Having a controlled and reliable inventory is an important objective to companies.
Indeed, it allows to:
Minimize the invested capital in inventories
Reduce the financial cost caused by overinventories
Control the risk of scheduled or unscheduled mark-down
Limit sales lost because of inventory shortages.
Reduce the realization cost of the annual stocktaking
What is it necessary to include in inventories?
When defining an inventory process, it is necessary to identify what are the elements to be booked in inventory.
The inventory has to include all goods belonging to the company, available or under production which will be used in the commercial process.
Generally, we identify the followings types of products:
The product enters the inventory when takes place a change of ownership or of responsibility regarding the integrity of the product.
So, to know which products must be included in the inventory, it is beforehand necessary to identify on contracts agreed with suppliers, customers and operators the very moment of the ownership’s transfer of ownership, and to specify what Incoterm is associated to the commercial relation.
Furthermore, other commercial situations can influence the notion of responsibility regarding the goods:
Sale at given date with ownership delay: the responsibility is transferred to the buyer once the totality of the products is delivered (Even if the responsibility transfer is not done immediately, if there is no insolvency risks, movements of expedition and sale follow the goods’ physical flow.
Sales from secondhand store (deposit and sale)…
Generally, according to most used Incoterms, goods to be booked in inventory correspond:
In products being physically stored in company warehouses (proper or sub-contracted), except:
The outstanding discounted bills of reception
Products received in deposit on behalf of the suppliers (goods delivered to a customer but the supplier remains the owner)
Products received in deposit on behalf of the suppliers
Products in deposit on behalf of the customers
In products delivered to the customers in deposit
In products in transport towards the customer, not yet received.
In products under delivery to the company and for which the responsibility transfer already took place (the transport is organized by the company)
The various notions of inventory
The physical inventory
Corresponds to the photo of the inventory physically present in the company’s warehouses (or sub-contracted warehouses)
The accounting inventory
The inventory which appears in accounts (in assets of the Balance). Its valuation varies according to the method chosen by the company.
The final inventory / initial inventory
The inventory corresponding to the quantity measured at the end of the accounting year. This reference value is also the initial inventory of the following exercise.
So, an error of inventory on the final inventory affects the valuation of the inventory of two consecutive years.
The periodic inventory
Consists in a punctual inventory in the course of which, the inventory belonging to the company, independently from its location, is physically counted.
It is then checked that the counted units are in accordance with the information system’s inventory values. In case of discrepancies, counter-checks are down until being able to validate a quantity corresponding to the physically counted quantity.
The permanent inventory
With this method, the inventory is constantly updated by recording movements of inventory entry and release (exit).
The cycle counting
It consists in scheduled (or programmed) countings in regular intervals throughout the year, by selecting each time different items. It must allow controlling the whole inventory at least once a year.
It is possible to prioritise the references counting by using, for example, the ABC method in frequency or value, or by identifying the critical products (in customer’s mark-down terms, customer’s availability…).
How to set up a cycle counting system
Identify products to be included in the process of cycle inventory (during the process definition)
Define the products categories according to priorities criteria (ABC, criticality)
Allocate to every product / category a frequency of objective counting (by respecting the principle according to which every article must be counted at least once a year)
Realize the counting.
Note the date of the counting on every article in the article database.
Analyze the possible discrepancies between the physically counted inventory and the permanent inventory (and count again physically if need be)
Validate the quantities in inventory
Analyze and correct the causes of discrepancies
Key points to organize a periodic inventory
The process of inventory has to respect the legal terms and the accounting standards of every country.
To be effective, the inventory process has to include staff, not only from warehouse exploitation but also, for example, accounts, commercial and purchase departments…
If the size of the company does not allow such organization, the chief accountant will oversee the process.
The presence of the chief accountant is, whatever are the resources allocated to the realization of the inventory, a factor of the result reliability.
The areas where are located products to be inventoried must be ordered: products grouped together by homogeneous lots clearly isolated from each other, produced correctly labeled, isolated from not inventoried inventories.
The process will have to mention storage addresses and the areas affectation for every counting team.
The inventory data reliability handed back on the counting forms is directly linked to a good products knowledge and identification (clear and reliable visible references on products, knowledge of products, precision of the counting units on forms (weight, linear meter, square meter, unit…).
Every article in inventory must be booked only once. To assure the fulfillment of this requirement, the activity must be stopped during the inventory period. During this period, it is thus necessary to forbid any activity of production or warehousing (expedition or reception). Furthermore, it is advisable to mark already counted lots in order not to take them into account twice.
In case of management by permanent inventory, it is necessary to make sure that all the movements of products previous to the start of the inventory are registered in the permanent inventory follow-up system.
If there is a discrepancy between the permanent inventory and the result of the counting, it is necessary to count again. If the difference is effective, it is necessary to analyze the reasons of this discrepancy to validate the inventory result.
Spec Sheets 
