconciliations in inventory.
3. Seasonal Method
Depending on the nature of your products and businesses, you might be carrying out reconciliations at different points during the year.
Most businesses try to reconcile their inventory at the start of a season to ensure that their stock levels match the determined supply and demand levels.
This method is especially great for brands and companies that deal with products that witness seasonal demand fluctuations.
For instance, the demand for umbrellas and caps will go up during summers and monsoons, making it important for retailers to check the inventory levels at the start of these seasons.
Using this method, you can identify any discrepancies with your seasonal demand and replenish your inventory with stock based on the reconciliation process.
4. Cycle Counting
When dealing with a large inventory, conducting frequent reconciliation inventory checks or reconciling all your inventory at the same time may not be possible.
In such cases, you can opt for cycle counting, which involves reconciling a subset of your inventory, such as perishable inventory or available-to-promise inventory, on a rotational basis.
The cycle counting approach is often automated and helps you keep your inventory records updated without disrupting any part of your daily operations.
How to Reconcile Inventory? A Step-by-Step Process
Now that we have covered the basics, let us dive deeper into the steps to be followed in a typical inventory reconciliation process.
Step 1: Prepare for It
Before you initiate inventory reconciliation, you must first prepare all the essentials for it so that you can do it easily and accurately.
You must ensure that all your inventory transactions and related records, such as sales, purchases, pre-orders, returns and any edits, have been accurately recorded.
You should also record any updates and adjustments in your inventory accurately and consider them in the process.
Step 2: Conduct a Physical Inventory Count
The next step in the inventory reconciliation process in SAP or any other software involves going to a warehouse or storage location to conduct a physical count.
Begin by identifying the exact number of items in your inventory. Then, you must physically count every item in the storage facility and record the quantities of each product individually.
After all, the final count indicates the actual number of products on your shelves. The idea is for your physical count to get as close as possible to the quantity recorded in your books.
Step 3: Identify and Address Discrepancies
Once you have ensured that you have the exact quantity of products in your inventory and have taken a physical count of all the products in your inventory, you can identify the discrepancies between the two metrics.
Ask yourself:
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How many items are missing?
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Which items are showing discrepancies?
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What can I do about this?
Remember, discrepancies during inventory reconciliation can result from manual error, administrative mistakes, or even something more serious like shoplifting, supplier fraud, or employee theft.
Once you understand the exact discrepancy and its reason, all you have to do is address it so that your numbers match up.
To do so, review all your purchase orders, inventory records, and sales with your previous inventory reconciliation reports.
You can probably identify and correct whatever is not adding up by doing just this. However, if you are unable to find anything so far, there is a chance that the shrinkage is due to more malicious reasons, like theft. You can then take measures to increase security and prevent fraud or theft.
Step 4: Reconcile With the Recorded Data
Once you have implemented the necessary measures to ensure no more discrepancies, you may finalise your inventory reconciliation report template after ensuring that it contains important metrics such as the shrinkage rate, recorded inventory levels, total cost, and retail value of the shrinkage.
Other parameters to include in your inventory reconciliation report template are the description of materials, SKU ID, closing system stock, in-hand stock, difference, damage, manufacturing and expiry dates, and any other information specific to your items.
Step 5: Document and Adjust Records
You can manage the accuracy and efficiency of your inventory reconciliation process by simply ensuring consistency in checking and updating inventory records.
The more consistent and frequent you are in updating your records, the less the chances of errors or discrepancies leading to shrinkage. Moreover, the cost and process of inventory reconciliation can be simplified even further for your business by simply doing it frequently.
7 Inventory Reconciliation Best Practices to Consider for Your Business
So far, we have covered the step-by-step process of inventory reconciliation, and it is apparent that the process has much to do with maintaining consistency and ensuring accuracy. That said, here are some of the best practices we recommend you follow when reconciling inventory:
1. Implement Cycle Counting
Earlier, we explored cycle counting as a potential inventory reconciliation method, but it is worth understanding the merits it offers for your business.
While you may already know by now that reconciling your inventory once a year does not serve much purpose, doing it frequently is quite challenging.
Instead, using cycle counting to track and manage your inventory between your larger reconciliation events will help you keep an eye on your stock movement and prevent shrinkage.
2. Keep Inventory Well Organised
A well-organised inventory eliminates most stock-related issues such as poor management practices, inaccuracies in data, overstocking, or understocking, and simplifies your inventory reconciliation process.
Come up with an optimal design for your warehouse or storage facility so that your inventory is organised to expedite the fulfilment process, where pickers can easily get access to fast-moving products.
Not only does this boost the efficiency of your fulfilment process, but it also makes it easy to carry out the physical count of the stock in your inventory.
3. Prioritise High-Value Items
When arranging, auditing or reconciling your inventory, you must prioritise the high-value products and items before others.
This is one of the reasons that makes the ABC method ideal for carrying out consistent and accurate inventory reconciliations.
The method involves categorising all your products into three categories (A, B, and C), wherein A refers to the items that generate more than 80% of the sales revenue.
4. Set Down a Clear Process for Reconciliation
While there are multiple approaches that you can take towards inventory reconciliation, as we have discussed already, setting down a clear process ensures that your whole team is on the same page.
Set down clear policies and procedures to follow for processes like inventory forecasting and reconciliation, and specify the dos and don’ts clearly in an inventory reconciliation document.
Remember that maintaining consistency in the process is one of the primary things you want to achieve from the process.
5. Leverage Technology for Efficiency and Accuracy
Many companies, and rightly so, prefer utilising technology and popular inventory reconciliation software and tools to boost the efficiency and accuracy of their inventory reconciliation.
Since the biggest challenges plaguing the effectiveness of the process are inaccuracies stemming from human error, technology can overcome that challenge and make the entire process faster and the output more efficient.
6. Analyse Discrepancies
The entire inventory reconciliation process has merit only if you make the most of it by analysing and evaluating the discrepancies identified while carrying it out.
Identify the causes behind the discrepancies, the reasons that contribute to them, and then figure out the best way to resolve them.
With a detailed analysis of these discrepancies, you can work harder and smarter to eliminate them and build better vendor-managed inventory and logistics processes.
7. Implement Continuous Improvement With Regular Reconciliation Reports
Generate comprehensive inventory reconciliation reports frequently by coming up with an inventory reconciliation template to get valuable insights into shrinkage rates, inventory trends, and improvement areas.
You can then utilise all this data to make informed decisions that will help you establish a culture of continuous improvement in your business.
You can also boost the efficiency, productivity and accuracy of your processes by implementing continuous improvement.
Concluding Remarks
Inventory reconciliation plays a pivotal role in ensuring that your logistics and fulfilment processes function smoothly and seamlessly.
From recording the products in the inventory to regularly checking and ensuring that everything is in order, there is quite a bit to manage when it comes to inventory reconciliation.
Since inventory reconciliation helps you eliminate issues such as overstocking or stockouts and boosts your revenue, ensure that you set appropriate processes to manage this part of your inventory management.
Contact us to have an experienced 3PL service provider assist you with your fulfilment process and keep your inventory turnover going.