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