Inventory audit

What is inventory audit?

Inventory audit is a counting or validation process of stocks in inventory to ensure if the existing levels match with what's recorded in inventory systems. It is the process of physically counting warehouse stocks to verify and reconcile that the books match the reality – a quick inspection to ensure the inventory health.

Inventory audit is mandatory for the following reasons.

1 - Detect any shortages, shrinkages, errors, theft, or other human mistakes. 2 - Maintain accuracy in sheets, as inventory equals a major asset. 3 - Make better decisions, especially reorders, overselling, facing stock-outs, etc. 4 - Audit reports are essential for regulators, investors, or lenders. 5 - Better operational efficiency, by identifying slow-moving vs. fast-moving SKUs.

Where traditional inventory audits fall short?

Most inventory audits happen manually, where supervisors have to make physical inspections and maintain paper records of numbers. Though this works, traditional inventory audit isn’t efficient due to the following reasons.

1 - Need to track continuously: The paper records from manual audits are only snapshots. It doesn’t auto update and needs to be updated every day, week, or month.

2 - Prone to human errors: With inventories of mid to large sizes, possibilities of missing values and counting errors are high. Manual monitoring is what causes discrepancies in inventory audits, which is mainly due to rushed processes, fatigue, or simply poor documentation.

3 - Difficult to perform root cause analysis: You can see what’s missing. But you can’t find out the why behind it. That’s what happens with traditional and manual inventory audit processes where sales, inventory, and supplier data remains disconnected.

4 - Can’t predict future: Just like how you can’t look deep into what happened, traditional inventory management leaves little to no scope for pattern dissection. It cannot highlight or flag potential risks in the future.

5 - Is expensive in terms of time and money: There might be pauses or delays when there full stocktakes happen, which can bring heavy productivity losses for large retailers.

Integrating inventory audits with POS or ERP systems

When audits happen in isolated manner, it only exists on paper or spreadsheets. That’s why integrating audits with enterprise resource planning systems is necessary. It creates a single source of truth—transactions, stock movements, and physical audits all align in one place.

Here’s how the integrated audit works.

1 - You connect inventory audit with POS systems. Which means every time a sale happens, the audit data is automatically updated and reconciled. 2 - Similarly, every procurement or warehouse movement is reconciled automatically with actual counts.

Setting up automated inventory audit

If you want to avoid manual counting and errors that happen because of them, then automated inventory audit is mandatory. Here’s a practical way to set up automated audits for inventories, warehouses, and fulfilment centers.

1 - Define the problem statement: Identify and define the exact problem. Is it the shrinkage, missing stock, stock-outs, or supply-demand discrepancies? Is the problem same across all warehouses or locations? How much time or effort gets wasted in the manual/semi-automated process. 2 - Choose the tech stack and method: Select the right inventory automation tool depending on your need, either Zoho Inventory, NetSuite, Odoo, or similar. Similarly, there must be hardware setup like RFID scanners, IoT devices, tags, real-time trackers, etc.
3 - Capture data: Once you have all the sources, integrate them with the help of ETL tools to bring in data from all directions – POS, ERP, eCommerce platforms, etc. The RFID scanners and tags will enable automated inventory audits every time the product enters or leaves a warehouse or store.
4 - Amp up the process with data and AI: You can also set up automated rules and alerts, like reordering if the stock volume falls below a certain level. Adding predictive analytics on top of this will help you predict demand and seasonality with accuracy, ensuring seamless audits and smoother operations. 5 - Real-time alerts and dashboard monitoring: Use BI tools to track the progress across different locations, which means the availability of real-time insights about stock-outs, overstocking, shrinkages, fast-moving SKUs, expired and near-expiring goods, and more. 6 - Train staff and enhance continuously: It doesn’t stop here. Training staff on how to use and respond to automated alert systems, scanners, and devices will ensure complete effectiveness.

How inventory audits reduce shrinkage?

Shrinkage is a major problem in retail, CPG, FMCG, and manufacturing industries. A well-set up automated inventory audit brings this down by considerable amount, bringing visibility into what’s received, what’s sent out to stores, what’s being stored, and other similar categories.

Shrinkage is the difference between what systems say and what’s actually on shelves. When audits of physical stock vs book stock happen with accuracy, it brings to light what’s missing and why it is missing.

Here’s why you should automate inventory audits to minimize retail shrinkage.

1 - Exposes the hidden gaps between existing and book stock values. 2 - Identifies and alerts when there is a risky pattern, which cannot be noticed by regular analysis. 3 - With automated audits, there will be fewer instances of internal theft or negligence.