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Avoid the Mistake of Taking Inventory Accuracy for Granted

Inaccurate inventory leads to loss of sales, poor customer experience, and may indicate a more drastic issue of retail theft.  Inventory Records Accuracy (IRA) is an area most business people take for granted. Daily Cycle Counting and Root Cause Analysis for a goal of 98-100% daily accuracy is critical to all departments in the company: Purchasing, Finance, Supply Chain, Distribution, Warehousing, Accounting, etc.

The on hand number on the computer screen has to be the same as the on hand number in the Warehouse, especially when shipping anything to the customer. The shipments have to be accurate. Back orders are frowned upon. Most companies assume they have an accurate inventory, and state, “Oh, it’s about 90-95% accurate.” When you do a sample cycle count, you find the assumed number to be a lot less than 90-95% accurate.

You should know your Inventory Records Accuracy percent every single day.

Software people all talk about managing inventory with ERP and other IT tools. Sure these tools are helpful, but they are not effective unless the inventory accuracy is near 100% accurate.

What is formal, daily cycle counting?

The Warehouse is your Bank. There is MONEY in it. Not pallets, parts, items, bins or boxes, but the company’s MONEY. Protect it. Care for it. It has to be secure. There has to be genuine discipline and teamwork to meet the goal of 98-100% accuracy daily.

The inventory: any part number or commodity is money in the bank. You probably know how much money is in your wallet. If you opened your wallet and NO money was there, what would you do? You would figure out where it went (root cause).

Goal: The on hand number in the warehouse equals (=) the on hand number in your ERPWMS or Computer software 98-100% of the time.

Cycle count the Computer generated items provided daily by part number (with no on hand balance showing) from the ERP/Computer software system. It is imperative that you count the warehouse on hand amount first in all locations and then compare it to the ERP/Computer on hand amount. This is known as a “blind count.” Knowing the ERP/Computer on hand balance while you are counting the warehouse on hand balance, will jeopardize the cycle count and influence your counts. You can cycle count by location daily until you do the entire warehouse, use the A, B, C inventory value classification of items or the 80/20 Pareto principal wherein 20 items out of a list of 100 are 80% of the total. Cycle count ONLY when warehouse, or any transaction, activity is frozen.  Post today’s % accuracy on the cycle count board/inventory accuracy report to track progress to the 98-100% goal.

The Distribution warehouse cycle count team divides the number CORRECT items by the total number counted to obtain your accuracy figure for the day: 4 correct out of a 10 count equals (=) 40% accuracy for the day. This % age is not good.
Any variances that occur between the on hand balance in the warehouse and the ERP/Computer indicate the need to find the root cause of the variance.

The root causes may be:

  1. Incorrect Unit of Measure
  2. Obsolescence-Excess/Obsolete Inventory
  3. Poor/No Security: easy access (other departments allowed in the warehouse to look at/take parts)
  4. Theft
  5. LOCATOR system problems
  6. Item Identification (All locations should have part numbers on items)
  7. Timely Reporting of Transactions (Transaction detail study)
  8. Transactions going on during cycle count?
  9. Receiving count incorrect
  10. Poor physical inventory
  11. Bad count by cycle counter

Both numbers should be the same. When you tell a customer you see 100 on hand in the computer, the warehouse on hand also must be 100 units.

Once the root cause is found, a Standard Operating Procedure (SOP) written to avoid the root cause from happening again. See root cause examples on the daily cycle count sheet.

Once you are through cycle counting a part number in a bin location, use the “in-out-balance” sheet (a check and balance system) to keep inventory accurate in that bin, as items are received or withdrawn (picked) and the balance in the bin location changes. When you cycle count that bin location again, the in-out-balance should be an accurate count of that bin, but you do a blind count anyway to check the balance on the in-out-balance sheet. Eventually, as the warehouse becomes completed with cycle counts, and inventory accuracy increases, as seen on the cycle count board, this balance on the in-out-balance sheet can be used when you cycle count.

Cycle counting is more efficient and timely rather than taking physical inventories which are costly and very labor intense. Cycle counts are done daily, not every year, every quarter or monthly. On hand numbers degrade quickly after physical inventories are taken. Once you reach 98-100% accuracy on a daily basis, physical inventories may be eliminated based on company policies.

Inaccurate Inventory Records Accuracy affects all facets of the business: Purchasing (over and under purchases), Finance (dollars on reports), Sales, Customer Service promises, Inventory Control decisions, Operations Control, the Supply Chain, the owner of the business, et al. Our goal is to make the inventory as accurate as possible: 98-100%.

We are doing this, not for my benefit, or someone in management, but for the entire company, including you. It is critical. It is one of many visible (cycle count board for all to see) Key Performance Indicators (KPIs). It is one of the foundations that must be in place for World Class Distribution/Warehousing. It cannot be taken for granted. Don’t say we have “90% + accuracy in the warehouse,” KNOW THAT YOU HAVE 98-100% accuracy by daily cycle counting.

About Charles Intrieri

Charles Intrieri is subject matter expert on Cost Reduction, Supply Chain, and 3rd Party Logistics. He is also an author on Flevy (view his documents materials). Managing his own consultancy for the past 25 years, Charles has helped dozens of clients achieve leaner and more efficient operations. You can connect with him here on LinkedIn or email him directly ([email protected]). Charles also has a presentation Why Lean Fails in a Company? available for free download here.

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