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Inventory Preparation: The Ultimate Guide for 2024

3 minutes

In this article, we explain exactly what inventory preparation is and why it's important. We will also walk you through our simple 6-step framework for inventory preparation, with real-world examples. Read on to learn more.

inventory preparation

What Is Inventory Preparation?

Inventory preparation is the process of organizing, counting, and evaluating items in a store or warehouse to maintain accurate records. This ensures that businesses have the right number of products on hand and understand their inventory's value. 

Example: Farm Fresh Produce found discrepancies in their records. While their records showed they had 20,000 pounds of potatoes, a recent inventory preparation process revealed they actually had 18,500 pounds. This discrepancy was crucial as it directly affected their supply contracts and seasonal sales predictions.

Why Is Inventory Preparation Important? 

Inventory preparation is the foundation of effective inventory management. Here are some key reasons why:

Accurate Financial Reporting: Proper inventory counts contribute to correct financial statements and tax reporting.

Operational Efficiency: Keeping accurate inventory helps in timely replenishment, reducing the risk of stockouts.

Enhanced Customer Satisfaction: Accurate stock levels mean customers get what they want, when they want it.

Loss Prevention: Through regular checks, theft or misplacement can be identified and addressed.

Data-driven Decision Making: With precise inventory data, businesses can make informed purchasing and sales decisions.

Avoidance of Excess Stock: Regularly assessing inventory prevents overstocking, which ties up capital and storage space.

what is inventory preparation

6-Step Framework for Effective Inventory Preparation

Preparing your inventory efficiently is a multifaceted task. Here's our simple 6-step process for you to get started:

Step 1: Define Objectives

Understand what you aim to achieve, whether it's updating records, tax preparation, or evaluating stock levels. 

Example: Home Decor Ltd. decides to evaluate stock levels to determine which items to put on sale.

Step 2: Gather Necessary Tools

Ensure you have all required equipment, such as barcode scanners, inventory software, or counting sheets. 

Example: Novel Reads Bookstore invests in a digital inventory system to track the inflow and outflow of books efficiently.

Step 3: Segment Your Inventory

Break down inventory into manageable sections or categories. This can simplify the counting process. 

Example: Auto Parts Corp. divides their inventory into engine parts, body parts, and interior accessories.

Step 4: Perform the Count

Engage in a physical count of every item, updating records as you go. It may be beneficial to close shop or do it during off-hours. 

Example: Sports Gear Outlet chooses a low-traffic day to count their athletic equipment, realizing they have 80 tennis rackets and 100 running shoes.

Step 5: Reconcile with Records

Compare the physical count with digital or paper records, noting discrepancies. 

Example: Fresh Grocery Inc. finds that their physical count of oranges is 1,200, but records indicate 1,300.

Step 6: Address Discrepancies

Investigate and resolve any differences between physical count and records, adjusting entries as necessary. 

Example: Electro Hub identifies that 15 smartphones sold during a promotion weren't deducted from the system, and they correct this oversight.

inventory preparation steps

Case Study

Elite Shoe is distinguished medium-sized shoe retailer. They have noticed some irregularities in its quarterly financial reporting. 

To rectify this, the company employed our 6-step inventory preparation framework:

Step 1: Define Objectives

Elite Shoe's primary goal is to pinpoint overstocked items that could be put on sale to free up storage space and increase sales. The management team reviews sales data and identifies specific shoe models that haven't been selling as anticipated.

Step 2: Gather Necessary Tools

Realizing the need for a more efficient system, Elite Shoe invests in state-of-the-art inventory software, ensuring that every sale, return, and new stock entry is logged instantly and accurately.

Step 3: Segment Your Inventory

To facilitate a more manageable counting process, the inventory team classifies their extensive range into specific categories: men's shoes, women's shoes, kids' footwear, and various accessories. This categorization allows each department to focus on their respective areas, ensuring more accuracy.

Step 4: Perform the Count

The company opts for a day with minimal in-store traffic to perform a comprehensive count. After thorough scrutiny, they tally up 2,500 men's shoes, 3,000 women's shoes, 1,000 kids' shoes, and 500 assorted accessories in their inventory.

Step 5: Reconcile with Records

Upon comparing their fresh count with the electronic records, the team finds an inconsistency. The system indicates they have 2,600 men's shoes, signaling a discrepancy of 100 pairs from their recent count.

Step 6: Address Discrepancies

Looking into this inconsistency, the inventory specialists trace back through shipment logs and sales receipts. It soon becomes clear that a shipment of 100 men's shoes was erroneously entered twice into the system, explaining the variance.

We hope you now have a better understanding of what inventory preparation means and why it’s essential.

If you enjoyed this article, you might also like our article on inventory issues or our article on finished goods inventory.

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