Inventory discrepancies can create problems far beyond the warehouse. When the inventory in your system doesn’t match what is physically on the shelf, the result can be overselling, backorders, inaccurate forecasts, unnecessary purchasing, and frustrated customers.
An inventory audit provides an opportunity to identify discrepancies, determine why they occurred, and improve the processes responsible for keeping inventory accurate. When you outsource fulfillment to a third-party logistics provider (3PL), the inventory audit process also helps ensure that your internal records and your fulfillment partner’s warehouse management system (WMS) remain aligned.
A successful inventory audit starts well before the physical inventory count. Brands and their fulfillment partners should reconcile records, establish clear cutoff procedures, verify inventory physically and electronically, investigate discrepancies, and use the findings to improve inventory controls going forward.
Table of Contents
- What Is an Inventory Audit?
- Why Stock Reconciliation With Your 3PL Matters
- Before the Audit: What to Prepare
- The Inventory Audit Checklist
- Common Discrepancies and What They Signal
- After the Audit: Next Steps With Your Partner
- Inventory Audit FAQs
What Is an Inventory Audit?
An inventory audit is a structured process for comparing inventory records and financial records with the inventory physically stored in a warehouse or fulfillment center.
At its most basic level, the process asks a straightforward question: Does the inventory we think we have match the inventory we actually have?
The answer, however, can require more than simply counting boxes.
Effective inventory audit procedures may include physical verification of inventory items, reviewing warehouse transactions, validating receiving records, examining returns and damaged inventory, checking lot or expiration information, and performing cutoff analysis to ensure transactions are recorded in the correct period.
Inventory audits can take several forms.
A full physical inventory count typically involves counting all inventory within a facility or designated operation. Depending on the business, these audits may occur annually, at the end of a financial reporting period ahead of an internal audit or external audit, or at another predetermined interval.
Cycle counts, by comparison, examine smaller groups of inventory on a recurring basis. Instead of counting every SKU at once, a warehouse may regularly count high-volume, high-value, fast-moving, or historically problematic inventory.
Cycle counting can make inventory control less disruptive to business operations and help identify problems before they become significant discrepancies. It also reduces reliance on a single, potentially time-consuming annual physical inventory count.
For many growing brands, the best approach incorporates both: routine cycle counts throughout the year combined with periodic broader inventory reconciliation.
Why Stock Reconciliation With Your 3PL Matters
When fulfillment is outsourced, inventory accuracy becomes a shared responsibility.
Your fulfillment partner maintains physical custody of your products and records warehouse activity and inventory data in its WMS. Meanwhile, your ecommerce platform, ERP, inventory management software, accounting software, or other internal systems may maintain their own inventory records.
Those systems need to stay aligned to maintain accurate records.
Consider what happens if your ecommerce platform or inventory system indicates that 100 units of a SKU are available while only 75 units are physically present. Customers may continue placing orders for products that cannot actually be shipped.
The reverse is also problematic. If 100 units are physically available but your inventory system shows only 75, sellable merchandise could sit unnecessarily in the warehouse.
Inventory discrepancies can affect:
- Product availability and overselling
- Order fulfillment performance
- Customer experience
- Reordering and demand forecasting
- Cash flow and working capital
- Inventory valuation and finished goods cost analysis
- Financial reporting
- Regulatory compliance, where applicable
Reliable inventory tracking isn't simply a warehouse concern. It affects decisions across operations, inventory management, finance, purchasing, sales, and customer service.
An inventory audit creates a defined point at which the brand and its fulfillment partner can compare inventory data, sales records, shipping records, and other records, investigate differences, and establish a common view of inventory.
Before the Audit: What to Prepare
The quality of an inventory audit depends heavily on what happens before anyone begins counting.
The objective of auditing inventory should be to establish a clean baseline so that legitimate discrepancies aren't confused with inventory that is currently being received, picked, packed, returned, transferred, or adjusted.
Your Internal Records
Start by making sure your own inventory and accounting records are as current as possible.
Pull recent sales and order information and confirm that shipped orders have been deducted appropriately. Review returns to determine which units should have been returned to available inventory and which should remain damaged, quarantined, or otherwise unavailable.
Next, reconcile purchase orders against inventory received by your fulfillment partner. Pay particular attention to partially received purchase orders, unexpected quantities, substitutions, and inbound shipments that may have arrived but not yet been fully processed.
Before the audit, also document known:
- Damaged goods
- Write-offs
- Samples
- Quarantined inventory
- Pending returns
- Inventory transfers
- Bundles or kits
- Inventory awaiting inspection or refurbishment
Addressing known exceptions in advance prevents the audit team from spending time investigating variances that already have an explanation.
Coordinating With Your Fulfillment Partner
Communication with your 3PL is equally important when auditing inventory.
Request an inventory snapshot from the warehouse based on an agreed-upon date and time. Your team and the 3PL should compare data from the same point in time rather than reports generated hours or days apart.
SKU conventions also need to match. Confirm that both parties use consistent SKU numbers, product descriptions, pack sizes, and units of measure.
For example, one system recording inventory by "case" while another records individual "each" units can create what appears to be a significant discrepancy even though the physical inventory is correct.
You should also establish the audit's cutoff procedures. Determine what will happen with:
- Orders being picked or packed
- Newly received inventory
- Returns awaiting processing
- Inventory transfers
- Inventory adjustments made during the count
In some situations, inventory movement can be temporarily paused. In high-volume fulfillment operations, completely stopping activity may not be practical. Either way, both parties need a defined procedure, supported by cutoff analysis, for separating pre-audit and post-audit transactions.
The Inventory Audit Checklist
A repeatable checklist makes it easier to conduct the audit consistently, follow best practices, and document the results.
Physical Stock Verification
☐ Compare physical inventory counts with system quantities.
Perform the required inventory counts and compare the results with quantities recorded in the WMS and the brand's inventory management system.
☐ Verify SKU identity, not just quantity.
Confirm that the product physically located in each bin or storage location matches the SKU assigned to that location.
☐ Inspect surrounding locations.
When a SKU is short, check adjacent bins, reserve storage, staging areas, return areas, and other locations where inventory may have been misplaced.
☐ Verify lots, batches, serial numbers, and expiration dates where applicable.
For products requiring lot control, expiration management, or serialization, quantity alone is not sufficient. Confirm the relevant inventory attributes as part of the physical verification.
☐ Separate damaged or unavailable inventory.
Confirm that damaged, quarantined, expired, or otherwise unsellable products aren't incorrectly included in available inventory.
☐ Perform recounts on material discrepancies.
A second physical inventory count can eliminate simple counting errors and confirm an accurate count before additional investigation begins.
System and Documentation Checks
☐ Compare the 3PL's WMS data with your records in your inventory management software.
Export inventory from both systems using the same cutoff point and identify differences at the SKU level.
☐ Verify inbound receipts.
Compare purchase orders, supplier documentation, and warehouse receiving records. Confirm that expected quantities match what was actually received and entered into inventory.
☐ Review recent inventory adjustments.
Look for manual data entry errors, manual adjustments, damaged-product deductions, inventory status changes, and other transactions that could explain a variance.
☐ Review return-to-stock activity.
Returned products are a common source of discrepancies. Confirm that returned units deemed sellable were accurately inspected and added back to inventory.
☐ Review recent outbound activity.
Confirm that orders shipped around the audit cutoff were deducted correctly and weren't counted twice—or omitted entirely.
SKU-Level Reconciliation
☐ Calculate the variance for each SKU.
Compare expected quantity against physical quantity and categorize each discrepancy as an overage, shortage, or match.
☐ Prioritize material variances.
A five-unit discrepancy has very different financial implications for a $5 item versus a $500 item. Consider both unit variance, unit costs, and inventory value.
☐ Investigate unexplained inventory shrinkage.
Look for receiving discrepancies, damage, mis-picks, mis-shipments, inaccurate returns processing, theft, and incorrect adjustments.
☐ Document supporting evidence.
Record inventory counts, locations, transaction histories, receipts, photographs where appropriate, and any other evidence used to resolve the discrepancy.
☐ Identify the root cause—not just the adjustment.
Changing a system quantity so that it matches the physical quantity fixes today's record. It does not fix the process that caused the discrepancy.
That final step is particularly important. The real value of an inventory audit isn't simply producing an accurate number. It's learning why the number became inaccurate in the first place.
Common Discrepancies and What They Signal
Not every inventory variance has the same cause. The type and pattern of discrepancies can provide clues about where to investigate.
Phantom Inventory
Phantom inventory occurs when a system indicates that stock exists, but the corresponding physical inventory cannot be found.
Possible causes include inaccurate receiving, missed shipment deductions, misplaced products, incorrect return-to-stock processing, unit-of-measure problems, or erroneous manual adjustments.
For an ecommerce brand, phantom inventory is particularly dangerous because it can lead directly to overselling.
Inventory Overages
Sometimes the physical quantity exceeds the quantity recorded in the system.
Overages can result from receiving errors, inaccurate counts, products being placed under the wrong SKU, customer returns not being recorded properly, or previous inventory adjustments.
An overage shouldn't simply be viewed as "extra inventory." It is still evidence that a transaction or process may not have been recorded correctly.
Shrinkage
Shrinkage occurs when physical inventory, or actual stock, is lower than expected.
Potential causes include damage, theft, incorrect picks, shipping errors, receiving shortages, lost inventory, and administrative mistakes.
Individual shortages should be investigated, but patterns matter even more. If shrinkage repeatedly occurs within the same product family, warehouse zone, process, or transaction type, it can indicate a larger operational issue.
Recurring Variances
A one-time discrepancy may be an isolated error. The same discrepancy appearing repeatedly is different.
Recurring problems can indicate weaknesses in receiving, labeling, inventory movement, picking, returns processing, system integration, inventory processes, or inventory control procedures.
This is where regular cycle counts become particularly useful. Instead of waiting until an annual inventory audit to discover a pattern, ongoing inventory counts provide additional data points that can help identify systemic issues sooner.
After the Audit: Next Steps With Your Partner
The audit process isn't complete when the last item is counted.
Your brand and fulfillment partner should review the findings together and agree on which discrepancies have been validated, which require additional investigation, and which system adjustments should be made.
For material discrepancies, conduct a root-cause analysis. Rather than stopping at "inventory was short by 20 units," trace the transactions associated with those units and determine where the breakdown occurred.
Then establish corrective actions with clear ownership and timelines.
Depending on the findings, those actions could include:
- Updating receiving procedures
- Improving SKU or barcode labeling
- Adjusting bin locations
- Changing return-to-stock procedures
- Adding verification steps for high-value inventory
- Updating system integrations
- Increasing inventory cycle count frequency for selected SKUs
- Revising employee training, best practices, or SOPs
After corrections are implemented, schedule a follow-up inventory cycle count for affected inventory. This provides a practical way to confirm that the corrective action solved the problem rather than simply correcting the previous variance.
Audit findings from regular inventory audits should ultimately feed back into your inventory audit procedures and operating procedures.
A strong fulfillment relationship isn't one in which discrepancies never occur. It is one in which inventory is tracked carefully, discrepancies are visible, both parties can investigate them using reliable data, and problems lead to measurable process improvements.
Better Inventory Visibility Starts With the Right Fulfillment Partner
Inventory accuracy has a direct impact on inventory management, order fulfillment, forecasting, purchasing, customer experience, and working capital. A well-planned inventory audit helps ensure that your physical stock, warehouse records, and internal systems tell the same story.
At a2b Fulfillment, inventory management is an integral part of the fulfillment process. Our technology, operational controls, and inventory visibility help growing brands manage inventory and maintain confidence in the products moving through their fulfillment network. Contact a2b Fulfillment to learn how we can support your inventory management and order fulfillment needs.
Inventory Audit FAQs
What is an inventory audit?
An inventory audit is a structured review that compares inventory records with the physical inventory held in a warehouse or fulfillment center. The process can include physical inventory counts, transaction reviews, receiving verification, inventory valuation checks, and reconciliation of discrepancies.
How do I prepare for an inventory audit with my fulfillment partner?
Start by confirming the audit date and establishing a clear transaction cutoff. Reconcile purchase orders, sales, returns, damages, and known adjustments beforehand, and make sure your SKU lists, units of measure, and expected inventory levels align with your fulfillment partner's records.
What should be included in an inventory audit checklist?
An inventory audit checklist should cover physical SKU counts, warehouse locations, batch or lot numbers, expiration dates where applicable, damaged or quarantined inventory, inbound receipts, returns, system records, inventory adjustments, and discrepancies between physical stock and recorded inventory.
How often should ecommerce businesses audit inventory?
Many ecommerce businesses perform a full physical inventory audit at least annually as part of a consistent audit schedule, while using regular cycle counts throughout the year. High-volume, high-value, seasonal, fast-moving, or historically problematic SKUs may warrant more frequent cycle counts.
Why is stock reconciliation important in fulfillment?
Stock reconciliation verifies that the inventory available in your systems matches what your fulfillment partner physically holds. Accurate inventory reconciliation helps reduce overselling, missed orders, purchasing errors, inaccurate forecasting, and customer service problems.
