Inventory auditing concepts

Inventory auditing can be broadly categorized into physical, analytical, and cycle audit methods as described in the following topics. FactoryLogix Materials Management focuses on several types of cycle audits in a highly customizable environment, allowing you to make the most of the system’s capabilities to achieve accurate inventory audits without experiencing the downsides of pure physical or analytical audits.

Physical audits

• Physical audits focus on a full physical count of all inventory.
  
  Physical inventory audits involve counting and inspecting 100% of your inventory items all at once at a specific point in time (for example, at the end of a fiscal period). A physical inventory verifies the accuracy of inventory records and ensures they match the physical stock on hand in the factory. It may take several weeks of undivided attention, and many warehouses may have to stop other operations to participate.
  
  For manufacturers, physical inventory counts are often impractical, time consuming, and too costly due to factors like the sheer volume and/or complexity of the factory inventory. Manual processes in physical inventory audits are also prone to human error, and often the lack of adequate inventory controls and/or poor inventory labeling can also be detrimental to achieving accurate inventory counts.

Analytical audits

• Analytical audits analyze inventory data without physically counting inventory to identify trends.
  

  Analytical audits involve periodically analyzing data such as unit costs, profit margins, and inventory turnover to identify inventory trends and potential discrepancies/inconsistencies without physically counting inventory.
  
  For manufacturers, analytical inventory audits may not be the best method of inventory auditing. Why? Difficulty developing accurate expectations based on complex manufacturing processes, high costs related to data collection and analysis, and the time-consuming nature of analytical audits. Analytical inventory audit data also have the potential to be misinterpreted.

Cycle audits

• Cycle inventory audits (also known as cycle counting) focus on smaller subsets of inventory over a period of time.
  
  Cycle audits involve regularly auditing small subsets of inventory (that is, instead of performing a full count) at a specific time, usually on a set day, without handling the entire stock in one iteration. Cycle inventory audits continuously track inventory movements and identify potential discrepancies or issues as they happen. This type of inventory auditing method ensures that inventory is accurate and up to date at all times. Cycle counting is a method of checks and balances by which manufacturers confirm that their physical inventory counts match their inventory records. Cycle counting involves performing a regular count and recording the adjustment of specific inventory items. Over time, they will have counted all their inventory items.
  
  The purpose of cycle audits/cycle counting is to apply statistical analysis to understand the factory inventory. Statistical sampling is used to choose which items to count, helping you estimate how accurate your inventory records are without having to tally every inventory item all at once. For example, if the SKUs you counted this month all come in at approximately 15% below the count in your inventory records, you can assume the rest of your inventory probably also experienced an approximate 15% shrinkage. Generally, an inventory audit can take anywhere from a day or a week to months, depending on the size of your inventory.
  
  For manufacturers, performing inventory cycle counts instead of one large physical audit or an analytical audit can save a lot of valuable time.