Does your company need to improve inventory accuracy?

Often, writing on improving inventory accuracy focuses on techniques, such as cycle counting. While this is a very important item in the material or inventory professional’s toolkit, cycle counting is only primarily a measurement and diagnostic tool. Think of it as SPC (Statistical Process Control) for inventory accuracy. You probably won’t cycle count for inventory accuracy without major improvements to your material handling, transaction control, reporting, and feedback process. For many companies, using cycle count adjustments to correct errors in inventory records is like trying to scoop out the ocean, as errors can be made much faster than they can be economically corrected.

So what should I do?

An effective inventory accuracy program should consist of the following elements:

oh Inventory accuracy metrics (metric), including item ID/part number, quantity and unit of measure, location, and timeliness of posting. Some companies also measure other related data such as customer/contract number, configuration/revision letter, lot, serial number, grade, and expiration date. I have visited companies that claim 95, 98 or 99+% registration accuracy which quickly drops to the mid double digits when we apply our uncompromising criteria objectively. Sometimes companies have invalid criteria, sometimes they deceive themselves, sometimes their employees deceive them, sometimes unknowingly or unconsciously.

oh A clearly defined flow of materials and documents, with identified control and follow-up points. These must be clearly marked in the shop and employees must be fully indoctrinated. A simple flowchart of the desired system is an excellent educational tool. It should include routing of materials, documents and transactions, “delivery points”, flow times, registration, batch controls, reporting and auditing.

oh Adequate facilities, space, storage and material handling systems and other equipment. Good housekeeping practices are a must. It may be necessary to physically secure the inventory with fences, gates, and padlocks, if floor discipline cannot be achieved otherwise. Make sure there is a place for everything: materials, equipment, documents and, of course, people. Use signs and markings so they are obvious.

oh Effective Policies and Procedures for material handling, storage, identification, packaging, labeling, data collection, counting, and transactions. Use good forms and tools to correctly structure the work.

oh A training/certification/assessment program for all persons who handle or track inventory, or who are in a position to influence its operation. Consider PROACTION’s Inventory Accuracy Seminar. Use APICS materials.

oh A continuous program of evaluation and diagnosis., such as cycle count. Such programs can be administered in any of several organizations within the company, as long as the manager in charge is sensitive to inventory accuracy needs and seriously devotes the necessary effort to the program. That being said, we believe that third-party oversight, by an internal or external audit group or an outside consultant, is needed to keep the program on track.

oh Effective procedures for reconciliation and cut-off control of inventory transactions, including the accounting of all transaction documents. Don’t even dare THINK about actual cycle counts until you get control of this, although it’s recommended that you start early with a small control group, to debug the process and begin troubleshooting. Expand to a larger cycle count program only after you know what you are doing.

oh Transaction control system Post transactions and provide inventory status to all departments that need it, preferably through an online computer system. Barcodes and other automated data collection systems are desirable, if cost effective, but not required to run an accurate system. Visual control systems, such as Kanban, 2-bin, pallet squares, etc., can sometimes reduce or even eliminate the need for most automated transactions and systems, under the right circumstances.

So, you may be thinking, this is all pretty straightforward: why doesn’t everyone do something like this with success? It’s actually much more difficult than it seems, why:

oh Attitude: Not everyone agrees that inventory accuracy is important. I say: Are you satisfied with the alternative? It requires a high degree of consensus. about focus, responsibilities and “ownership”. In extreme cases, the company’s executive leadership may need to step in to help change the culture and oversee the necessary changes.

oh discipline is neededday after day, year after year. This is not a one-time cleanup job where management can declare victory and just go home. It requires someone to be at least a part-time “precision czar” to keep the effort focused and permanently active.

Implementation Ideas

System configuration:

oh Theme executive directive on the need for inventory accuracy and accountability. Formally announce the improvement and maintenance program. Establish management authority and responsibility for data accuracy/completeness.

oh To create Transaction and facility flow diagrams. Train everyone involved.

oh Fixed and use part numbers (make sure the BOM is structured correctly), locations.

oh Write Inventory Stock Keeping and Transaction Procedures and Training Materials: Train everyone involved.

oh Post a data integrity policy and incorporate these concepts into company procedures and training.

oh Check the adequacy of the facilities and equipment to store and handle the material. Make necessary improvements to support the agreed material control approach: space, shelves, racks, bins, conveyors, fences, gates, forklifts, stairs, scales, etc.

oh Develop performance measures. Post them regularly, on paper, bulletin boards, hold people accountable, with appropriate rewards and punishments, reflected in performance reviews, compensation, praise, etc. Use tools, such as cycle counting/Statistical Process Control.

oh established an objective audit program.

Operational recommendations

o Use PROACTION recommended data accuracy criteria and cycle count procedures

o Keep flowcharts on nearby walls; consult them when necessary

o Maintain pager controls as practical

o Use appropriate storage media: shelves, racks, bins, pallets

o Make judicious use of automation where possible: conveyors, automated storage and retrieval (AS/RS) systems, automated data collection such as barcoding, automatic weighing/counting scales, automatic bagging machines, pallet wrappers, etc.

o Use containers of standard sizes, weights, and quantities. Mark standard weights and quantities on containers.

o Use authorized sealed boxes. It is not usually necessary to count these sealed boxes.

o Use visual control methods: KanBan squares, clear plastic calibrated containers, etc.

o Post transactions in real time, as practical

o Put frequently used items where they are most accessible. Store at point of use, if practical and controllable.

o Practice excellent housekeeping.

o Be careful with descriptions, units of measure.

o Purge obsolete, inconsistent and unnecessary material.

o Use good labeling practices.

o Tag, track, control items with useful life.

o Matrix of material to facilitate access and counting.

Inventory Tracking Approaches

o Perpetual computer or manual transactions

o Control of discrete problems

o Control of “Backflush” problems

o “2-bin”, min-max or kanban control, visually driven

o “2 bins”, min-max control or kanban, controlled by perpetual inventory

o Control of batches of work

o Out of control (not recommended)

Verification methods

o Control group (start with this)

o Periodic inventories

o Cycle Count

o Rent audits

o Review of transactions

WIP inventory

o Maintain excellent housekeeping

o Report transactions as soon as possible, including rejects, adjustments, and exceptions.

o Use hook or station numbers on production lines

o Use containers of standard sizes and weights. Mark standard weights and quantities on containers.

o Have standard bins, marked shelves

o Minimize work in progress, remove all material that is not needed for X hours

o Mark amounts on sealed containers

o Assign workers the responsibility of monitoring certain items

o Use power lines, cells, fabricate as needed, and keep parts in line when practical

This article is also available on our website: PROACCIÓN – Generating Good Practices. This is an excerpt from an article originally written by George Miller, founder of PROACTION. It has been modified and updated by Paul Deis, CEO of PROACTION.