How to do a perfect physical inventory of stock in a warehouse?

A well run physical inventory can actuall lead to a productivity gain for many organizaitons.

Why do companies conduct a physical inventory?  There are many reasons to conduct a physical inventory, but the primary reasons are:

  1. Make sure the inventory record files are up to date and accurate

  2. Find excess and obsolete inventory that can be written off or sold

  3. Find non-conforming inventory that can get reallocated into other products or sold

  4. Clean the facility and reorganize the inventory

Physically counting the inventory wrong will lead to differences between the electronic record and the actual count. The financial accounting rules will want to balance the books.  If they do not match, financial adjustments are made to make sure they match. This adjustment has both financial and operational impact on the company.

In our experience most physical inventories are poorly run leading to ineffective results and lost productivity.  When done wrong, physical inventories are an exercise of counting inventory. After the count a financial value is calculated based on the count. When the value is different a correction is made the financial records.  This impacts the cash in the business because of tax regulations.

A poor physical inventory count can lead to issues for the facility.   During the counting process people will double count, miss count items, and make mistakes on the unit of measure.  Each of these issues will lead to problems with inventory accuracy. This often leads to rework and frustration as well as poor results.

To conduct a perfect physical inventory a company needs a good process.  The process should be broken into three phases. Those phases are the planning process, physical count process and the audit process.


The planning process should identify the key people in the process and how the inventory will be counted.  A step by step way to count and audit inventory is discussed. Who is counting the inventory should also be discussed.  When the counting is done in a free form approach problems happen. Finally a consistent method for documenting the inventory should be determined.


The physical count process is when the company actually goes on the floor to record the inventory in stock. Three things to remember with counting inventory.  First, make sure the person, date and amount is all recorded on the inventory tag. If unique items being count exist like full boxes make sure a consistent approach is used to record the item.  Second count the items in sections within the plant. That way once the section is counted the audit team can start there process. Third, all tags must be collected and accounted for after the count including ripped or voided tags.  This will allow audit to quickly identify any missing tags.


The audit process is the most important piece of the whole procedure. Audit identifies any high dollar inventory item that is out of control.  The controller finds items from the count that do not match the computer files. They then will send a person to recount the item to make sure it has all been counted.  If there is a item that is not as expected the company should do an investigation as to why there was a problem. Finally after the investigation is complete the controller can adjust the books.        


Manufacturing companies will always need to conduct physical inventories.  They can lower the frequency that they conduct physical inventories by getting rid of waste in the process.  This improvement leads to a more effective inventory control system.


Contact us, if you would like to find out more about how we can help you with your inventory control systems.

Picture of a Warehouse