The Inventory Reconciliation Process

Accurately managing inventory quantities is highly important for manufacturers and it only increases in importance as production quantities rise and products become more complicated. It’s easy to focus purely on the ordering side of maintaining inventory, but having an exact understanding of what the company has on hand is just as important. That means being able to trust what’s in the inventory system is the same as what’s on the shelf. That’s where the process of inventory reconciliation comes in.

Performing inventory reconciliation offers businesses numerous advantages. It ensures the accuracy of financial reporting by aligning recorded inventory levels with the actual physical stock on hand. This accuracy is vital for meeting accounting standards and providing stakeholders with reliable financial information. Further, it helps identify and address discrepancies that may result in financial losses, such as shrinkage or theft, leading to significant cost savings over time. 

The process of inventory reconciliation optimizes inventory management practices, helping businesses to maintain optimal stock levels, reduce carrying costs, and minimize the risk of stockouts or overstock situations. Additionally, accurate inventory data facilitates informed decision-making regarding purchasing, production planning, and pricing strategies. Finally, inventory reconciliation enhances supply chain efficiency by streamlining operations, improving inventory visibility, and fostering collaboration with suppliers and distributors. 

What is the inventory reconciliation process

Put simply, inventory reconciliation involves comparing the actual physical inventory on hand with the inventory records maintained in the company’s accounting or inventory management system. 

This comparison is conducted to identify any discrepancies between the recorded inventory levels and the actual quantities of goods in stock. By reconciling inventory, businesses can ensure the accuracy of their inventory records. This is essential for making informed decisions, maintaining optimal stock levels, and complying with regulatory requirements. For small manufacturers that produce one or two products, the process can be as simple as checking the inventory spreadsheet against what they have in the stock room. For larger companies, the process is much more expansive.

An in-depth inventory reconciliation process goes beyond comparing the actual physical inventory on hand with the inventory records maintained in the company’s inventory management system. If done properly, it helps make sure other departments that rely on this information are using correct data to base other important decisions on, including accounting, purchasing and production. Therefore companies need to have proper processes in place to help guarantee accuracy during the operation. Here’s a general overview of the inventory reconciliation process:

1. Preparation

Before starting the reconciliation process, it’s essential to ensure that all inventory transactions, such as purchases, sales, returns, and adjustments, are accurately recorded in the inventory system. This includes updating the system with any recent inventory counts or adjustments.

2. The Physical Count

Conduct a physical count of all inventory items in the warehouse or storage locations. This involves physically counting each item on hand and recording the quantities observed.

3. Comparing the Physical Count with Record

After completing the physical count, compare the quantities recorded during the count with the inventory records in the system. This comparison helps identify any discrepancies between the actual physical inventory and the recorded inventory levels.

4. Investigating Discrepancies

Investigate any discrepancies discovered during the comparison process. Discrepancies may result from various factors such as errors in recording transactions, theft, shrinkage, or damaged goods. Conduct a thorough investigation to determine the root cause of the discrepancies.

5. Adjusting Inventory Records

Make necessary adjustments to the inventory records to reflect the accurate inventory levels. This may involve updating quantities for items with discrepancies, recording any inventory losses or gains, and making corrections to transaction records as needed.

6. Document Findings

Document the findings of the inventory reconciliation process, including any discrepancies identified, the root causes of the discrepancies, and the actions taken to resolve them. Maintaining detailed documentation helps track inventory accuracy over time and facilitates future audits or reconciliations.

7. Implement Controls

Implement measures to prevent future inventory discrepancies. This may include improving inventory management practices, enhancing security measures to prevent theft or shrinkage, implementing barcode or RFID tracking systems, and providing training for employees involved in inventory handling and recording.

8. Scheduling Regular Reviews

Schedule regular reviews and periodic inventory reconciliations to ensure ongoing accuracy of inventory records. Regular monitoring helps detect and address discrepancies in a timely manner, minimizing the risk of inventory issues impacting operations and financial reporting.

9. Practicing Continuous Improvement

Continuously evaluate and refine the inventory reconciliation process to improve efficiency and accuracy. Solicit feedback from employees involved in the process, identify areas for improvement, and implement changes as needed to optimize inventory management practices.

How often is inventory reconciliation done?

The frequency of inventory reconciliation depends on various factors, including the size of the business, production throughput, the nature of the inventory, industry regulations, and internal policies. However, here are some general guidelines:

1. Regular Scheduled Reconciliations

Many businesses conduct inventory reconciliations on a regular basis, such as monthly, quarterly, or annually. The frequency often depends on the volume and turnover of inventory, as well as the importance of maintaining accurate inventory records for financial reporting and decision-making purposes.

2. High-Turnover Items

Items with high turnover rates or those prone to shrinkage or theft may require more frequent reconciliation. Some businesses often reconcile inventory for high-value or high-demand items more frequently to minimize the risk of stockouts or discrepancies.

3. Taking into Account Seasonal Variations

Businesses that experience seasonal fluctuations in demand may adjust the frequency of inventory reconciliations accordingly. For instance, a manufacturer of consumer electronics may conduct more frequent reconciliations before and during production for peak holiday demand periods to ensure adequate stock levels and accurate inventory records.

4. Adjusting for Just-in-Time Inventory

Businesses that operate on a just-in-time (JIT) inventory management system may reconcile inventory more frequently to maintain optimal inventory levels and minimize excess inventory or stockouts. 

5. Meeting Regulatory Requirements

Some industries, such as healthcare and pharmaceuticals, have regulatory requirements that mandate specific inventory reconciliation practices and frequencies. Businesses operating in regulated industries must comply with these requirements to ensure compliance and avoid penalties.

6. Internal Policies and Best Practices

Businesses may establish internal policies and best practices for inventory reconciliation based on their specific needs, risk tolerance, and operational priorities. For instance, they may also develop different schedules for parts managed in a Kanban fashion. These policies may outline the frequency of reconciliations and any additional procedures or controls to be followed.

Ultimately, the goal of inventory reconciliation is to ensure the accuracy of inventory records and minimize the risk of discrepancies that could impact financial reporting, operations, and customer satisfaction. Therefore, businesses should determine the appropriate frequency of inventory reconciliation based on their unique circumstances and requirements, striving for a balance between accuracy, efficiency, and resource utilization.

Managing inventory reconciliation at vendors and contract manufacturers

Inventory reconciliation at contract manufacturers involves verifying the accuracy of inventory records maintained by both the contracting company and the manufacturer. This process is helpful in ensuring transparency, accountability, and efficient supply chain management. Here’s how inventory reconciliation is typically done at contract manufacturers:

1. Establish Clear Communication Channels

Effective communication between the contracting company and the contract manufacturer is essential. Both parties should agree on the frequency and process of inventory reconciliation, including the format of inventory reports, timelines for sharing data, and responsibilities for conducting reconciliations.

2. Define Inventory Ownership

Clarify which party owns the inventory at various stages of the manufacturing process. This includes raw materials, work-in-progress (WIP) inventory, and finished goods. Clear ownership definitions help prevent confusion and disputes during inventory reconciliation.

3. Exchange Inventory Data

The contracting company and the contract manufacturer exchange inventory data regularly. This data may include inventory levels, receipts, shipments, adjustments, and any other relevant transactions. Electronic data interchange (EDI) or other automated systems can facilitate the exchange of inventory data in a timely and accurate manner.

4. Verify Receipts and Shipments

Both parties reconcile inventory receipts and shipments against the corresponding purchase orders, packing lists, and shipping documents. This ensures that the quantities received and shipped align with the agreed-upon terms and that any discrepancies are promptly addressed.

5. Conduct Physical Counts

Periodically, physical inventory counts are conducted at the contract manufacturer’s facilities. Representatives from both the contracting company and the manufacturer may participate in these counts to verify inventory accuracy. Any discrepancies between the physical counts and recorded inventory levels are investigated and resolved collaboratively.

6. Document Discrepancies and Adjustments

Any discrepancies identified during inventory reconciliation are documented in detail, including the root causes of the discrepancies and the actions taken to resolve them. Adjustments to inventory records are made as needed to reflect the accurate inventory levels.

7. Implement Controls and Best Practices

Both parties implement controls and best practices to minimize the risk of inventory discrepancies in the future. This may include improving inventory management processes, enhancing communication protocols, implementing barcode or RFID tracking systems, and providing training for personnel involved in inventory handling.

8. Regular Reviews and Audits

Regular reviews and audits are conducted to ensure ongoing compliance with inventory reconciliation processes and identify opportunities for improvement. These reviews may be conducted internally or by third-party auditors to provide an objective assessment of inventory accuracy and control.

By following these steps and maintaining open communication and collaboration between the contracting company and the contract manufacturer, inventory reconciliation can be effectively managed, leading to improved supply chain efficiency and customer satisfaction.

Making inventory reconciliation easier with MRP software

Homemade tools can work well for small operations but when a business grows, having purpose built systems can make a big difference. This holds true for doing inventory reconciliation. The process can be made significantly more efficient with Material Requirements Planning (MRP) software. MRP software is specifically designed to help businesses manage their inventory, production planning, and procurement processes in one system. Here are several ways MRP software simplifies the inventory reconciliation process:

1. Real-Time Tracking

MRP software provides real-time visibility into inventory levels, allowing businesses to track stock movements, adjustments, and transactions as they occur. This real-time data makes it easier to identify discrepancies between physical inventory counts and recorded quantities, enabling prompt resolution of any issues.

2. Automated Data Entry

MRP software automates many inventory-related tasks, such as recording sales, purchases, returns, and adjustments. This automation reduces the likelihood of manual errors in data entry, leading to more accurate inventory records and minimizing the need for extensive reconciliation efforts.

3. Integrated Systems

MRP software often integrates with other business systems, such as accounting software, point-of-sale systems, and warehouse management systems. This integration enables seamless data exchange between different departments and eliminates the need for manual data entry or reconciliation between disparate systems.

4. Forecasting and Demand Planning

MRP software includes features for demand forecasting and production planning based on historical data, sales forecasts, and inventory levels. By accurately predicting demand, businesses can optimize their inventory levels and reduce the likelihood of stockouts or overstock situations that may complicate reconciliation efforts.

Barcode and RFID Tracking

Many MRP software solutions support barcode and RFID tracking technologies, enabling businesses to quickly and accurately capture inventory data during receiving, picking, and counting processes. This streamlined data capture process simplifies inventory reconciliation by reducing the time and effort required for manual inventory counts.

6. Custom Reporting

MRP software typically offers customizable reporting capabilities, allowing businesses to generate detailed inventory reports tailored to their specific needs. These reports can include information such as inventory valuation, stock movements, aging inventory, and discrepancies between physical counts and recorded quantities, facilitating the reconciliation process.

7. Audit Trails

MRP software maintains audit trails of inventory transactions, recording details such as the date, time, user, and nature of each transaction. These audit trails provide a comprehensive history of inventory-related activities, making it easier to trace the root causes of discrepancies and ensure accountability.

Overall, MRP software streamlines the inventory reconciliation process by providing real-time visibility, automating data entry, integrating with other systems, supporting forecasting and demand planning, facilitating barcode and RFID tracking, offering custom reporting capabilities, and maintaining audit trails of inventory transactions. By leveraging these features, businesses can improve the accuracy of their inventory records and minimize the time and effort required for reconciliation tasks.

Bringing it all together

By conducting regular inventory reconciliations, investigating discrepancies, and implementing preventive measures, businesses can maintain optimal stock levels, improve operational efficiency, and comply with regulatory requirements. But the amount of data and oversight to perform these functions properly almost requires the use of dedicated software to manage everything efficiently. Many small and medium sized businesses turn to Material Requirements Planning (MRP) software, like Aligni MRP to manage inventory processes.

If you’re ready to take your inventory management processes to the next level, you need to have the right tools to do it well. It’s time to sign up for Aligni MRP today.