Inventory Sampling – an Insight into the Stress-Free Stocktaking Variant

Feb 12, 2024 // Daniel Schulteis

Stocktaking – a term that triggers both anticipation and slight panic in many companies. In this blog post, we will focus on a special inventory method: inventory sampling. Warehouse managers face the challenge of recording stock efficiently and accurately. Financial managers are obliged to ensure correct accounting. Inventory sampling offers an interesting alternative to full inventory and can significantly reduce the effort involved.

Stocktaking

Stocktaking is an indispensable part of warehouse management. It involves listing stock levels, inventories, assets and liabilities and recording them according to quantity and value. This allows companies to keep track of their stock levels and ensure that actual inventory match the recorded data. Inventory provides visibility into the company's assets and helps ensure that business processes run smoothly.

As of the balance sheet date, a target/actual comparison must be made for all of a company's goods and services.

Legal requirements for stocktaking

The legal requirements for inventory vary by country and industry. In Germany, companies are obliged to carry out an inventory in accordance with Section 240 of the German Commercial Code (HGB). The most important legal requirements are

1. Annual financial statements: For the financial officer, the inventory is part of the annual financial statements and must be carried out in accordance with generally accepted accounting principles.
2. Valuation: Assets must be valued at their fair value (market value) or at acquisition cost.
3. Documentation: The results of the inventory must be recorded in an inventory. This inventory forms the basis for the annual financial statements.
4. Immediacy: The inventory should be carried out on the balance sheet date.

Inventory methods and inventory simplification procedures

There are several ways to conduct an inventory. In a full inventory, all of the company's assets and liabilities are physically counted/measured/weighed and valued. This is often the case at the end of the year. Two other variants are known as simplified procedures: One is the perpetual inventory, in which the inventory is recorded and valued on an ongoing basis. Events such as material storage and retrieval with stock=0 are often suitable for inventory recording. On the balance sheet date, the stocks can then be transferred to the inventory by means of a corresponding book update. Second, inventory sampling, where representative samples are taken and extrapolated to determine the actual inventory. In Germany, inventory sampling is legally recognized as a simplified inventory procedure compared to the full inventory.

The traditional full inventory is time-consuming and costly. Inventory sampling is therefore more suitable: it is less time-consuming, can be carried out in the current financial year and is (statistically) just as reliable as the full inventory.

Inventory Sampling

The principle of inventory sampling is based on the assumption that inventory management is (almost) correct. The simplification of inventory sampling is that this assumption is validated using suitable mathematical and statistical methods.

In order to carry out inventory sampling, a leading warehouse management system with reliable, item-specific inventory management and continuous, correct updating is required. On the other hand, mathematical and statistical knowledge is useful. Since inventory sampling is based on mathematical principles, a basic understanding is helpful.

Choosing the right sample size for inventory sampling depends on factors such as the variety of items, the number of items and the size of the warehouse. Statistical methods can help calculate the optimal sample size. Good planning is crucial here: as the sample should be representative, inventory managers should consider different item categories and storage areas. Modern inventory software makes it possible not only to randomly select samples, but also to accurately record inventory data as it is taken.

Mathematical-Statistical Methods of Inventory Sampling

The mathematical-statistical methods used for inventory sampling have been defined by the Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW) and the Arbeitsgemeinschaft für wirtschaftliche Verwaltung e.V. (AWV). These are each suitable for different warehouse situations.

• Extrapolation: Sample items are randomly selected from a statistical population (in this case, the quantity of all warehouse items). These are inventoried by value and quantity. The value of the inventoried items determined in this way is used to extrapolate the value of the entire warehouse. The extrapolation method is mainly used in conventional warehouses with normal stock reliability. On average, it reduces the counting effort by 95%.
• Sequential test: The sequential test is a further simplification. Ideally, 31 samples, typically 70, are sufficient to confirm proper inventory management. This method is suitable for warehouses with high stock reliability.

Inventory Sampling Suitable for many Industries and Warehouses

The inventory sampling method can be used in various industries, from retail to manufacturing. It is also suitable for many types of warehouses: From spare parts warehouses to warehouses for merchandise, raw materials, semi-finished products and finished goods - and for both manual and automated warehouses.

The Benefits of Inventory Sampling

• Time savings and efficiency: Traditional full inventories require all inventory to be counted, which can take weeks or even months depending on the size of the warehouse. Inventory sampling, on the other hand, only requires a representative sample to be counted. This greatly speeds up the process and allows employees to focus on other important tasks. Warehouse managers can also carry out inventory sampling outside of regular business hours so as not to disrupt operations..
• Accuracy and reliability: Modern inventory software makes it possible to randomly select samples to ensure a representative selection. This improves the accuracy of the inventory data. Inventory sampling provides a reliable estimate of total stock levels without the need to count every single product.
• Cost savings: The traditional full inventory requires additional manpower that is employed over a longer period of time. Inventory sampling reduces personnel costs and minimizes overtime costs.

ConclusioN

Stocktaking is an important process that ensures a company's financial transparency. By complying with legal requirements, companies can keep their books in order, determine the actual value of their assets and keep track of their inventory levels. Inventory sampling is the most efficient method: it is accurate, saves time, reduces costs and is therefore the least stressfull inventory method for warehouse managers.

How do you deal with inventory stress in your company?

To learn more about how you can improve your inventory processes, visit our inventory sampling website: