Q&A: Inventory Location Codes

We’re often asked what functions location codes serve and why they’re emphasized so much.

Location codes are used to identify and track inventory within a store or warehouse. They can be used to indicate a specific aisle, shelf, rack, or bin where a product is stored. The codes are often alphanumerical, and can be used to track inventory levels, restocking needs, and sales trends. They are used to improve inventory management, increase efficiency in restocking, and can also be used to improve the shopping experience by helping customers find products more easily.

In the United States, the IRS requires businesses to use an inventory system that is consistent with generally accepted accounting principles (GAAP) to determine the value of inventory for tax purposes. This includes using a method such as the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method.

If an item is physically pulled from a location but not tracked in the system, it can result in overstating the value of inventory on hand and can also lead to understating the cost of goods sold. This can lead to overpaying taxes on the income generated by the sale of that item. Also, double-counting inventory can cause discrepancies in the inventory value reported on the tax return and the actual inventory on hand. In a large facility, this can be a massive discrepancy.

It’s important to have a good inventory management system in place and to reconcile inventory regularly to avoid these issues. It’s also important to consult with a tax professional to ensure that the inventory system used is compliant with tax laws and regulations.

To set up a location system, first define the scope of your system. Determine which areas of your store or warehouse will be included in the location code system and what types of products will be tracked.

Decide on the format of the codes, such as numerical or alphanumerical, and create a logical structure for the codes that will be easy for employees to understand and use.

Assign codes to your specific locations. It’s important to ensure that the codes are unique and easy to identify. Naming locations is dependent on the facility the locations are used in. There are no set standards (but there are best practices outlined below). Two separate facilities might use completely different systems.

Train your employees and implement your system. Ensure that all employees who will be using the location code system are trained on how to properly use and maintain the codes. You may need to update inventory management software and other systems to include the location codes, and you’ll need to make sure that all products are properly labeled and tracked using the new codes.

Finally, continuously monitor the system and make any necessary adjustments. Evaluate how well the system is working, and look for ways to improve efficiency and accuracy.

Facility location layout an labeling can be daunting. The time you spend organizing your locations, what they’re called, and how they’re grouped will be important when you implement your system. The codes themselves, what areas are actually called always differ between facilities. There are, however, a few industry standards you should follow in order to prevent needing to rename all your shelves later on and alleviate potential confusion for your pickers.

• Number shelves from the ground up. This way, if you add height to your shelves as you grow, you don’t have to relabel your shelves. Otherwise, if you have a rack with four shelves with the top shelf given the number one and the bottom shelf being number four, if you want to build up and add locations, your new location (let’s say shelf five) would be on top of shelf one.
• Generally, use a zero in all numbers less than ten (i.e. 01, 02, 03, etc.). This will allow your system to accurately read the locations alphanumerically.
• Consistency is Vital. There’s nothing that will confuse your employees faster than having an inconsistent method of labeling.