Find Lost Inventory Fast with Location Audits

First let me say that Location Audits are not a standardized term or process in the warehouse industry. I first set up what I called a Location Audit process back in the 90s and have been doing and recommending them ever since.

Lost inventory is a common problem in warehouses that use random slots for putaway. What makes it worse is that the lost inventory often represents an entire receipt or an entire pallet in these operations.

The typical process for finding this inventory is to have someone(s) walk up and down the aisles looking for the lost inventory. This is slow and poor use of labor, but also may not be all that successful.

The main objective of a Location Audit.

The main objective of a Location Audit is to find and correct lost inventory fast. We’re not trying to find that lost item that the person walking up and down the aisles was looking for. We’re trying to find and correct ALL the lost inventory in the warehouse and do it in an efficient manner.

It’s important to remember this objective when laying out your process, so you don’t clutter the process with other objectives.

The Location Audit Process.

Start by running a report of warehouse inventory sorted by location. When I say location, I’m talking about the slot in the warehouse the inventory is stored in.
Start at the first slot. This would likely be a shelf in pallet rack.
Look at the first item in this slot, then check to see if it is on the report.

Important! This sequence is incredibly important. You need to look at the item on the shelf and then look at the report. DO NOT look at the report, then try to find the item on the shelf. This sequence is the difference between a process to find stuff and a process to identify something that is missing. We want to find stuff.

If it is on the report, circle the item number on the report. If it is not on the report, you need to have a log sheet to fill out to identify the item and quantity found.
When you are done, this log sheet is a list of items and quantities that have been found.

The items on the report that are not circled are items that are missing—but that wasn’t the goal here, we wanted to find stuff, not identify what is missing. Those are just a byproduct of this process.

Note: this is NOT a Cycle Count or a Physical Inventory Count. You are not counting inventory here; you are just identifying if it is on the report or not. If it is not on the report, you do need to determine the quantity to fill out the log sheet, but that is the only counting that should take place here. Once again, we are going for speed here, so don’t start looking for other things to add to this process. If you keep it simple and solely focus on finding lost inventory, you can get through the entire warehouse in a short amount of time. If you decide you may as well count inventory “while you’re there,” you no longer have a “Fast” process for finding inventory.

Fixing the variances identified.

There are various approaches to fixing the variances you’ve identified in the location audit. Here are some considerations.

You don’t want to put too much of a burden on the person(s) conducting the audit as this can slow them down quite a bit.

Correcting inventory is very dangerous, the person doing this needs to have significant knowledge or the related processes and transactional systems.

Option A: Use a Variance Location.

I like this one a lot because it keeps the audit moving along. The idea is to create a bin location to track variances. I’ll call it location VAR. When you find something on a shelf that doesn’t belong there, you do a location transfer from VAR to the location where you found the item. If you find something missing from a location, you do a location transfer from the location to location VAR. In theory, this should clean up a lot of variances without a person having to think too much. However, ultimately you will end up with some variances that don’t clean themselves up. These will have to be evaluated by someone with greater knowledge and skills. In addition, this process will create negative balances whenever you move something from VAR to the found location unless the transaction for the ‘lost’ item has already been done. Some people can get freaked out over negative inventory, so this may not be an option for you. The good news is that since you are only transferring inventory between locations (slots) you are not affecting the overall inventory balance for any items with this process.

Option B: Fix them as they come up.

Again, this would have to be done by someone with greater knowledge and skills, and would likely take up more time than using a variance location. That said, most of these are not that difficult to fix. If you find something that’s not where it’s supposed to be, it’s usually rather easy to figure out where it is missing by inquiring about the item to see the locations and quantities it shows in the system. So, in most cases, “fixing them” just involves doing a location transfer from where it is missing to where it was found. While this sounds pretty simple, it will still likely be more prone to error than using a variance location because there is a little more thinking involved.

When should you do Location Audits?

Anytime you have a lot of lost inventory. This would most likely be in random storage areas, but it can also be useful to do a location audit in a fixed bin storage area if you’ve experienced misplaced bins.

The rate at which you do location audits is directly related to what you find. If you find a lot of lost products, be very aggressive at doing audits. If you get to where you are not finding many things, you can slow down the rate and frequency.

Always do a location audit prior to conducting a physical inventory count. Having things turn up in wrong locations during a physical inventory count can get very messy, so clean it up before.

Similarly, do location audits before starting a cycle count process. The reality is that most cycle counting processes are not very good at handling lost inventory, so don’t expect these to get cleaned up in your cycle count.

After a major project such as a physical move or a warehouse reconfiguration. Don’t wait until you start getting problems due to lost inventory, just plan to clean it up as soon as you finish the project.