| INTRODUCTION | | | | above criteria/all items sampled) x 100. We |
| | | | sometimes convert performance measures to |
| Do you have inventory accuracy problems? | | | | error parts per million (PPM), to make |
| Typical symptoms:- Lots of inventory errors | | | | measurements more compatible with companies' |
| - Surprise backorders, unplanned shortages, "lost | | | | quality systems.MEASURE ACTUAL |
| material" | | | | PERFORMANCE |
| - Nobody believes the records-- numerous calls | | | | |
| to "check" on availability | | | | Why It's DifficultThis too, is more difficult than it |
| - Air freight bill exceeds the national debt | | | | sounds. Many companies are simply unable to |
| - Nasty financial reporting "surprises" | | | | reconcile book to physical inventory because |
| - Lack of consensus on importance of accuracy | | | | they:- Have multiple, incompatible inventory |
| - Lack of consensus on how to measure it | | | | systems. |
| - Inability to reconcile inventories, cycle counts | | | | - Can't master the timing "cutoffs" for count |
| - Error causes largely unknown | | | | reconciliation. |
| - Weak/no company tradition of data accuracy | | | | - Poorly define and enforce material and |
| - New systems/software implementation causing | | | | transaction flow procedures and policies. |
| more confusion | | | | - Don't have people assigned to and/or schooled |
| | | | in inventory records reconciliation.Initial SurveyYou'll |
| Solution recommendations are presented as | | | | need an initial survey to assess the level of |
| follows...ORGANIZE PROJECT | | | | accuracy. This is recommended, even if there is |
| | | | an ongoing system in place, to help verify how |
| Results are usually best when there is a bit of a | | | | well it is working. To assess the level of inventory |
| crisis atmosphere established. Business as usual | | | | accuracy, pick a representative and statistically |
| won't usually serve to get serious inventory | | | | valid sample of items, crossing different product |
| accuracy problems fixed within two months. | | | | lines, processes and areas. Consult an expert in |
| Sometimes a humbling blow, such as losing millions | | | | QC or SPC (Statistical Process Control) if not sure |
| in an inventory "write-down", or an unfavorable | | | | how to do this.Make sure you have agreement on |
| "write-up" by a customer, is helpful to shatter the | | | | what is to be measured and how. Get agreement |
| status quo and energize an organization to begin | | | | on the measurement criteria (see section II, |
| work in earnest on a solution. Top level executive | | | | above). If there is more than one inventory |
| action works best to motivate and mobilize | | | | system, agree on which one(s) you will be |
| people. At a minimum, perception of a costly | | | | reconciling to. Be aware of how these systems |
| problem is needed, with some realization of a | | | | are updated and enlist the cooperation of those |
| need to correct it. | | | | involved in their operation and maintenance.Better |
| | | | results will be obtained if all transactions are |
| This article is also available on our website: | | | | posted before counting, especially if the inventory |
| PROACTION - Generating Best Practices. It is an | | | | system is in poor working order. This helps |
| excerpt of a paper originally written by George | | | | eliminate a very common source of errors, |
| Miller, Founder of PROACTION. It has been | | | | "cut-off" timing. In particular, watch out for items |
| modified and updated by Paul Deis, PROACTION | | | | in staging areas, QC, Shipping, Scrap, Bond, etc. |
| CEO. | | | | It's best to do the survey while operations are |
| | | | shut down, since it further reduces the chance of |
| Try to tie company goals and objectives to | | | | transaction cut-off problems.For improved |
| project objectives, to help ensure that people | | | | objectivity, it is recommended that people who |
| "buy-in" to the project and will be measured and | | | | are removed from "ownership" of the current |
| rewarded on the results. | | | | system be used to audit or even supervise this |
| | | | survey. Bias may be inadvertently or intentionally |
| Once the initial goals are attained, don't just | | | | introduced otherwise.The survey should be used |
| declare victory and go home. Set up a lower key | | | | to help establish "baseline" accuracy by area- for |
| ongoing maintenance effort to ensure that the | | | | instance- "Store Room #1, "Shipping Area", QC |
| problem stays fixed and that further | | | | Hold #3", "Disk Assembly," and "Total." Publish the |
| improvements are made. | | | | results after careful verification, then discuss and |
| | | | act on them. The initial survey often helps to |
| - An Executive Sponsor is needed, someone with | | | | establish the dialogue that propels successful |
| the clout to keep resources and attention focused | | | | projects. It is possible that some diagnostic work |
| on the problem until completion. Results are usually | | | | can be done during the survey, but in general, we |
| directly proportional to the strength and | | | | have found that diagnostics are problematic at |
| commitment of the executive sponsor. | | | | best for a poor inventory system without |
| Sometimes it's not possible to get a sponsor until | | | | baseline figures, good procedures in place and |
| a case is made that there's a problem.- A Project | | | | regular cycle counts.FIX THE SYSTEM |
| Leader and Multi-Disciplinary Team is required, | | | | |
| preferably from Operations, Materials, Finance, | | | | Institute Improved Policies and |
| Distribution and possibly, Process and Design | | | | ProceduresProcedures are often in need of a |
| Engineering (depending upon the problems | | | | major overhaul. Many are poorly documented, |
| identified). In a large organization, a full time | | | | unworkable or cumbersome. The project |
| project leader may be needed. People will be | | | | diagnostics, team meetings, cycle count results, |
| needed for inventory verification, cycle counting | | | | conference room pilot and employee suggestions |
| and reconciliation. The amount of manpower | | | | can all funnel information to the people who revise |
| needed is dependent upon organization size, | | | | procedures.Identify every single transaction and |
| complexity and magnitude of the problem. For | | | | procedure potentially affecting inventory accuracy. |
| example, one 500,000 sq. ft. process plant with | | | | Review and, if necessary, enhance, simplify and |
| about 4000 items and 30+% inventory accuracy | | | | document them, then thoroughly train all applicable |
| needed a full time coordinator, four full time cycle | | | | personnel in their use. Keep simple concise |
| counters and two part timers for six months, | | | | procedures available for employees' ready access. |
| tapering off after that. Often, consultants and | | | | Have employees practice/drill in procedure use. An |
| corporate auditors participate to make projects | | | | inventory system test or "demo" database is a |
| more successful.- A Project Plan is needed, | | | | good tool to practice with.- New procedures |
| incorporating recommendations from this paper | | | | changes should be reviewed with users in |
| and other company-specific activities. This plan, | | | | advance, thoroughly tested and documented prior |
| along with a running list of accuracy related issues | | | | to implementation.- Procedures should cover all |
| and actions, should be used to drive the project | | | | aspects of inventory transactions: receiving, |
| and focus efforts on activities needed to attain | | | | inspection, stores, issues to floor stock, |
| accuracy goals. Issues should be identified, put on | | | | production, substitutions, transfers, scrap, rework, |
| a master issues list, assigned to appropriate | | | | return to vendor, completions to stock, |
| personnel to solve, then discussed and tracked at | | | | shipments.Set Up Basic Inventory Movement |
| every weekly meeting for the duration of the | | | | Structure and ControlsMost companies lack a |
| initial improvement project.The plan should contain | | | | common understanding on how inventory |
| specific activities, responsibilities and dates. It | | | | transactions- material and paperwork - should |
| needs to be followed and managed competently. | | | | flow. One of the first evident symptoms of this is |
| Unless carefully managed, a substantial amount of | | | | an almost total inability to reconcile cycle counts |
| project time will be spent trying to figure out | | | | of active items, due to transaction "cut-off" |
| what the problems are, and getting resources | | | | problems attributable to unpublished/unenforced |
| assigned to them.Choose Your BattlesRealize that | | | | transaction document flow times. Forget about a |
| there are limited resources available, and that | | | | full cycle counting program until this is corrected. |
| these cost money, so prioritize by tackling issues | | | | First, establish, implement and enforce:- Inventory |
| offering the best payback and those that can be | | | | "transaction flow map" showing all work centers |
| won.Actual examples:- For one company, it was | | | | cells/stores areas, material and paper flows, |
| very hard to keep track of color concentrates, | | | | transaction types and account numbers, so that |
| since they were ladled out of barrels, were kept | | | | people will know what should happen. When |
| out on the floor, and didn't cost all that much | | | | people see a graphical depiction of system flow |
| anyway. So, these and other similar items were | | | | and have it explained to them, it often helps them |
| placed on "two bin" order control and expensed, | | | | to decode the mysteries of a system.- Flow |
| eliminating a whole class of inventory record | | | | times - How long it should take to receive a part, |
| problems with little more than a stroke of a pen.- | | | | move it to stores, issue it, move it between |
| Another firm had three storerooms. The first one | | | | operations. Publish these flow times, post them, |
| contained fabrics for airline seats and was very | | | | and get people accustomed to working with them. |
| well organized and well run, so minimal effort was | | | | Highlight transactions missing flow time targets.- |
| expended to improve it. The second one was a | | | | Cutoff times - How long it should take to post a |
| poorly controlled raw material storeroom with a | | | | transaction after it physically occurred. Publish and |
| short-timer supervisor about to retire. Material | | | | highlight similar to the above item.- Drop points - |
| lead times were only a few days, so the effect | | | | Where material and transaction documents should |
| of errors was less serious. We elected to wait | | | | be placed. Mark these areas plainly to reduce |
| out his retirement, which was only a couple of | | | | confusion. Painted lines on the floor, signs, |
| months away. The third storeroom contained | | | | sometimes even fences, may be needed to get |
| purchased parts and specialty fabrications. Lead | | | | the point across.- Logging and batch controls, |
| times were long, costs were high and the | | | | especially for key "gateway" transactions such as |
| consequences of errors were serious, so we | | | | receiving and shipping. Comparing daily posted |
| elected to initially focus on this area. To narrow | | | | transactions to the logs often helps detect missing |
| scope even further, we initially concentrated only | | | | or erroneous data. Logs can also be useful in |
| on items needed within the lead time horizon and | | | | reconstructing "crashed" systems.Write Cycle |
| ignored obsolete and excess materials.- The VP, | | | | Counting ProcedureCycle counting should be the |
| Finance in still another manufacturing company | | | | principal ongoing performance measurement, |
| agreed to waive physical inventories for areas | | | | diagnostic and problem-solving approach, basically |
| demonstrating that accuracy goals were being | | | | "SPC for inventory control." It is a procedure to |
| met, freeing up resources for more productive | | | | help determine if the other inventory procedures |
| purposes.- In general, controlled storerooms are | | | | are working. The procedure needs to fully reflect |
| the easiest to improve, since they are often | | | | the overall systems flow and timing. For instance, |
| physically restricted areas, have supervision more | | | | if inventories are updated daily by MIS, it may be |
| oriented to accuracy concepts, transactions less | | | | necessary to adjust for unposted transactions |
| subject to process-related errors and they can be | | | | prior to completing reconciliation.- In a high-volume |
| more easily counted. Then attack work-in-process | | | | repetitive production in a backflush environment, |
| areas, which are generally more challenging.- One | | | | It is necessary to log production occurring |
| team uncovered dozens of accuracy issues. | | | | between backflushes and to know precisely when |
| These were prioritized so that problem-solving | | | | these were performed. In addition, knowing the |
| resources could be focused on the best payback | | | | whereabouts of discrepant material routed for |
| items with the greatest chances of resolution.- A | | | | inspection and alternate processing, but still |
| few companies we worked with have gotten | | | | unposted, is vital, since counts of material in the |
| almost immediate payback by conducting location | | | | area may omit it.Consignment inventory rules |
| audits. Simply check each location and compare it | | | | sometimes need revision to facilitate cycle count |
| to your records. Physical locations not in the | | | | reconciliation as well.Run a Control GroupOnce the |
| records may be exciting windfalls. The opposite | | | | program is underway, team members often want |
| case is cause for a corrective cycle count | | | | to quickly start an ambitious, large scale program |
| adjustment. This approach requires far less | | | | of cycle counting. Some people come running out |
| resources than a physical count inventory.- Most | | | | of cycle counting seminars, flushed with |
| companies observed weren't able to reconcile all | | | | enthusiasm, wanting to use their new tools |
| errors, especially in the beginning. They were | | | | immediately to vanquish the demons of inventory |
| advised not to even try. It's like attempting to bail | | | | error. In general, don't. Why? Because in most |
| out the ocean, because errors were being made | | | | cases the infrastructure isn't yet in place to |
| faster than inventory balances could be corrected, | | | | support an effective cycle counting system. Make |
| let alone diagnosed and reconciled. So, they | | | | sure it is in place BEFORE starting regular cycle |
| focused on eliminating the principal CAUSES of | | | | counting, or you're in for some big |
| errors initially. Every time a cause is identified and | | | | disappointments and loss of credibility.In the |
| corrected, it may likely eliminate dozens, hundreds | | | | meantime, use the initial survey population as a |
| or even thousands of future potential errors. This | | | | "control group" to help regularly and frequently |
| concept may be difficult to sell to some | | | | assess the propagation of errors. Count and |
| accounting personnel, who have been conditioned | | | | reconcile these items over and over again until |
| to balance every debit and credit to the penny. | | | | you start to get the hang of what's wrong. |
| Choose your battles!DEFINE INVENTORY | | | | Chances are, this will be a very tough chore |
| ACCURACY | | | | initially, because of the many things wrong with |
| | | | the system. Don't be surprised if you can't |
| What It Isn'tWe have often been told by | | | | identify many item error causes with certainty in |
| representatives of various companies that their | | | | the initial period. As you count them more |
| inventory accuracy was high, even "world class," | | | | frequently, there will be shorter intervals between |
| 95, 98 or even 99+%, when in fact, there were | | | | counts, increasing the likelihood that error causes |
| surprise backorders, unplanned material shortages | | | | can be isolated. As the basic controls identified |
| and unexplained excess inventories. When asked | | | | above are established, they will eliminate many |
| about inventory accuracy, shop floor and stores | | | | errors and make it simpler to identify those that |
| personnel would just smile and tell us their | | | | remain. Make sure that problems are posted to |
| inventory horror stories.So why does this happen? | | | | the issues list, prioritized, assigned for resolution, |
| There are different ways of measuring it. For | | | | discussed at meetings, completed, documented |
| example:- One firm thought their inventory | | | | and resolved.At some point, when the team feels |
| records were outstanding because they were | | | | that they have basic controls in place and have |
| accurate within $20,000 for a $6MM inventory, or | | | | mastered control group diagnostics, they can turn |
| 99.7% accurate, they boasted. Well, it turned out | | | | the cycle counts loose on a larger scale.When the |
| that this was merely an arithmetic sum of the | | | | control group is running in the mid 90% accuracy |
| financial errors and that the absolute value of the | | | | range, it's time to turn on large scale cycle |
| individual errors was actually $900,000. Even this | | | | counting. Companies trying to turn it on too early |
| sounded like 85% accuracy.But, operations people | | | | may get swamped by massive numbers of |
| know that products are built with specific | | | | irreconcilable errors. Some even compound the |
| components and that customers are shipped | | | | errors when they start posting corrections before |
| specific products or services, not dollars. When | | | | they've got reconciliation/posting procedures |
| other factors like posting cut-offs, location errors | | | | working satisfactorily.Most error causes can be |
| and part number errors were considered, it was | | | | found and resolved during the initial control group |
| calculated that accuracy was actually only | | | | period.Make Physical ChangesPaint lines on floors |
| 66%!Inventory accuracy is the probability of | | | | to indicate drop points and department boundaries. |
| finding the right items in the right location and | | | | Record tare weights on all containers used in |
| quantity that the books say are there. 66% | | | | weigh counting. Use bar code or other accurate, |
| accuracy means that 34% of items surveyed | | | | efficient data acquisition methods. Deploy counting |
| had quantities, locations or part numbers | | | | scales where appropriate. Isolate obsolete |
| significantly differing from "book" records. Looking | | | | inventory for final dispositioning. Assign designated |
| at it another way, for a ten item order, there | | | | drop points for discrepant or "hold" status |
| would be only a 15% probability of finding all parts | | | | material. Ensure that there is adequate and |
| corresponding to what the books said was there. | | | | appropriate material handling and storage |
| Is that any way to run a business? By the way, | | | | equipment. Sometimes something as simple as |
| it's sad to say that 66% is about average.Another | | | | lines on the floor, a fence or a gate can make a |
| reason for the accuracy credibility gap is that | | | | significant difference. Consider a move to a |
| people delude themselves, occasionally even lie. | | | | process-related flow, which may greatly simplify |
| The author once had to fire someone who was | | | | material/inventory control.A comprehensive facility |
| falsifying counts. The sad news came out of a | | | | location system is essential for success in locating |
| routine audit designed to check the effectiveness | | | | material quickly and efficiently when it is needed |
| of the cycle counting system. More often, people | | | | All inbound and in-transit material should be |
| just rationalize that things are much better than | | | | directed to locations, or they should be assigned |
| they really are. Example:What It Is95% accuracy | | | | upon arrival. If the location system is simple |
| is said to be the minimum acceptable level to run | | | | enough, materials might be automatically routed. |
| a formal system. Our experience is that 95% is a | | | | Reduce the number of possibilities to make |
| lot better than the average company, but it's | | | | mistakes. The location codes should be plainly |
| nowhere near what is required to run a world | | | | marked all around the facility, so that there is no |
| class operation, where 98 or 99+% is more | | | | confusion about the location. Isolate/purge |
| appropriate. Going from 66% to 90% is easier | | | | excessive, obsolete and damaged |
| than going from 90 to 95%, which is easier than | | | | inventory.CONCLUSIONS |
| going from 95 to 97%. When a company sets a | | | | |
| goal of 95, 98 or 99+% inventory accuracy, | | | | As with most major change efforts, inventory |
| what should that mean? We usually recommend | | | | accuracy needs strong, continuing management |
| the following accuracy criteria, subject to | | | | support to change the culture and practices.- |
| company special requirements:- Quantity of book | | | | Very little happens in some companies until top |
| to reconciled physical inventory to be accurate, | | | | management makes poor results unacceptably |
| for example, within 1% for "A" items, 3% for "B" | | | | uncomfortable to those failing to deliver. |
| items and 5% for "C" items. These targets should | | | | - Even after that, things sometimes don't |
| reflect relative value of the material and the limits | | | | improve until meaningful performance |
| of counting process capabilities. Most firms | | | | measurements and improvement mechanisms are |
| compare physical to reconciled book quantity | | | | implemented. |
| error vs. book quantity to measure accuracy, for | | | | - Strong project leadership is the next most |
| convenience of computations. Sometimes we | | | | important factor, along with a sound approach and |
| recommend comparing the calculated error to the | | | | an implementation plan.- The price of continued |
| weekly or monthly usage quantity, because it's | | | | inventory accuracy success is eternal vigilance. |
| statistically more valid, especially in a high-volume, | | | | When programs lose "mindshare," results often |
| low inventory environment.- Item identification | | | | quickly deteriorate. |
| must be correct, or it counts for two errors, | | | | - Inventory accuracy is a permanent state of |
| since if it isn't what the records stated it was, | | | | mind, not a quickie, one-time project. Periodic |
| then it must be something else. Unless inventory | | | | backsliding needs constant attention. This is one |
| people are very thorough and knowledgeable | | | | area where zealots and dictators are |
| about item identities, these errors often go | | | | needed!Successful inventory accuracy efforts |
| unrecognized until detected by an inspector, | | | | often have five phases:1. Realization that there is |
| production operator, or even a customer. We | | | | a problem |
| recommend item verification before storage or | | | | 2. Agreement on a solution approach |
| movement to the next process station. It is | | | | 3. Problem-solving phase |
| helpful to post item specifications and photos and | | | | 4. Records correctionv |
| train employees in their use to reduce such | | | | 5. Ongoing cycle counting/maintenance- Inventory |
| errors.- Item must be physically in the exact | | | | accuracy doesn't really improve by counting things. |
| "book" location or it is considered an error. If you | | | | It only improves when basic systems, procedures |
| can't find it, that's even worse than not having it | | | | and training improve. |
| at all, because it cost money and it's taking up | | | | - Identifying issues and resolving them so that |
| valuable space. Make sure you define item | | | | they never occur again is the key to achieving |
| locations neither too detailed nor too general. If | | | | accuracy goals. |
| too detailed, it will be burdensome to maintain the | | | | - Leadership and peoples' attitudes are the two |
| records and control material.- Timeliness of | | | | most important factors for success.There are |
| records - Must be posted by some deadline, such | | | | some significant differences in attaining inventory |
| as immediately when moved, within an hour, or | | | | accuracy in non-discrete, process, repetitive, |
| by the end of the shift when transaction was | | | | cellular and project-oriented enterprises.Learn |
| physically executed. This greatly improves the | | | | them well and adapt to their needs. Realize also |
| timeliness of information and improves "cut-off" | | | | that most companies are a mix of different |
| control for reports and reconciliations.- Accuracy | | | | environments, so mix approaches if warranted. |
| percentage = (number of items sampled meeting | | | | |