Stock that does not match the records: where the differences come from and how to stop them

Once a year a company stops work, counts the warehouse and finds that actual stock does not match the records. The difference is posted, the report is signed and everything starts again. Next year the difference is back, about the same size.

The stocktake showed that a problem exists. It did not show where it arises, because the difference did not arise on the day of the count, but over the twelve months before it.

Where the differences come from

When discrepancies are sorted by cause, theft is near the bottom of the list. At the top are ordinary, everyday things.

Delayed recording. Goods are physically issued, and the issue note is entered tomorrow or at the end of the week. In the meantime the records show goods that are not there.

Errors on receipt. The quantity on the supplier’s delivery note is received, not the quantity that actually arrived. Or a pallet of 48 pieces is received as 50 because that is what the order says.

Mixed-up items. Two similar items, different codes. One is issued, the other is booked out. The total value may be roughly right while both balances are wrong, one over and one under.

Units of measure. Purchased in boxes, issued in pieces, with the bill of materials in kilograms. Every manual conversion is a place where accuracy is lost.

Unrecorded scrap and breakage. Damaged goods are thrown away or put aside, and nobody writes them off.

Production consumption above the bill of materials. The system books out material according to the bill of materials, while more is actually used. The difference builds up for months. We described how to track this in the article on bills of materials and work orders.

Returns and samples. Goods returned by a customer or sent out as samples often have no document of their own.

Goods in the wrong place. The item exists, but not where it should be. It is not found during the count and a shortage is posted; next time it is found and a surplus is posted.

What it costs

The posted difference is the smallest part of the cost. The larger part does not show up as one amount:

• Stoppages. Production stops because material that exists in the records is not on the shelf.
• Rush purchases at a higher price and with more expensive transport.
• Excess stock. When the records are not trusted, people order “just in case”, and money sits on shelves.
• Wrong decisions. Margin per product and stock value in the balance sheet are calculated from figures that are not accurate.
• Time. People check stock by walking to the warehouse instead of looking at the system.

There is also a tax side: in Croatia, shortages above permitted limits have consequences for VAT and profit tax, and the accounting treatment depends on the cause and on the company’s internal rules. That is a question to settle with a tax adviser before the stocktake, not after it.

Why an annual stocktake is not enough

The annual stocktake is a legal obligation and has to be done. As a management tool it is weak, for three reasons:

• It reveals the difference months after it arose, when the cause can no longer be found.
• It gives one aggregate number, with no information about the step at which the error occurred.
• It corrects the balance, not the process. The process that produced the difference keeps producing it.

What actually helps

Record at the moment and place of the event. Receipt is posted at the dock, issue at the shelf, with a scanner or terminal. Paper retyped at the end of the day is the main source of delays and errors.

Receive what arrived. The quantity is counted or weighed and compared with the order and the delivery note. Any difference is settled with the supplier straight away.

Introduce cycle counting. Instead of everything once a year, a small part of the warehouse is counted every week. Expensive and fast-moving items more often, slow ones less often. A difference is then spotted while the trail is still fresh.

Label locations. Every shelf has a label, every item its place in the records. Goods in the wrong place then become a visible exception, not the normal state.

Look for the cause, not just fix the number. Every larger difference gets a reason: late posting, wrong code, scrap. After a few months it is clear which cause repeats, and that is where the procedure changes.

Separate duties. The person who issues goods should not be the only one who counts them and posts corrections. That is a basic internal control, not a sign of distrust.

Write off scrap when it occurs, with quantity and reason.

Where to start

There is no need to start with every item. It is enough to take the twenty that carry the most value or most often stop production, count them weekly for a month and record the cause of every difference. That usually reveals two or three causes that explain most of the problem.

This is where two things we do meet. An internal audit reviews the warehouse process and controls and shows where differences arise. A system such as our FERP lets receipt, issue and production be recorded once and immediately, so differences stop arising at the points that depend on retyping.

If your stocktake shows the same thing every year, tell us how your warehouse works today.