The Annual Inventory

In a physical inventory audit, normal operations cease while every inventory item is identified and counted. The physical counts are then compared to records and, where necessary, the record is corrected.

Most firms conduct the physical inventory for financial reasons. However, it also has the effect of correcting errors and improving cycle count programs. Within a few days, accuracy can increase,  quickly and dramatically to 98% or more.

Then, as figure 2 shows, accuracy begins to drop the moment operations resume. Transactions introduce errors. At one year, accuracy will drop to the initial level, other factors being equal.

Figure 2 shows an initial IRA of 63%. Such a low figure is not too unusual. After the annual inventory in January, IRA rose to about 99%. It then steadily declined to the original 63% by the following December. This gives an overall average of about 80%.

This could be improved by taking a physical inventory every six months. However, this is expensive and frustrating for people. It still gives only a 90% average IRA and this is insufficient for MRP/ERP systems. It is undesirable even in manual systems.

Figure 2-IRA With Physical Inventory