How to Conduct a Physical Inventory in Manufacturing

Buying and holding inventory is a substantial investment for many small manufacturing businesses. Once or twice a year, business owners take a physical count of every inventory item in stock. If you use a periodic inventory system, you will update your inventory records on a particular time schedule, such as biannually or annually. If you use a perpetual inventory system, you update your inventory records as needed. Conducting a physical inventory can point out discrepancies between the book inventory and actual inventory.

The ideal time to conduct a physical inventory is after your business has closed for the day. If you operate a second or third shift, you may have to schedule the count on a weekend. To save time, order the supplies your employees may need, such as two-part pre-numbered inventory count tags, in advance. Organize your stockroom or warehouse, and return any loose inventory items to its proper bin. You can have any slow-moving inventory items counted in advance. After the count is completed, have the container sealed and write the number of items on a pre-numbered count tag. Remove and account for any damaged and obsolete inventory.

The day before the inventory is scheduled, organize your employees into two-person counting teams. Pair a more experienced employee together with a newer employee. Have the more experienced employee count the inventory and the newer employee seal the bin and tag it. Instruct all teams about the inventory procedure. Do not tell your employees how many items should be in any of the bins. Assign a specific area or a set number of bins to each team. Keep a master list of your counting teams and their areas of responsibility.

Start counting inventory after all production activities have stopped and your business is closed. Keep a record of the tag numbers given to each team. As you count each inventory item, affix one part of the two-part tag to the sealed bin or directly to the item. Write the bin number, the inventory item number, the part number, the item description and the quantity on the tag. Repeat this procedure until the entire inventory is counted. You should receive the second part of each tag as the employee teams complete their counts. Verify you have all the tags before your employees leave.

Make sure your master inventory list is complete and up to date. Mark off each tag number against your master tag number list to ensure all items were counted. For each inventory item, compare the quantity stated on the master inventory list against the quantity listed on the tag. If there is a difference between the counts that is above the acceptable threshold, recount the inventory item. If there are several count discrepancies in one area, have a different employee team recount that section. Once you verify all the counts, enter the inventory data into your computer.