Physical Inventory

Chapter Topics
Tips for Effective Physical Inventories
Before You Begin the Physical Inventory
Count Sheets
Counting the Merchandise in the Store
Starting the Physical Inventory

Applying the Physical Counts

Applying the Physical Inventory 
Running Physical Inventory Reports
Having Confidence in the Physical Inventory

Doing periodic physical inventories is the essential piece of any effort to control your inventory. Physical inventories, the process by which retailers count the physical merchandise in the store and then look to reconcile it with stock quantities in the system, are the bridge between theory and reality. No matter how good your inventory control software is, if you are not periodically conducting physical inventories, the numbers in the system will be increasingly divorced from reality as time goes on.

The physical inventory process can only be done at a Remote station since, consistent with the philosophy of inventory control behind XpertMart, every store or warehouse is responsible for its own inventory. By design, managers at the Main cannot intervene at any step of the physical inventory process since it would then create too many opportunities for store managers to claim they are not responsible for discrepancies in stock since part of the process is open to outside intervention.

Tips For Effective Physical Inventories
The physical inventory is nothing more than an audit. In other words, it cannot prevent robbery or shrinkage; however it can alert you to the fact that merchandise is missing. As a retail manager, you cannot be expected to prevent all shrinkage. It is safe to say that it is always possible that you could lose merchandise to an unscrupulous or incompetent employee once; but
any more than once is the manager's responsibility because it means she has not set up the right audit systems to detect this shrinkage. Because it is the ultimate audit tool, it is vital that you carry out physical inventories in your stores frequently to spot any problems before they occur again. At a  bare minimum, you should conduct a physical inventory at least once a month, though bi-weekly and even weekly counts are  ideal.

For best results, implement these policies:
1) Conduct closed-door physical inventories. The count will be a lot more accurate if merchandise is static. Ideally, the physical inventory can be done at night or in the morning when the store is closed or on days when the store will be closed anyway (Sundays, holidays, etc.). It is a lot harder to do a count when you have to keep track of merchandise that is being sold as you are counting and make the necessary corrections. If a closed door count is impossible, be sure to schedule the physical inventory during the day and time with the least customer traffic.

2) All counting should be done by bar code only. Though data can be inputed  into Count Sheets when a bar code tag is not available by looking up items in the Items Catalog, this makes it easier to cheat. An unscrupulous employee might remeber that he stole a pair of Nike Airwalks and two pairs of  Reebok DMX running shoes and therefore make sure to overcount these. However, if you force employees to rely on bar codes, then it is a lot harder to remember that he must replace one 00234980 and two 037809700994, and so on.

3) Periodically assign employees from a different store to do the physical inventory. For example, have the employees of Store #7 do the physical inventory of Store #13. Where possible, be sure to shuffle these assignements to avoid any predictable patterns. As paranoid as this sounds, we have heard too many stories of retailers being robbed by what are essentially highly organized mafias of unscrupulos employees. We know of one chain of men's suits that eventually went out of business because they were losing so much merchandise to employee theft. Whenever there was goin to be a physical inventory of one store, the manager of that store would call another store and ask them to transfer to him the merchandise he knew was missing so that it could be counted. When the physical inventory was done, he would transfer the merchandise back. This group of employees was able to preemptively shift inventory between stores just before audits for years. The same suit was being counted multiple times at different stores. By the time the owners of the chain found out, it was too late: the y had already lost too much money to hope to recover.

4) Conduct physical inventories on the day the store manager has off. It is difficult for employees to be corrupt without the store manager noticing. Therefore, most of the time when there is organized theft in a store, the manager is complicit. Carrying out physical inventories when he is not in the store reduces opportunities for elaborate cheating.

5) When possible, implement surprise audits. Though most of the time physical inventories will have to be scheduled ahead of time (particularly if they involve having to close the store and bring in a different team of employees), it is good to have some unschedule counts since it is when unscrupulous employees have no time to prepare a cover-up that you are most likely to detect any theft that might be going on. And, the very threat of a sudden audit is a powerful deterrent for any employee who might be tempted.

Before You Begin the Physical Inventory
Before you begin the physical inventory, it is essential that you make a backup of your database (usually C:/Main/Main.gdb) before you begin the counting and another backup before you apply the physical inventory. In the event of a a grave operational error, you will have secured reliable points of reference to fall back on.

Some retailers who have previously had sloppy inventory control (e.g. selling items before Receipts are made and they are added to the stock of the store) and are looking to start again with a clean slate often wonder if they should drop all existing stock down to zero using Adjustments before proceeding with the physical inventory. However, this is not necessary. When the physical inventory is applied the system will automatically make any required Adjustments up or down to get to the stock level that is actually counted as being on hand. Therefore, bringing stock levels down to zero is an unnecessary (and time consuming) additional setp.

The first step in the physical inventory is to drop the Physical table by entering the Processes>Physical Inventory menu and selecting the Drop Physical table option as shown below:

The Physical Table is a virtual table in the database that stores the data used during the physical inventory process. Dropping or erasing this table will ensure that you do not accidentally include any data from the prior count.

Next, select the Erase Counts option in the Processes>Physical Inventory Menu. This will erase all Count Sheets currently stored in the system. (You can verify this by entering the Documents>Counts catalog and seeing that there are no records there.) This will ensure that you do not accidentally include any previously made Count Sheets in the physical inventory.

Count Sheets
Count sheets are a document that you can use at a Remote station to store stock quantities without affecting inventory, the Audit Log (Kardex) or the average cost of that item in the Cost Audit Log. To begin a count, select the Count option in the Transactions menu.

A Count  is a lot like any other transaction and items can be entered in the same way: by the item number, by scanning the bar code, by looking up the item in the Items Catalog, by entering quantities in a style matrix (activated by pressinf F4) and by downloading data from a Portable Data Terminal (PDT).

Using a PDT is the fastest and most accurate way to do a physical count of merchandise. If you have any questions about the compatability of a certain PDT with XpertMart, be sure to check with your Authorized Dealer. Your PDT may have to be programmed to communicate properly with XpertMart.

When you are done scanning items into the PDT, connect the PDT to your computer (using either a cable or communications cradle, depending on the PDT model) and press F11. You will see a message saying that transmission is in progress and after a few moments the items you scanned into the PDT will appear on the Count Sheet. In the example below, 66 items have been "counted" and enterd into the Count Sheet.

As data is transmitted from the PDT to XpertMart, you might see the following error:

This means that either the PDT read a bar code of an item that has not been scanned into the EAN/UPC field in the Items Catalog, or that there was an error reading the bar code and the number somehow got garbled. Be sure to make a note of which bar code was not found in the catalog to make sure that the item(s) in question is added to the Count Sheet.

Note that you do not have to group the items by style or arrange the data in any special way in a Count Sheet. During the physical inventory process, XpertMart adds together all of the Count Sheets and takes the Net total. So, for example, if you counted one item in one Count Sheet for the store window, five of the same item on a different Count Sheet for a store shelf and six more of the item in yet another Count Sheet for a shelf in the warehouse, XpertMart would add all of these together when you Apply the Physical Count Sheets and that item would show a stock of 12 (1 + 5 + 6 = 12).

Once you are finished entering data into a Count screen, the Count Sheet will be stored in the Documents>Counts Catalog. As with any document, you can print bar code labels for every item listed in the Count Sheet by pressing the Labels button at the top of the Catalog toolbar. This way you can quickly tag any merchandise that is missing bar code labels.

Counting the Merchandise in the Store
The easiest and most efficient way to do a physical inventory is to divide the store and warehouse into different sections and create a Count Sheet for each one of those sections. Ideally you would create a Count Sheet for every piece of furniture (stand, shelf, display case, etc) in the store and warehouse. When you are finished with a Count Sheet, you should print it out and post it next to the merchandise that was just counted. This will allow you to double-check every Count Sheet by re-counting the physical merchandise and comparing the totals to the ones posted. It is also a good idea to ask a store supervisor or auditor to sign at the bottom of every Count Sheet verifying that the totals have been checked. This redundancy will ensure more accurate results.

If you find that there is a difference between the total shown on the Count Sheet and the actual physical merchandise, you can create a second Count Sheet that will correct the difference.  For example, if a piece of merchandise is missing, you can create another Count Sheet with the additional item. If there is one item too many, you need to create another Count Sheet that shows a negative (-1) quantity for that merchandise. XpertMart will take net total from the sum of all Count Sheets as its' final count.

Starting the Physical Inventory
There are two objectives behind the Physical Inventory. The first is to be able to compare what the system has recorded as stock quantities versus the stock quantities physically counted, and to have a report showing the differences between the two. The second objective is to adjust the quantities recorded in the system so that they coincide with those physically counted. 

To accomplish these two objectives, XpertMart creates the Physical table in the database, which can be seen by opening the Inventory>Physical Catalog. A sample of the data contained in the Physical table is shown below:

For every item in the database there is a brief description followed by three  columns. The SYS column shows the stock quantity currently recorded by the system; the PHYS column shows the stock quantity that was counted (by adding the net totals from all of the Count Sheets); and the DIFF column displays any difference there might be between these two columns.

In the example above, for Item #857 the system shows a stock quantity of 2 and the physical count also yielded a stock of 2. Therefore, the difference between these two is 0. For Item #858, however, the system shows a stock quantity of 0 but the physsical count yielded a stock of 1. Therefore, the difference between the two is 1. (Note that when the system quantity is greatere than the physical quantity the difference is expressed as a negative number).

Before you begin the physical inventory, you will need to drop the previous Physical table from the database so you can start from scratch. When you are ready to begin, go the Physical Inventory menu under Processes in the Main Menu and select Start Physical Inventory.

When you select Start Physical Inventory you will see this screen:

When you press <OK> XpertMart will create the Physical table (if you've never created one before) and will take the current stock quantities in the system and write them to the SYS column. Furthermore, XpertMart will set the PHYS and DIFF column to zero. It is important to note that at this point you have not affected the inventory levels in the system in any way. (That is only done through Adjustments when you Apply the Physical Inventory). When the system has finished with this step, you will see this screen:

At this point you could run the Physical Inventory Complete Catalog report to verify that the PHYS and DIFF columns are set to zero.

Make sure you only select the Start Physical Inventory option once, as it "cleans out" all prior data in the Physical table. If you were to select this option midway through a physical inventory you will need to check every Count Sheet in the system and may even have to start all over again if they were erased.

Applying the Physical Counts
The next step is to apply the Count Sheets. Prior to this step you should have finished counting all of the merchandise in the store/warehouse and double-checked the Count Sheets. When you are ready, select Apply Phsical Counts from the Physical Inventory menu under Processes.

You will see the following screen:

When you press <OK> XpertMart will add up all of the quantities in the Count Sheets on file and will write the net total for each item in the PHYS column of the Physical table. At this point, XpertMart will also automatically calculate any differences between the SYS and PHYS columns and will write them in the DIFF column. When it is finished, you will see the following message:

Once again you can run the Physical Inventory Complete Catalog report and verify that the PHYS column is now populated with the quantities that were counted (whereas before it only displayed zeros). Remember, at this point you have not affected the inventory levels in the system in any way.

Look carefully at the DIFF column. Ideally this column would display nothing but zeros, indicting that there is no difference between the stock quantities in the system and those that were just counted. However, there will inevitably be some difference between theory and reality. Your job is, first of all, see if that difference is do to an operation error: perhaps someone forgot to enter an invoice or transfer into the system. If this is the case, you can still enter the missing transaction(s) into the system. When you are finished, you will need to run the Start Physical Inventory step again. Do not erase the existing Count Sheets.

If you discover that you are missing Count Sheets or there is a portion of your store/warehouse you overlooked, you can still enter new Count Sheets into the system. When you are done entering the additional Count Sheets, you will need to run the Apply Physical Counts step again. Once again, do not erase the prior Count Sheets as they are still valid. Applying the same Count Sheet twice does not duplicate the stock quantity.

Once you have made sure that there are no missing transactions or Count Sheets, take a closer look at any remaining items showing a difference between the SYS and the PHYS columns. This is the merchandise that you have lost, either through shoplifting, employee theft or incompetence. Any shrinkage level above 0.5% should be of concern (that's one piece of merchandise lost for every 1000 passing through the store). These differences can point to a real problem in your operation and must be looked at carefully. If the missing items are high-ticket items, that can point to a lack of security. Consult the Audit Table for each item showing a difference for further clues.

Applying the Physical Inventory
The last step is to Apply the Physical Inventory. This step will replace the quantities in the SYS column with those in the PHYS column. The way XpertMart does this is by creating an Adjustment for every instance where there is a difference between the system stock and the physical stock to make the former equal to the latter. This is also keeping with our philosophy of inventory control which states that all changes to inventory can only be made through a document that can be audited, in this case, an Adjustment. Those Adjustments created by the physical inventory process will show up in the Audit Table as such.

To proceed, select Apply Physical Inventory from the Physical Inventory menu:

You will see the following screen:

At this point you will affect inventory, so be sure you are ready to proceed. When you press <OK> the following window will appear:

This window gives you the ability to filter those items that will go through the physical inventory process. You only need this filter  if for some reason the physical inventory process was interrupted at some point and you need to pick up where you left off. If this happens, you can enter the Adjustments Catalog and go to the last Adjustment in there to see which was the last item whose stock quantity as adjusted. You would then enter this item number in the "For items number larger than:" field in the window above. In most cases, you just need to have a 0 in that field and XpertMart will apply the physical inventory to every item in the database.

If you select the checkbox next to the "Print adjustments?" field then the system will print an Adjustment every time it creates one (whenever there is a difference between SYS and PHYS). Otherwise, the Adjustment gets saved to the Adjustements Catalog and you are free to print them at leisure. Selecting the "Print adjustments?" is only recommended if you have a high-sped printer; otherwise it slows the process down too much.

When this process is finsihed, the stock levels of every item will be exactly those that were counted as being on hand.

Running Physical Inventory Reports
During the Physical Inventory process there are several reports that you can run to help you verify the steps you have taken and to, ultimately, measure the differences between your stock on hand and the stock reported in the system. If you select the Physical Reports option in the Processes>Physical Inventory menu, you will see an XpertReportsRunner screen which has a list of those reports you can launch:

The Count Journal is a report that shows all Count Sheets currently in the system (for a given date range) and their totals. This report (shown below) is very useful when you need to keep track of which Count Sheets are in the system.

The Physical Inventory Complete Catalog reports is basically a display of the Physical table as it shows, for every item in the database, the stock in the system (SYS), the stock that was counted (PHYS) and any difference between the two (DIFF). The quantities in this report will change as you move through the steps of the physical inventory process. This report, shown below, is a very powerful diagnostic tool:

The Physical Inventory Differences reports shows only those items where there is a discrepancy between the system stock and the physical stock, so it can help you pinpoint any shrinkage problems you may be having. The Physical Inventory Total Values report is a summary with no detail and will give you a quick glance at how efficient your store or warehouse is being run.

Having Confidence in the Physical Inventory

There are several steps you can take to verify that the Physical Inventory was done correctly:

1) You can run the Count Journal report from the Physical Inventory menu. The sum total of the quantities in the Count Sheets will be the same as the total of the PHYS column in the Physical table. The contents of the Physical table can be seen by running the Physical Inventory Complete Catalog report or you can also check one item at a time by opening the Physical catalog (in the Catalogs>Inventory menu).

2) You can run the Adjustment Journal report from the Adjustments Catalog (under Documents in the Main Menu) for the date range covering the time of the physical inventory. The sum total of the quantities in all of the Adjustments will equal the total in the DIFF column in the Physical table.

3) Immediately after applying the physical inventory you can redo the process by once again selecting Start Physical Inventory and Apply Physical Counts. After running these two processes, the Physical table should show nothing but zeros in the DIFF column since the physical quantities should equal the system quantities. (You should only run this test using a copy of the database).

If any of these three tests fail, then there was a problem with the Physical Inventory and you need to redo the process using, of course, the backup you made before you started.

Copyright © 2002 XpertMart

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