Inventory Accuracy Hints
By Paul Deis
Does your company need to improve inventory accuracy?
Often, writings on inventory accuracy improvement focus on techniques, such as cycle counting. While this is a very important item in the toolkit of the inventory or materials professional, cycle counting is only mainly a measurement and diagnostic tool. Think of it as SPC (Statistical Process Control) for inventory accuracy. You probably aren’t going to cycle count your way to inventory accuracy, without also making major improvements in the material handling, transaction control, reporting and feedback process. For many companies, using cycle count adjustments to correct inventory record errors is like trying to bail out the ocean with a spoon, since errors may be made far faster than they can be economically corrected.
So what should you do?
An effective inventory accuracy program should consist of the following elements:
• Inventory accuracy measurement criteria (metrics) - including item/part number identification, quantity and unit of measure, location and posting timeliness. Some companies also measure other related data, such as customer/contract number, configuration/revision letter, lot, serial number, grade and expiration date. I have visited companies claiming to have 95, 98 or 99+% record accuracy that quickly shrinks to mid-double digits when we apply our uncompromising criteria objectively. Sometimes companies have invalid criteria, sometimes they deceive themselves, sometimes their employees deceive them, sometimes unconsciously or unwittingly.
• A clearly defined material and document flow, with control and tracking points identified. These should be clearly marked out in the shop and employees should be thoroughly indoctrinated. A simple flow chart of the desired system is an excellent educational tool. It should include material, document and transaction routing, “drop points,” flow times, logging, batch controls, reports and auditing.
• Adequate facilities, space, storage and material handling systems and other equipment. Good housekeeping practices are a must. It might be necessary to physically secure the inventory with fences, gates and locks, if floor discipline cannot be achieved otherwise. Make sure that there is a place for everything- materials, equipment, documents, and of course, people. Use signs and markings to make these obvious.
• Effective policies and procedures for material handling, storage, identification, packaging, labeling, data collection, counting and transactions. Use good forms and tools to structure work properly.
• A training/certification/assessment program for all people who handle or track inventory, or who are in a position to influence how well that works. Consider PROACTION’s Inventory Accuracy Seminar. Use APICS materials.
• An ongoing assessment and diagnostic program, such as cycle counting. Such programs may be administered in any one of several organizations within the company, as long as the manager in charge is sensitive to the needs of inventory accuracy and earnestly dedicates the needed effort to the program. That being said, we believe that 3rd party oversight, by an internal or external audit group or an outside consultant, is needed to keep the program on track.
• Effective inventory transaction cut-off control and reconciliation procedures, including accounting for all transaction documents. Don’t dare even THINK about real cycle counting until you get control of this, although it is recommended that you start early with a small control group, to debug the process and begin error diagnostics. Expand to a larger cycle count program only after you know what you’re doing.
• Transaction control system to post transactions and provide inventory status to all departments needing it, preferably via an on-line computer system. Bar code and other automated data collection systems are desirable, if cost-effective, but are no means mandatory to run an accurate system. Visual control systems, such as Kanban, 2-bin, pallet squares, etc, can sometimes reduce or even eliminate the need for most transactions and automated systems, in the proper circumstances.
So, you may be thinking, all of this is fairly straightforward-- why isn’t everyone doing something like this successfully? It’s actually much harder than it looks—why:
• Attitude: Not everyone agrees that inventory accuracy is important. I say: Are you satisfied with the alternative? It requires a high degree of consensus on the approach, responsibilities and “ownership.” In extreme cases, company executive leadership may need to step in to help change the culture and oversee required changes.
• Discipline is needed, day after day, year after year. This is not a one time cleanup job that management can declare victory for and just go home. It requires that someone be at least a part time “Accuracy Czar,” to keep the effort focused and permanently active.
Setting up the system:
• Issue executive directive on need for inventory accuracy and accountability. Formally announce improvement and maintenance program. Establish management authority and accountability for data accuracy/integrity.
• Create transaction and facility flow charts. Train everyone involved.
• Fix and use part numbers (make sure BOM structured properly), locations.
• Write inventory stock keeping and transaction procedures and training materials- train everyone involved.
• Publish a data integrity policy and work these concepts into company procedures and training.
• Review the adequacy of facilities and equipment to store and handle material. Make needed improvements to support the material control approach agreed upon-- Space, racks, shelves, bins, conveyors, fences, gates, fork lifts, ladders, scales, etc.
• Develop performance measures. Publish them regularly, on paper, bulletin boards, hold people accountable, with appropriate rewards an punishments, reflected in performance reviews, compensation, praise, etc. Use tools, such as cycle counting/Statistical Process Control.
• Establish an objective auditing program.
• Use PROACTION recommended data accuracy criteria and cycle counting procedures
• Keep flow charts on nearby walls- refer to them when needed
• Maintain locator controls as practical
• Use appropriate storage media—Racks, shelves, bins, pallets
• Make judicious use of automation where feasible -- conveyors, automated Storage and Retrieval Systems (AS/RS), automated data collection, such as bar coding, automated counting/weighing scales, automatic baggers, pallet wrappers, etc.
• Use standard container sizes, weights, quantities. Mark weights and standard quantities on containers.
• Use authorized sealed cartons- Recounts of these sealed cartons not usually necessary
• Use visual control methods- KanBan squares, clear plastic calibrated containers, etc.
• Post transactions as real time as is practical
• Put most frequently used items in the most accessible place. Store at point of use, if practical and controllable.
• Practice excellent housekeeping.
• Be careful with descriptions, units-of-measure.
• Purge obsolete, discrepant, unneeded material.
• Use good labeling practices.
• Label, track, monitor shelf life items.
• Array material for easier access and counting.
Inventory Tracking Approaches
• Perpetual- computer or manual transactions
• Discrete issues control
• “Backflush” issues control
• “2-bin”, min-max or kanban control, visually driven
• “2-bin”, min-max or kanban control, perpetual inventory driven
• Job lot control
• Out of control (not recommended)
• Control group (start with this)
• Periodic inventories
• Cycle counting
• Location audits
• Transaction review
• Maintain excellent housekeeping
• Report transactions as timely as possible, including scrap, adjustments, exceptions
• Use hook or station numbers on production lines
• Use standard container sizes, weights. Mark weights and standard quantities on containers.
• Have standard bins, racks marked
• Minimize WIP, remove all material not needed for X hours
• Mark quantities on sealed containers
• Assign workers responsibility for monitoring certain items
• Use feeder lines, cells, make as needed and keep parts on line where practical
This article is also available on our website: PROACTION – Generating Best Practices. It is an excerpt of a paper originally written by George Miller, Founder of PROACTION. It has been modified and updated by Paul Deis, PROACTION CEO.
ABOUT THE AUTHORS
Paul Deis, CFPIM, is CEO, PROACTION. He brings over 25 years of consulting and senior executive experience to his work, including detailed work with nearly 60 companies. Prior to acquiring PROACTION, Paul’s experience includes running a small ERP software company, leading other consulting businesses, prior work with PROACTION, Manager at Deloitte & Touche, VP Manufacturing at Raypak, Inc., where he was very successful with an early Lean management initiative, and dozens of projects in the areas of enterprise software, operations management,crisis resolutions, in a wide variety of industries, business types, and scales. Our website: PROACTION – Generating Best Practices.
George J. Miller, CFPIM, is Founder of PROACTION. Prior to selling the company to Paul Deis, George had worked with dozens of companies in assignments involving productivity, quality and service improvement, business systems, change management, acquisitions, divestitures, expert witness testimony, and others.