Thursday, July 22, 2010

Auditing Inventory

One of the secrets of keeping an accurate perpetual inventory is to maintain an on-going audit of every item in the store. This requires the use of store employees to do these audits and I think all store employees should be incorporated into the auditing process.

Many operators may hold a skeptical view of using store employees to audit the store's inventory for fear they may attempt to cover up shortages. But keeping employees in the dark about the volume of products in the store doesn't make any sense to me. On the one hand we are saying, "We don't want the employees to tell us what's in the store, but we want them to order it when they don't have enough." (Someone please explain this to me).

In an environment where you cram $56,000 worth of inventory in a 2,700 square foot space and come back once a month to see if there's any money in the till, I can see where there may be some validity in running your business in this fashion. But you don't have to do that anymore and changing the way you manage your inventories means changing other things as well …store audits is merely one of them.

Keeping inventory by item rather than by category, changes everything. By using the computer to enforce a strict routine in real time during the auditing process, operators will quickly realize it is the only way to maintain accurate figures concerning the amount of stock on-hand, and will result in a far superior method of auditing the store's inventory than any other method being currently employed.

Our experience has shown that it takes from eight to sixteen employee-hours to completely audit an average store's inventory, however when subsequent audits have occurred using our system, 85%-90% of the store inventory is neither over nor short. This accuracy is due in no small part to the methods we employ while doing these daily audits and cannot be compared to the inferior method of auditing inventory by category on a monthly basis. Therefore, the answer to the problem of auditing so many items is to concentrate on the 10%-15% that is high-risk and audit the other items once or twice a month.

Using the maximum sixteen employee-hour figure as our guide, we can assume that the most time will be spent on high-risk items in the average convenience store and should be no less than two hours and twenty-four minutes each day. By requiring employees to spend an additional twenty-seven minutes per day auditing low-risk items, each low-risk item can be audited monthly. Therefore the total time that is spent daily on auditing the store is no more than three employee-hours per day.

By breaking the audit up into three small shifts, each daily audit could be accomplished in three one-hour shifts. Our experience has also convinced us that there is ample slack time available during the day in which these audits may be carried out.

High Risk Items
10%-15% of the items in the store are considered high risk. Some people might say the cigarette category is one of them, but that's Category Management thinking. The truth of the matter is not all cigarettes are high-risk. Some cigarettes that are placed in the cigarette bins are so unpopular that even employees won't steal them. We provide a sophisticated set of computerized procedures running in the background, providing employees with information to identify high-risk items in the store, by using the data that comes from the audits and creating the 'daily audit lists' moments before the audit process begins.

I emphasize moments before the audit for a reason. Audit lists should be generated by the computer immediately before we expect the audit to take place. Employees will plan for an audit at a certain time, but they don't know until the last minute what will be audited.

Employees are going to make mistakes when auditing the inventory. If mistakes are suspected, the system will include the item into the next audit. Surely we have no way of knowing why an item is short or over at the time the audit is made, but the employees don't know that, and by letting them know an item has been placed on the high-risk list, you can bet the entire staff will focus on that item more than on items not on the list.

The "High-Risk" lists should be posted in the stockroom every day for all employees to see. To the employee that has stolen items before, being presented with the knowledge that headquarters is paying more attention to the item or items they have stolen will have a tremendous psychological impact on job security and thoughts of jail time.

Keeping items off the high-risk list is a goal set forth by management. In a multi-store operation, the shift with the most consecutive days with no high-risk items on their audit list will receive an award of some kind. Instead of standing around talking about boy or girlfriends and how much they hate their jobs, they can participate in ideas that will cause the audits to come up with fewer errors. One simple example might be if the Snickers keeps coming up short, maybe they need to be moved to an area in the store that is less hidden from the store clerks' view? Whoever thinks about these things?

Imagining ways in which you can improve your business varies drastically when you alter the environment. Things that you never considered become possible when business practices change for the better.

A Learning Process
The auditing process is as much a teaching tool as it is a tool for maintaining an accurate inventory. The rewards are a cleaner, more organized work environment. Employees become frustrated when items don't scan, are not correctly priced, or when customers complain they can't find items on the shelf. Employees will be encouraged to remember what is in their store and where it's located. Keeping the store clean and organized will make the auditing process much more enjoyable.

Each employee should be assigned a User ID and a password so that the audits will be flagged with their name. Items that are skipped during the audit will be recorded and the store employee should be made to explain why the item was skipped. Employees will become aware that they are an integral part of the overall business environment and that they are being supervised as if they were working in an office at headquarters.

Finding Items in the Store
I generally do my grocery shopping at a local store. I guess you might classify this store as a 'large' grocery store. Over the past five years of shopping I cannot remember a single case when an employee could not take me to any particular item in the store that I asked for. The practice of scattering items in multiple locations may spur the occasional impulse sale, however too much of it confuses the employees and the customers. Keep it down to a minimum and the store will run smoother and more efficiently.

Our auditing process is just challenging enough to attract employee's interest, instill pride and confidence in their work, and take their minds off of personal matters, while putting the focus on customer satisfaction, store presentation, accuracy, and quality of service.


  1. Regardless of what program you use, you must have to have a physical inventory. A professional inventory auditor must be hired to do the physical audit periodically to confirm that your software and other controls are working. If you are in Dallas surrounding area, you can call Amir at 817-714-1940, your Desi professional inventory auditor.

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  4. You will need a good POS System to track of your inventory both input and output. Then do your inventory audit once a month or every two/three months to find out what you are missing. This NOT ONLY tells you how much you have lost from Shrinkage (lost/stolen) but also tells you the items that didn't move at all.

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