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