Inventory Accuracy in 60 Days

<h1>Inventory Accuracy in 60 Days</h1>Author: <a title="Paul Deis" href="http://www.articlesbase.com/authors/paul-deis/7699.htm">Paul Deis</a> This article is also available on our website: <a href="http://www.proaction.net">PROACTION - Generating Best Practices</a>. It is an excerpt of a paper originally written by George Miller, Founder of PROACTION. It has been modified and updated by Paul Deis, PROACTION CEO. 
INTRODUCTION
Despite great advances in manufacturing technology and management science, thousands of organizations still don't have a handle on basic inventory record accuracy. Many companies don't even measure it properly, or at all, and lack corrective action programs to improve it. This paper offers an approach that has proven successful a number of times, when companies were quite serious about making improvements. Not only can it be accomplished, but it can likely be done within 60 days per area, if properly managed. The hardest part is selling people on the need to improve and then keeping them motivated.
The net cost of such a program? Very likely free, when one considers the benefits gained, which usually far exceed the costs. Inventory accuracy benefits help: provide excellent customer service, determine purchasing and manufacturing priorities, reduce operating costs, and provide accurate data for financial records.
The author also addresses the gap in contemporary literature in the area of accuracy program features for repetitive, JIT, cellular, process and project-oriented environments.
Do you have inventory accuracy problems? Typical symptoms:
• Lots of inventory errors 
• Surprise backorders, unplanned shortages, "lost material" 
• Nobody believes the records—numerous calls to "check" on availability 
• Air freight bill exceeds the national debt 
• Nasty financial reporting "surprises" 
• Lack of consensus on importance of accuracy 
• Lack of consensus on how to measure it 
• Inability to reconcile inventories, cycle counts 
• Error causes largely unknown 
• Weak/no company tradition of data accuracy 
• New systems/software implementation causing more confusion
Solution recommendations are presented as follows...
ORGANIZE PROJECT
Results are usually best when there is a bit of a crisis atmosphere established. Business as usual won't usually serve to get serious inventory accuracy problems fixed within two months. Sometimes a humbling blow, such as losing millions in an inventory "write-down", or an unfavorable "write-up" by a customer, is helpful to shatter the status quo and energize an organization to begin work in earnest on a solution. Top level executive action works best to motivate and mobilize people. At a minimum, perception of a costly problem is needed, with some realization of a need to correct it.
Try to tie company goals and objectives to project objectives, to help ensure that people "buy-in" to the project and will be measured and rewarded on the results.
Once the initial goals are attained, don't just declare victory and go home. Set up a lower key ongoing maintenance effort to ensure that the problem stays fixed and that further improvements are made.
• An Executive Sponsor is needed, someone with the clout to keep resources and attention focused on the problem until completion. Results are usually directly proportional to the strength and commitment of the executive sponsor. Sometimes it's not possible to get a sponsor until a case is made that there's a problem.
• A Project Leader and Multi-Disciplinary Team is required, preferably from Operations, Materials, Finance, Distribution and possibly, Process and Design Engineering (depending upon the problems identified). In a large organization, a full time project leader may be needed. People will be needed for inventory verification, cycle counting and reconciliation. The amount of manpower needed is dependent upon organization size, complexity and magnitude of the problem. For example, one 500,000 sq. ft. process plant with about 4000 items and 30+% inventory accuracy needed a full time coordinator, four full time cycle counters and two part timers for six months, tapering off after that. Often, consultants and corporate auditors participate to make projects more successful.
• A Project Plan is needed, incorporating recommendations from this paper and other company-specific activities. This plan, along with a running list of accuracy related issues and actions, should be used to drive the project and focus efforts on activities needed to attain accuracy goals. Issues should be identified, put on a master issues list, assigned to appropriate personnel to solve, then discussed and tracked at every weekly meeting for the duration of the initial improvement project. 
The plan should contain specific activities, responsibilities and dates. It needs to be followed and managed competently. Unless carefully managed, a substantial amount of project time will be spent trying to figure out what the problems are, and getting resources assigned to them.
Regular Review Sessions
Initially weekly, these sessions will help the team to stay focused. It's strongly advisable to have the sponsor there at least every other meeting. Missing participants should send bonafide, participating, decision-making delegates if they cannot themselves attend. The standard agenda is the project plan and the issues list, which should be updated and distributed well before each meeting. Copies should go to key executive and management people, who should ask probing questions, offer help and show some interest in the project. The effect of management "mindshare" on the results of such projects cannot be over-emphasized.
Education
An inventory accuracy seminar/workshop, delivered early in the project life cycle to the project team and key operating/administrative personnel, will improve help quality and schedule performance, often dramatically. The workshop should cover accuracy criteria, needs, inventory system approaches, needed changes, cycle counting and physical inventories.
It should focus less on how to cycle count than how to set up a good inventory system to avoid problems in the first place. As a result, with some coaching, the team will be able to set accuracy criteria, install diagnostics, design system improvements, write and make procedure improvements and institute performance measurements.
There needs to be ongoing instruction on inventory/material control principles, techniques and specific company policies and procedures.
Publicize Program and Performance
Get the word out. The program goals, objectives, general approach and performance need to be communicated orally and in writing to company staff, most employees, and even suppliers and customers, if they are involved in the effort. Large posters can be displayed around the facilities to communicate project goals and current status. Orientation meetings can be conducted and employees educated in problem areas and procedures to help remedy them. Contests and other events can be used to raise awareness of problems and goals, and even to make it fun. Successes should be celebrated, failures used as lessons learned and applied.
Choose Your Battles
Realize that there are limited resources available, and that these cost money, so prioritize by tackling issues offering the best payback and those that can be won. 
Actual examples:
• For one company, it was very hard to keep track of color concentrates, since they were ladled out of barrels, were kept out on the floor, and didn't cost all that much anyway. So, these and other similar items were placed on "two bin" order control and expensed, eliminating a whole class of inventory record problems with little more than a stroke of a pen.
• Another firm had three storerooms. The first one contained fabrics for airline seats and was very well organized and well run, so minimal effort was expended to improve it. The second one was a poorly controlled raw material storeroom with a short-timer supervisor about to retire. Material lead times were only a few days, so the effect of errors was less serious. We elected to wait out his retirement, which was only a couple of months away. The third storeroom contained purchased parts and specialty fabrications. Lead times were long, costs were high and the consequences of errors were serious, so we elected to initially focus on this area. To narrow scope even further, we initially concentrated only on items needed within the lead time horizon and ignored obsolete and excess materials.
• The VP, Finance in still another manufacturing company agreed to waive physical inventories for areas demonstrating that accuracy goals were being met, freeing up resources for more productive purposes.
• In general, controlled storerooms are the easiest to improve, since they are often physically restricted areas, have supervision more oriented to accuracy concepts, transactions less subject to process-related errors and they can be more easily counted. Then attack work-in-process areas, which are generally more challenging.
• One team uncovered dozens of accuracy issues. These were prioritized so that problem-solving resources could be focused on the best payback items with the greatest chances of resolution.
• A few companies we worked with have gotten almost immediate payback by conducting location audits. Simply check each location and compare it to your records. Physical locations not in the records may be exciting windfalls. The opposite case is cause for a corrective cycle count adjustment. This approach requires far less resources than a physical count inventory.
• Most companies observed weren't able to reconcile all errors, especially in the beginning. They were advised not to even try. It's like attempting to bail out the ocean, because errors were being made faster than inventory balances could be corrected, let alone diagnosed and reconciled. So, they focused on eliminating the principal CAUSES of errors initially. Every time a cause is identified and corrected, it may likely eliminate dozens, hundreds or even thousands of future potential errors. This concept may be difficult to sell to some accounting personnel, who have been conditioned to balance every debit and credit to the penny. Choose your battles!
DEFINE INVENTORY ACCURACY
Why
This sounds simple enough, but experience has often proven otherwise. Before convincing people to fix inventory problems, they must first believe that there are problems and a need to fix them. Before establishing the existence of a problem, it helps to have standards to measure performance against.
What It Isn't
We have often been told by representatives of various companies that their inventory accuracy was high, even "world class," 95, 98 or even 99+%, when in fact, there were surprise backorders, unplanned material shortages and unexplained excess inventories. When asked about inventory accuracy, shop floor and stores personnel would just smile and tell us their inventory horror stories.
So why does this happen? There are different ways of measuring it. For example:
• One firm thought their inventory records were outstanding because they were accurate within $20,000 for a $6MM inventory, or 99.7% accurate, they boasted. Well, it turned out that this was merely an arithmetic sum of the financial errors and that the absolute value of the individual errors was actually $900,000. Even this sounded like 85% accuracy. 
But, operations people know that products are built with specific components and that customers are shipped specific products or services, not dollars. When other factors like posting cut-offs, location errors and part number errors were considered, it was calculated that accuracy was actually only 66%! 
Inventory accuracy is the probability of finding the right items in the right location and quantity that the books say are there. 66% accuracy means that 34% of items surveyed had quantities, locations or part numbers significantly differing from "book" records. Looking at it another way, for a ten item order, there would be only a 15% probability of finding all parts corresponding to what the books said was there. Is that any way to run a business? By the way, it's sad to say that 66% is about average.
Another reason for the accuracy credibility gap is that people delude themselves, occasionally even lie. The author once had to fire someone who was 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 things are much better than they really are. Example:
• At one company, a survey taken showed 47% inventory accuracy, only a month after the annual physical inventory. The Inventory Manager, after challenging the methodology, integrity and ancestry of the auditors, claimed that it should be adjusted to 73%, because not all of the unposted transactions, some more than a month old, had been factored in. Hmmm.
What It Is
95% accuracy is said to be the minimum acceptable level to run a formal system. Our experience is that 95% is a lot better than the average company, but it's nowhere near what is required to run a world class operation, where 98 or 99+% is more appropriate. Going from 66% to 90% is easier than going from 90 to 95%, which is easier than going from 95 to 97%. When a company sets a goal of 95, 98 or 99+% inventory accuracy, what should that mean? We usually recommend the following accuracy criteria, subject to company special requirements:
• Quantity of book to reconciled physical inventory to be accurate, for example, within 1% for "A" items, 3% for "B" items and 5% for "C" items. These targets should reflect relative value of the material and the limits of counting process capabilities. Most firms compare physical to reconciled book quantity error vs. book quantity to measure accuracy, for convenience of computations. Sometimes we recommend comparing the calculated error to the weekly or monthly usage quantity, because it's statistically more valid, especially in a high-volume, low inventory environment.
• Item identification must be correct, or it counts for two errors, since if it isn't what the records stated it was, then it must be something else. Unless inventory people are very thorough and knowledgeable about item identities, these errors often go unrecognized until detected by an inspector, production operator, or even a customer. We recommend item verification before storage or movement to the next process station. It is helpful to post item specifications and photos and train employees in their use to reduce such errors.
• Item must be physically in the exact "book" location or it is considered an error. If you can't find it, that's even worse than not having it at all, because it cost money and it's taking up valuable space. Make sure you define item locations neither too detailed nor too general. If too detailed, it will be burdensome to maintain the records and control material.
• Timeliness of records - Must be posted by some deadline, such as immediately when moved, within an hour, or by the end of the shift when transaction was physically executed. This greatly improves the timeliness of information and improves "cut-off" control for reports and reconciliations.
• Accuracy percentage = (number of items sampled meeting above criteria/all items sampled) x 100. We sometimes convert performance measures to error parts per million (PPM), to make measurements more compatible with companies' quality systems.
MEASURE ACTUAL PERFORMANCE
Why It's Difficult
This too, is more difficult than it sounds. Many companies are simply unable to reconcile book to physical inventory because they:
• Have multiple, incompatible inventory systems. 
• Can't master the timing "cutoffs" for count reconciliation. 
• Poorly define and enforce material and transaction flow procedures and policies. 
• Don't have people assigned to and/or schooled in inventory records reconciliation.
Initial Survey
You'll need an initial survey to assess the level of accuracy. This is recommended, even if 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 of items, crossing different product lines, 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. Get agreement on the measurement criteria (see section II, above). If there is more than one inventory system, agree on which one(s) you will be reconciling to. Be aware of how these systems are updated and enlist the cooperation of those involved in their operation and maintenance.
Better results will be obtained if all transactions are posted before counting, especially if the inventory system is in poor working order. This helps eliminate a very common source of errors, "cut-off" timing. In particular, watch out for items in staging areas, QC, Shipping, 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 is recommended that people who are removed from "ownership" of the current system be used to audit or even supervise this survey. Bias may be inadvertently or intentionally introduced otherwise.
The survey should be 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 after careful verification, then discuss and act on them. The initial survey often helps to establish the dialogue that propels 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 poor inventory system without baseline figures, good procedures in place and regular cycle counts. 
Wall-to-wall physical inventory
For some reason, many people love these and think that they provide "better control. " Although better numbers can often be obtained in this manner in companies with poor inventory systems, complete inventories are often disruptive, very expensive, time-consuming, introduce errors of their own and do little to correct the underlying problems contributing to inaccuracy. They are often done in a state of near-anarchy, with inadequate training, policies and procedures, using unmotivated people who don't want to be there. 
However, the majority of manufacturing companies still take a periodic wall-to-wall inventory, often annually, usually to reconcile the books for financial statements. Unfortunately, these are not necessarily beneficial to organizations needing accurate operational perpetual inventory numbers to do business with.
Improve how physicals are done, since they may in themselves be a significant source of error, as well as expensive and time-consuming. Procedures might need to be reviewed and upgraded, along with training. The cutoff, reconciliation and posting approaches employed are common sources of errors. 
FIX THE SYSTEM
Institute Improved Policies and Procedures
Procedures are often in need of a major overhaul. Many are poorly documented, unworkable or cumbersome. The project diagnostics, team meetings, cycle count results, conference room pilot and employee suggestions can all funnel information to the people who revise procedures. 
Identify every single transaction and procedure potentially affecting inventory accuracy. Review and, if necessary, enhance, simplify and document them, then thoroughly train all applicable personnel in their use. Keep simple concise procedures available for employees' ready access. Have employees practice/drill in procedure use. An inventory system test or "demo" database is a good tool to practice with.
• New procedures/changes should be reviewed with users in advance, thoroughly tested and documented prior to implementation. 
• Procedures should cover all aspects of inventory transactions: receiving, inspection, stores, issues to floor stock, production, substitutions, transfers, scrap, rework, return to vendor, completions to stock, shipments.
Set Up Basic Inventory Movement Structure and Controls
Most companies lack a common understanding on how inventory transactions- material and paperwork - should flow. One of the first evident symptoms of this is an almost total inability to reconcile cycle counts of active items, due to transaction "cut-off" problems attributable to unpublished/unenforced transaction document flow times. Forget about a full cycle counting program until this is corrected. First, establish, implement and enforce:
• Inventory "transaction flow map" showing all work centers/cells/stores areas, material and paper flows, transaction types and account numbers, so that people will know what should happen. When people see a graphical depiction of system flow and have it explained to them, it often helps them to decode the mysteries of a system.
• Flow times - How long it should take to receive a part, move it to stores, issue it, move it between operations. Publish these flow times, post them, and get people accustomed to working with them. Highlight transactions missing flow time targets.
• Cutoff times - How long it should take to post a transaction after it physically occurred. Publish and highlight similar to the above item.
• Drop points - Where material and transaction documents should be placed. Mark these areas plainly to reduce confusion. Painted lines on the floor, signs, sometimes even fences, may be needed to get the point across.
• Logging and batch controls, especially for key "gateway" transactions such as receiving and shipping. Comparing daily posted transactions to the logs often helps detect missing or erroneous data. Logs can also be useful in reconstructing "crashed" systems.
Write Cycle Counting Procedure
Cycle counting should be the principal ongoing performance measurement, diagnostic and problem-solving approach, basically "SPC for inventory control." It is a procedure to help determine if the other inventory procedures are working. The procedure needs to fully reflect the overall systems flow and timing. For instance, if inventories are updated daily by MIS, it may be necessary to adjust for unposted transactions prior to completing reconciliation. 
• In a high-volume repetitive production in a backflush environment, It is necessary to log production occurring between backflushes and to know precisely when these were performed. In addition, knowing the whereabouts of discrepant material routed for inspection and alternate processing, but still unposted, is vital, since counts of material in the area may omit it.
Consignment inventory rules sometimes need revision to facilitate cycle count reconciliation as well.
Run a Control Group
Once the program is underway, team members often want to quickly start an ambitious, large scale program of cycle counting. Some people come running out of cycle counting seminars, flushed with enthusiasm, wanting to use their new tools immediately to vanquish the demons of inventory error. In general, don't. Why? Because in most cases the infrastructure isn't yet in place to support an effective cycle counting system. Make sure it is in place BEFORE starting regular cycle counting, or you're in for some big disappointments and loss of credibility. 
In the meantime, use the initial survey population as a "control group" to help regularly and frequently assess the propagation of errors. Count and reconcile these items over and over again until you start to get the hang of what's wrong. Chances are, this will be a very tough chore initially, because of the many things wrong with the system. Don't be surprised if you can't identify many item error causes with certainty in the initial period. As you count them more frequently, there will be shorter intervals between counts, increasing the likelihood that error causes can be isolated. As the basic controls identified above are established, they will eliminate many errors and make it simpler to identify those that remain. Make sure that problems are posted to the issues list, 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 and have mastered control group diagnostics, they can turn the cycle counts loose on a larger scale.
Remind your people that control group accuracy levels are about as representative of all items as MENSA members and basketball players are of the general human population. By definition, the control group is skewed, because it receives inordinate attention and care as a diagnostic tool. We've actually seen companies boast about the control group accuracy as representative of all items, declare victory, then go home smiling. The control group only indicates the level of propagation of errors, and if you work at it, their cause. Even that could be wrong, since employees quickly discover which items are measured in the control group and pay special attention to them. Rotate items occasionally.
When the control group is running in the mid 90% accuracy range, it's time to turn on large scale cycle counting. Companies trying to turn it on too early may get swamped by massive numbers of irreconcilable errors. Some even compound the errors when they start posting corrections before they've got reconciliation/posting procedures working satisfactorily.
Most error causes can be found and resolved during the initial control group period.
Make Physical Changes
Paint lines on floors to indicate drop points and department boundaries. Record tare weights on all containers used in weigh counting. Use bar code or other accurate, efficient data acquisition methods. Deploy counting scales where appropriate. Isolate obsolete inventory for final dispositioning. Assign designated drop points for discrepant or "hold" status material. Ensure that there is adequate and appropriate material handling and storage equipment. Sometimes something as simple as lines on the floor, a fence or a gate can make a significant difference. Consider a move to a process-related flow, which may greatly simplify material/inventory control. 
A comprehensive facility location system is essential for success in locating material quickly and efficiently when it is needed All inbound and in-transit material should be directed to locations, or they should be assigned upon arrival. If the location system is simple enough, materials might be automatically routed. Reduce the number of possibilities to make mistakes. The location codes should be plainly marked all around the facility, so that there is no confusion about the location. Isolate/purge excessive, obsolete and damaged inventory.
Make Information Systems Improvements
Sometimes computer, software and MIS operational problems contribute to inventory problems. System users tend to overstate these, although we have seen them over and over.
Make sure to set up system tables/data fields properly, or they will generate erroneous transaction data. For example, if bill of material codes weren't set right, then certain inventory transactions wouldn't process. Once the system is set up wrong, these errors may take months to detect and diagnose. These can't simply be changed with impunity, but require careful prior testing and well coordinated changes, usually with the assistance of MIS and/or software suppliers.
Computer batch update processes are sometimes set up improperly or fail to execute as planned, creating erroneous or untimely postings. This is especially critical to three shift operations, where mission critical systems can't be down long and botched batch updates can significantly impede company operations. Ensure that they're set up, tested and properly operated. Ensure that there are recovery procedures in place in case things don't always work properly.
At one company, there were several major bugs not detected in the early conference room pilot, which was done before enhancements were made to the software. The system pilot testing was not very rigorous compared to the one the team did during the inventory accuracy project, when every single process and option was simulated on line, with an exhaustive review and rewrite of procedures done concurrently, followed by employee retraining. Examples of problems found and corrected: scrap transactions costing improperly, move tickets failing to print properly, improper costing with alternate routings, system parameters set up incorrectly causing backflushes to not calculate correctly.
Ensure that software documentation is made site-specific, so that sufficient simple, clear instructions applying to local conditions are made available to personnel, who should be thoroughly trained in these procedures.
Don't Forget Accounting Systems
Even if a system is "integrated," there may still be a few things that it does differently to accounting than to operations, such as scrap transaction costing, adjustments, etc. In addition, Accounting might have developed some "hand journal vouchering" procedures that circumvent the purpose of the system. Run tests to ensure that operations and accounting reports balance and that all transaction types process correctly and all transactions are accounted for.
Sometimes, system reports are too cumbersome to be helpful to the reconciliation effort. For example, in one company, Finance received a huge 16 inch thick report every month that didn't balance and didn't lend itself well to analysis. They worked to get better inventory cost sub-ledger/account data, better suited to check against other cost and operations data and reconciled in more frequent intervals. 
System set-up concerns cited above are equally applicable to Accounting.
Conduct Control Studies
Many industries, like wire manufacturing, for example, have complex wrinkles. For example, the way wire strands are twisted and compacted, wire customer requirements and the shape of wire drawing dies, can all have a significant effect on material consumption and inventory. Even when these are brought under control, the way transactions are reported can also affect accuracy.
To test the system out on a real life basis, conduct a limited number of highly structured "control studies," count and double check everything issued, everything consumed, all scrap, rework, and compare that to what the computer transactions/database thought was happening. It may be discovered that some bill of material, process, tolerance and transaction problems, need correction. Product lines with unacceptable process capability and tolerancing issues may be identified and targeted for correction, usually by a separate project.
Other Useful Things
• Conduct frequent walking tours through the facility with the project team, local officials and employees. Listen to what they say and look for obvious problems. Make assignments or take action on the spot. A picture is worth a thousand words, and the real thing is worth a thousand pictures.
• Focus on housekeeping. A sloppy, crowded, disorganized area is a warning that there are deficient attitudes, procedures or that facilities and equipment aren't up to the job. These things don't always stand out in reports. There's no substitute for being on the spot. Attack housekeeping problems head on. Consolidate material, improve marking and labeling, have a proper place for everything, work on rescheduling/re-routing materials to alleviate congestion. If housekeeping can't be resolved by checklists and new emphasis on orderliness, then go deeper down into the root causes and start solving the underlying problems.
PROCESS-RELATED DIFFERENCES
Most inventory accuracy literature uses conventional discrete manufacturing as a model. Repetitive, JIT, cellular flows, process and project-oriented models all introduce some special requirements. This section provides a brief overview of these.
Repetitive, JIT, Process-Oriented Flows
Repetitive process inventory control needs some different approaches. It's about 80% the same as discrete, but that other 20% is extremely important. Much of the product moves so fast that it's hard to even verify. To summarize some key differences:
• Yields require much more attention, especially where process capability is an issue. 
• Because of high volume and more continuous flow, small errors, even one or two percent, quickly add up to massive variances. 
• "Backflush" automated component relief needs to be watched closely, due to the above two items and also if there are component substitutions, bill-of-material errors, or discrepant material moves. In some cases, it may be advisable to go to discrete, counted material issues, then reconcile yield upon completion.
• A process flow or cellular layout/management approach makes it much easier to control inventory than for a functional or job shop scheme. Many companies realize this and are gradually shifting to a cellular paradigm for this and other reasons.
• In a process with many activities, don't try to count and reconcile every activity. Instead, reconcile various "pay point" or milestone activities, or even logical stocking points. If there are persistent discrepancies, consider extending controls into the upstream activities of most likely error sources until the causes are found and corrected.
• Trends in repetitive manufacturing indicate a move towards point of use delivery and storage, supplier-managed inventories (including consignments), backflush and work-orderless/paperless activity control, including "rate-based schedules." Some companies periodically close and reconcile rate-based master orders, to help determine performance.
• Some process plants are actually continuous process operations. Inventory control may be accomplished with check points, such as periodic meter readings, or with production rate monitoring. Material consumption may be checked against product characteristics such as specific gravity, density, durometer, coating thickness, etc. If one parameter is off, it can significantly affect other key parameters or resource consumption.
• Cells and dedicated lines generally have process-oriented flows and focus on families of similar items. Such facilities are inherently easier to control. Often, cells are largely self-managing, so employees will handle their own inventory control.
• Simplified control techniques, such as visual methods (Kanban, calibrated containers, two-bin), average inventory estimates, gateway/paypoint, and zero inventory make to order-only are becoming more common.
Project Oriented Industries
Make to order businesses often plan and control activities by job, project, order, or even lower level "work packages." It is commonplace to track inventory and costs by one or more of those entities. Such work is more likely to be engineered to order as well. In addition, customers sometimes have ownership/control over inventories and even designs and specifications.
• Project/job, work package, configuration, lot and serial number control are often additional tracking requirements. This makes inventory accuracy more difficult, because these may be included in inventory control, cycle counting and reconciliation.
• Inventory costing may get more complex as well, since actual or average costs are often maintained and the same item may have different costs for different projects/work packages, etc. 
• It often makes sense to cycle count by project in these types of businesses. The ideal time to count is when maximum benefit will be gained, which is just before major decisions affecting cost and schedule are made, such as planning and procurement, or at the end of a project phase, when residual inventory must be determined and dispositioned.
• Since customers sometimes own all or part of the inventory, accountability standards are sometimes higher. It's not so easy to "write off" a loss of material. In cases of adjustments for common-use inventory, who pays is a burning issue.
CONCLUSIONS
As with most major change efforts, inventory accuracy needs strong, continuing management support to change the culture and practices.
• Very little happens in some companies until top management makes poor results unacceptably uncomfortable to those failing to deliver. 
• Even after that, things sometimes don't improve until meaningful performance measurements and improvement mechanisms are implemented. 
• Strong project leadership is the next most important factor, along with a sound approach and an implementation plan.
• The price of continued inventory accuracy success is eternal vigilance. When programs lose "mindshare," results often quickly deteriorate. 
• Inventory accuracy is a permanent state of mind, not a quickie, one-time project. Periodic backsliding needs constant attention. This is one area where zealots and dictators are needed!
Successful inventory accuracy efforts often have five phases: 
1.Realization that there is a problem 
2.Agreement on a solution approach 
3.Problem-solving phase 
4.Records correction 
5.Ongoing cycle counting/maintenance
• Inventory accuracy doesn't really improve by counting things. It only improves when basic systems, procedures and training improve. 
• Identifying issues and resolving them so that they never occur again is the key to achieving accuracy goals. 
• Leadership and peoples' attitudes are the two most important factors for success.
There are some significant differences in attaining inventory accuracy in non-discrete, process, repetitive, cellular and project-oriented enterprises. 
Learn them well and adapt to their needs. Realize also that most companies are a mix of different environments, so mix approaches if warranted.
 
 About the Author: George J. Miller, CFPIM, is Founder of PROACTION. Prior to selling the company to Paul Deis, George had worked with dozens of companies in assignments involving productivity, quality and service improvement, business systems, change management, acquisitions, divestitures, expert witness testimony, and others. Prior to founding PROACTION in 1986, he was Vice President of Marketing for Western Data Systems; Director of Planning and Development and Assistant Director—Operations for Purolator Technologies (PTI); Consultant for Booz-Allen & Hamilton, and Manufacturing Systems Manager for Becton-Dickinson. 
Paul Deis, CFPIM, is CEO, PROACTION. He brings over 25 years of consulting and senior executive experience to his work, including detailed work with nearly 60 companies. Prior to acquiring PROACTION, Paul's experience includes running a small ERP software company, leading other consulting businesses, prior work with PROACTION, Manager at Deloitte & Touche, VP Manufacturing at Raypak, Inc., where he was very successful with an early Lean management initiative, and dozens of projects in the areas of enterprise software, operations management, crisis resolutions, in a wide variety of industries, business types, and scales. Website: <a href="http://www.proaction.net">PROACTION - Generating Best Practices</a>

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This article is also available on our website: PROACTION - Generating Best Practices. It is an excerpt of a paper originally written by George Miller, Founder of PROACTION. It has been modified and updated by Paul Deis, PROACTION CEO.

INTRODUCTION

Despite great advances in manufacturing technology and management science, thousands of organizations still don't have a handle on basic inventory record accuracy. Many companies don't even measure it properly, or at all, and lack corrective action programs to improve it. This paper offers an approach that has proven successful a number of times, when companies were quite serious about making improvements. Not only can it be accomplished, but it can likely be done within 60 days per area, if properly managed. The hardest part is selling people on the need to improve and then keeping them motivated.

The net cost of such a program? Very likely free, when one considers the benefits gained, which usually far exceed the costs. Inventory accuracy benefits help: provide excellent customer service, determine purchasing and manufacturing priorities, reduce operating costs, and provide accurate data for financial records.

The author also addresses the gap in contemporary literature in the area of accuracy program features for repetitive, JIT, cellular, process and project-oriented environments.

Do you have inventory accuracy problems? Typical symptoms:

• Lots of inventory errors
• Surprise backorders, unplanned shortages, "lost material"
• Nobody believes the records—numerous calls to "check" on availability
• Air freight bill exceeds the national debt
• Nasty financial reporting "surprises"
• Lack of consensus on importance of accuracy
• Lack of consensus on how to measure it
• Inability to reconcile inventories, cycle counts
• Error causes largely unknown
• Weak/no company tradition of data accuracy
• New systems/software implementation causing more confusion

Solution recommendations are presented as follows...

ORGANIZE PROJECT

Results are usually best when there is a bit of a crisis atmosphere established. Business as usual won't usually serve to get serious inventory accuracy problems fixed within two months. Sometimes a humbling blow, such as losing millions in an inventory "write-down", or an unfavorable "write-up" by a customer, is helpful to shatter the status quo and energize an organization to begin work in earnest on a solution. Top level executive action works best to motivate and mobilize people. At a minimum, perception of a costly problem is needed, with some realization of a need to correct it.

Try to tie company goals and objectives to project objectives, to help ensure that people "buy-in" to the project and will be measured and rewarded on the results.

Once the initial goals are attained, don't just declare victory and go home. Set up a lower key ongoing maintenance effort to ensure that the problem stays fixed and that further improvements are made.

• An Executive Sponsor is needed, someone with the clout to keep resources and attention focused on the problem until completion. Results are usually directly proportional to the strength and commitment of the executive sponsor. Sometimes it's not possible to get a sponsor until a case is made that there's a problem.

• A Project Leader and Multi-Disciplinary Team is required, preferably from Operations, Materials, Finance, Distribution and possibly, Process and Design Engineering (depending upon the problems identified). In a large organization, a full time project leader may be needed. People will be needed for inventory verification, cycle counting and reconciliation. The amount of manpower needed is dependent upon organization size, complexity and magnitude of the problem. For example, one 500,000 sq. ft. process plant with about 4000 items and 30+% inventory accuracy needed a full time coordinator, four full time cycle counters and two part timers for six months, tapering off after that. Often, consultants and corporate auditors participate to make projects more successful.

• A Project Plan is needed, incorporating recommendations from this paper and other company-specific activities. This plan, along with a running list of accuracy related issues and actions, should be used to drive the project and focus efforts on activities needed to attain accuracy goals. Issues should be identified, put on a master issues list, assigned to appropriate personnel to solve, then discussed and tracked at every weekly meeting for the duration of the initial improvement project.

The plan should contain specific activities, responsibilities and dates. It needs to be followed and managed competently. Unless carefully managed, a substantial amount of project time will be spent trying to figure out what the problems are, and getting resources assigned to them.

Regular Review Sessions

Initially weekly, these sessions will help the team to stay focused. It's strongly advisable to have the sponsor there at least every other meeting. Missing participants should send bonafide, participating, decision-making delegates if they cannot themselves attend. The standard agenda is the project plan and the issues list, which should be updated and distributed well before each meeting. Copies should go to key executive and management people, who should ask probing questions, offer help and show some interest in the project. The effect of management "mindshare" on the results of such projects cannot be over-emphasized.

Education

An inventory accuracy seminar/workshop, delivered early in the project life cycle to the project team and key operating/administrative personnel, will improve help quality and schedule performance, often dramatically. The workshop should cover accuracy criteria, needs, inventory system approaches, needed changes, cycle counting and physical inventories.

It should focus less on how to cycle count than how to set up a good inventory system to avoid problems in the first place. As a result, with some coaching, the team will be able to set accuracy criteria, install diagnostics, design system improvements, write and make procedure improvements and institute performance measurements.

There needs to be ongoing instruction on inventory/material control principles, techniques and specific company policies and procedures.

Publicize Program and Performance

Get the word out. The program goals, objectives, general approach and performance need to be communicated orally and in writing to company staff, most employees, and even suppliers and customers, if they are involved in the effort. Large posters can be displayed around the facilities to communicate project goals and current status. Orientation meetings can be conducted and employees educated in problem areas and procedures to help remedy them. Contests and other events can be used to raise awareness of problems and goals, and even to make it fun. Successes should be celebrated, failures used as lessons learned and applied.

Choose Your Battles

Realize that there are limited resources available, and that these cost money, so prioritize by tackling issues offering the best payback and those that can be won.

Actual examples:

• For one company, it was very hard to keep track of color concentrates, since they were ladled out of barrels, were kept out on the floor, and didn't cost all that much anyway. So, these and other similar items were placed on "two bin" order control and expensed, eliminating a whole class of inventory record problems with little more than a stroke of a pen.

• Another firm had three storerooms. The first one contained fabrics for airline seats and was very well organized and well run, so minimal effort was expended to improve it. The second one was a poorly controlled raw material storeroom with a short-timer supervisor about to retire. Material lead times were only a few days, so the effect of errors was less serious. We elected to wait out his retirement, which was only a couple of months away. The third storeroom contained purchased parts and specialty fabrications. Lead times were long, costs were high and the consequences of errors were serious, so we elected to initially focus on this area. To narrow scope even further, we initially concentrated only on items needed within the lead time horizon and ignored obsolete and excess materials.

• The VP, Finance in still another manufacturing company agreed to waive physical inventories for areas demonstrating that accuracy goals were being met, freeing up resources for more productive purposes.

• In general, controlled storerooms are the easiest to improve, since they are often physically restricted areas, have supervision more oriented to accuracy concepts, transactions less subject to process-related errors and they can be more easily counted. Then attack work-in-process areas, which are generally more challenging.

• One team uncovered dozens of accuracy issues. These were prioritized so that problem-solving resources could be focused on the best payback items with the greatest chances of resolution.

• A few companies we worked with have gotten almost immediate payback by conducting location audits. Simply check each location and compare it to your records. Physical locations not in the records may be exciting windfalls. The opposite case is cause for a corrective cycle count adjustment. This approach requires far less resources than a physical count inventory.

• Most companies observed weren't able to reconcile all errors, especially in the beginning. They were advised not to even try. It's like attempting to bail out the ocean, because errors were being made faster than inventory balances could be corrected, let alone diagnosed and reconciled. So, they focused on eliminating the principal CAUSES of errors initially. Every time a cause is identified and corrected, it may likely eliminate dozens, hundreds or even thousands of future potential errors. This concept may be difficult to sell to some accounting personnel, who have been conditioned to balance every debit and credit to the penny. Choose your battles!

DEFINE INVENTORY ACCURACY

Why

This sounds simple enough, but experience has often proven otherwise. Before convincing people to fix inventory problems, they must first believe that there are problems and a need to fix them. Before establishing the existence of a problem, it helps to have standards to measure performance against.

What It Isn't

We have often been told by representatives of various companies that their inventory accuracy was high, even "world class," 95, 98 or even 99+%, when in fact, there were surprise backorders, unplanned material shortages and unexplained excess inventories. When asked about inventory accuracy, shop floor and stores personnel would just smile and tell us their inventory horror stories.

So why does this happen? There are different ways of measuring it. For example:

• One firm thought their inventory records were outstanding because they were accurate within $20,000 for a $6MM inventory, or 99.7% accurate, they boasted. Well, it turned out that this was merely an arithmetic sum of the financial errors and that the absolute value of the individual errors was actually $900,000. Even this sounded like 85% accuracy.

But, operations people know that products are built with specific components and that customers are shipped specific products or services, not dollars. When other factors like posting cut-offs, location errors and part number errors were considered, it was calculated that accuracy was actually only 66%!

Inventory accuracy is the probability of finding the right items in the right location and quantity that the books say are there. 66% accuracy means that 34% of items surveyed had quantities, locations or part numbers significantly differing from "book" records. Looking at it another way, for a ten item order, there would be only a 15% probability of finding all parts corresponding to what the books said was there. Is that any way to run a business? By the way, it's sad to say that 66% is about average.

Another reason for the accuracy credibility gap is that people delude themselves, occasionally even lie. The author once had to fire someone who was 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 things are much better than they really are. Example:

• At one company, a survey taken showed 47% inventory accuracy, only a month after the annual physical inventory. The Inventory Manager, after challenging the methodology, integrity and ancestry of the auditors, claimed that it should be adjusted to 73%, because not all of the unposted transactions, some more than a month old, had been factored in. Hmmm.

What It Is

95% accuracy is said to be the minimum acceptable level to run a formal system. Our experience is that 95% is a lot better than the average company, but it's nowhere near what is required to run a world class operation, where 98 or 99+% is more appropriate. Going from 66% to 90% is easier than going from 90 to 95%, which is easier than going from 95 to 97%. When a company sets a goal of 95, 98 or 99+% inventory accuracy, what should that mean? We usually recommend the following accuracy criteria, subject to company special requirements:

• Quantity of book to reconciled physical inventory to be accurate, for example, within 1% for "A" items, 3% for "B" items and 5% for "C" items. These targets should reflect relative value of the material and the limits of counting process capabilities. Most firms compare physical to reconciled book quantity error vs. book quantity to measure accuracy, for convenience of computations. Sometimes we recommend comparing the calculated error to the weekly or monthly usage quantity, because it's statistically more valid, especially in a high-volume, low inventory environment.

• Item identification must be correct, or it counts for two errors, since if it isn't what the records stated it was, then it must be something else. Unless inventory people are very thorough and knowledgeable about item identities, these errors often go unrecognized until detected by an inspector, production operator, or even a customer. We recommend item verification before storage or movement to the next process station. It is helpful to post item specifications and photos and train employees in their use to reduce such errors.

• Item must be physically in the exact "book" location or it is considered an error. If you can't find it, that's even worse than not having it at all, because it cost money and it's taking up valuable space. Make sure you define item locations neither too detailed nor too general. If too detailed, it will be burdensome to maintain the records and control material.

• Timeliness of records - Must be posted by some deadline, such as immediately when moved, within an hour, or by the end of the shift when transaction was physically executed. This greatly improves the timeliness of information and improves "cut-off" control for reports and reconciliations.

• Accuracy percentage = (number of items sampled meeting above criteria/all items sampled) x 100. We sometimes convert performance measures to error parts per million (PPM), to make measurements more compatible with companies' quality systems.

MEASURE ACTUAL PERFORMANCE

Why It's Difficult

This too, is more difficult than it sounds. Many companies are simply unable to reconcile book to physical inventory because they:

• Have multiple, incompatible inventory systems.
• Can't master the timing "cutoffs" for count reconciliation.
• Poorly define and enforce material and transaction flow procedures and policies.
• Don't have people assigned to and/or schooled in inventory records reconciliation.

Initial Survey

You'll need an initial survey to assess the level of accuracy. This is recommended, even if 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 of items, crossing different product lines, 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. Get agreement on the measurement criteria (see section II, above). If there is more than one inventory system, agree on which one(s) you will be reconciling to. Be aware of how these systems are updated and enlist the cooperation of those involved in their operation and maintenance.

Better results will be obtained if all transactions are posted before counting, especially if the inventory system is in poor working order. This helps eliminate a very common source of errors, "cut-off" timing. In particular, watch out for items in staging areas, QC, Shipping, 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 is recommended that people who are removed from "ownership" of the current system be used to audit or even supervise this survey. Bias may be inadvertently or intentionally introduced otherwise.

The survey should be 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 after careful verification, then discuss and act on them. The initial survey often helps to establish the dialogue that propels 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 poor inventory system without baseline figures, good procedures in place and regular cycle counts.

Wall-to-wall physical inventory

For some reason, many people love these and think that they provide "better control. " Although better numbers can often be obtained in this manner in companies with poor inventory systems, complete inventories are often disruptive, very expensive, time-consuming, introduce errors of their own and do little to correct the underlying problems contributing to inaccuracy. They are often done in a state of near-anarchy, with inadequate training, policies and procedures, using unmotivated people who don't want to be there.

However, the majority of manufacturing companies still take a periodic wall-to-wall inventory, often annually, usually to reconcile the books for financial statements. Unfortunately, these are not necessarily beneficial to organizations needing accurate operational perpetual inventory numbers to do business with.

Improve how physicals are done, since they may in themselves be a significant source of error, as well as expensive and time-consuming. Procedures might need to be reviewed and upgraded, along with training. The cutoff, reconciliation and posting approaches employed are common sources of errors.

FIX THE SYSTEM

Institute Improved Policies and Procedures

Procedures are often in need of a major overhaul. Many are poorly documented, unworkable or cumbersome. The project diagnostics, team meetings, cycle count results, conference room pilot and employee suggestions can all funnel information to the people who revise procedures.

Identify every single transaction and procedure potentially affecting inventory accuracy. Review and, if necessary, enhance, simplify and document them, then thoroughly train all applicable personnel in their use. Keep simple concise procedures available for employees' ready access. Have employees practice/drill in procedure use. An inventory system test or "demo" database is a good tool to practice with.

• New procedures/changes should be reviewed with users in advance, thoroughly tested and documented prior to implementation.
• Procedures should cover all aspects of inventory transactions: receiving, inspection, stores, issues to floor stock, production, substitutions, transfers, scrap, rework, return to vendor, completions to stock, shipments.

Set Up Basic Inventory Movement Structure and Controls

Most companies lack a common understanding on how inventory transactions- material and paperwork - should flow. One of the first evident symptoms of this is an almost total inability to reconcile cycle counts of active items, due to transaction "cut-off" problems attributable to unpublished/unenforced transaction document flow times. Forget about a full cycle counting program until this is corrected. First, establish, implement and enforce:

• Inventory "transaction flow map" showing all work centers/cells/stores areas, material and paper flows, transaction types and account numbers, so that people will know what should happen. When people see a graphical depiction of system flow and have it explained to them, it often helps them to decode the mysteries of a system.

• Flow times - How long it should take to receive a part, move it to stores, issue it, move it between operations. Publish these flow times, post them, and get people accustomed to working with them. Highlight transactions missing flow time targets.

• Cutoff times - How long it should take to post a transaction after it physically occurred. Publish and highlight similar to the above item.

• Drop points - Where material and transaction documents should be placed. Mark these areas plainly to reduce confusion. Painted lines on the floor, signs, sometimes even fences, may be needed to get the point across.

• Logging and batch controls, especially for key "gateway" transactions such as receiving and shipping. Comparing daily posted transactions to the logs often helps detect missing or erroneous data. Logs can also be useful in reconstructing "crashed" systems.

Write Cycle Counting Procedure

Cycle counting should be the principal ongoing performance measurement, diagnostic and problem-solving approach, basically "SPC for inventory control." It is a procedure to help determine if the other inventory procedures are working. The procedure needs to fully reflect the overall systems flow and timing. For instance, if inventories are updated daily by MIS, it may be necessary to adjust for unposted transactions prior to completing reconciliation.

• In a high-volume repetitive production in a backflush environment, It is necessary to log production occurring between backflushes and to know precisely when these were performed. In addition, knowing the whereabouts of discrepant material routed for inspection and alternate processing, but still unposted, is vital, since counts of material in the area may omit it.

Consignment inventory rules sometimes need revision to facilitate cycle count reconciliation as well.

Run a Control Group

Once the program is underway, team members often want to quickly start an ambitious, large scale program of cycle counting. Some people come running out of cycle counting seminars, flushed with enthusiasm, wanting to use their new tools immediately to vanquish the demons of inventory error. In general, don't. Why? Because in most cases the infrastructure isn't yet in place to support an effective cycle counting system. Make sure it is in place BEFORE starting regular cycle counting, or you're in for some big disappointments and loss of credibility.

In the meantime, use the initial survey population as a "control group" to help regularly and frequently assess the propagation of errors. Count and reconcile these items over and over again until you start to get the hang of what's wrong. Chances are, this will be a very tough chore initially, because of the many things wrong with the system. Don't be surprised if you can't identify many item error causes with certainty in the initial period. As you count them more frequently, there will be shorter intervals between counts, increasing the likelihood that error causes can be isolated. As the basic controls identified above are established, they will eliminate many errors and make it simpler to identify those that remain. Make sure that problems are posted to the issues list, 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 and have mastered control group diagnostics, they can turn the cycle counts loose on a larger scale.

Remind your people that control group accuracy levels are about as representative of all items as MENSA members and basketball players are of the general human population. By definition, the control group is skewed, because it receives inordinate attention and care as a diagnostic tool. We've actually seen companies boast about the control group accuracy as representative of all items, declare victory, then go home smiling. The control group only indicates the level of propagation of errors, and if you work at it, their cause. Even that could be wrong, since employees quickly discover which items are measured in the control group and pay special attention to them. Rotate items occasionally.

When the control group is running in the mid 90% accuracy range, it's time to turn on large scale cycle counting. Companies trying to turn it on too early may get swamped by massive numbers of irreconcilable errors. Some even compound the errors when they start posting corrections before they've got reconciliation/posting procedures working satisfactorily.

Most error causes can be found and resolved during the initial control group period.

Make Physical Changes

Paint lines on floors to indicate drop points and department boundaries. Record tare weights on all containers used in weigh counting. Use bar code or other accurate, efficient data acquisition methods. Deploy counting scales where appropriate. Isolate obsolete inventory for final dispositioning. Assign designated drop points for discrepant or "hold" status material. Ensure that there is adequate and appropriate material handling and storage equipment. Sometimes something as simple as lines on the floor, a fence or a gate can make a significant difference. Consider a move to a process-related flow, which may greatly simplify material/inventory control.

A comprehensive facility location system is essential for success in locating material quickly and efficiently when it is needed All inbound and in-transit material should be directed to locations, or they should be assigned upon arrival. If the location system is simple enough, materials might be automatically routed. Reduce the number of possibilities to make mistakes. The location codes should be plainly marked all around the facility, so that there is no confusion about the location. Isolate/purge excessive, obsolete and damaged inventory.

Make Information Systems Improvements

Sometimes computer, software and MIS operational problems contribute to inventory problems. System users tend to overstate these, although we have seen them over and over.

Make sure to set up system tables/data fields properly, or they will generate erroneous transaction data. For example, if bill of material codes weren't set right, then certain inventory transactions wouldn't process. Once the system is set up wrong, these errors may take months to detect and diagnose. These can't simply be changed with impunity, but require careful prior testing and well coordinated changes, usually with the assistance of MIS and/or software suppliers.

Computer batch update processes are sometimes set up improperly or fail to execute as planned, creating erroneous or untimely postings. This is especially critical to three shift operations, where mission critical systems can't be down long and botched batch updates can significantly impede company operations. Ensure that they're set up, tested and properly operated. Ensure that there are recovery procedures in place in case things don't always work properly.

At one company, there were several major bugs not detected in the early conference room pilot, which was done before enhancements were made to the software. The system pilot testing was not very rigorous compared to the one the team did during the inventory accuracy project, when every single process and option was simulated on line, with an exhaustive review and rewrite of procedures done concurrently, followed by employee retraining. Examples of problems found and corrected: scrap transactions costing improperly, move tickets failing to print properly, improper costing with alternate routings, system parameters set up incorrectly causing backflushes to not calculate correctly.

Ensure that software documentation is made site-specific, so that sufficient simple, clear instructions applying to local conditions are made available to personnel, who should be thoroughly trained in these procedures.

Don't Forget Accounting Systems

Even if a system is "integrated," there may still be a few things that it does differently to accounting than to operations, such as scrap transaction costing, adjustments, etc. In addition, Accounting might have developed some "hand journal vouchering" procedures that circumvent the purpose of the system. Run tests to ensure that operations and accounting reports balance and that all transaction types process correctly and all transactions are accounted for.

Sometimes, system reports are too cumbersome to be helpful to the reconciliation effort. For example, in one company, Finance received a huge 16 inch thick report every month that didn't balance and didn't lend itself well to analysis. They worked to get better inventory cost sub-ledger/account data, better suited to check against other cost and operations data and reconciled in more frequent intervals.

System set-up concerns cited above are equally applicable to Accounting.

Conduct Control Studies

Many industries, like wire manufacturing, for example, have complex wrinkles. For example, the way wire strands are twisted and compacted, wire customer requirements and the shape of wire drawing dies, can all have a significant effect on material consumption and inventory. Even when these are brought under control, the way transactions are reported can also affect accuracy.

To test the system out on a real life basis, conduct a limited number of highly structured "control studies," count and double check everything issued, everything consumed, all scrap, rework, and compare that to what the computer transactions/database thought was happening. It may be discovered that some bill of material, process, tolerance and transaction problems, need correction. Product lines with unacceptable process capability and tolerancing issues may be identified and targeted for correction, usually by a separate project.

Other Useful Things

• Conduct frequent walking tours through the facility with the project team, local officials and employees. Listen to what they say and look for obvious problems. Make assignments or take action on the spot. A picture is worth a thousand words, and the real thing is worth a thousand pictures.

• Focus on housekeeping. A sloppy, crowded, disorganized area is a warning that there are deficient attitudes, procedures or that facilities and equipment aren't up to the job. These things don't always stand out in reports. There's no substitute for being on the spot. Attack housekeeping problems head on. Consolidate material, improve marking and labeling, have a proper place for everything, work on rescheduling/re-routing materials to alleviate congestion. If housekeeping can't be resolved by checklists and new emphasis on orderliness, then go deeper down into the root causes and start solving the underlying problems.

PROCESS-RELATED DIFFERENCES

Most inventory accuracy literature uses conventional discrete manufacturing as a model. Repetitive, JIT, cellular flows, process and project-oriented models all introduce some special requirements. This section provides a brief overview of these.

Repetitive, JIT, Process-Oriented Flows

Repetitive process inventory control needs some different approaches. It's about 80% the same as discrete, but that other 20% is extremely important. Much of the product moves so fast that it's hard to even verify. To summarize some key differences:

• Yields require much more attention, especially where process capability is an issue.

• Because of high volume and more continuous flow, small errors, even one or two percent, quickly add up to massive variances.

• "Backflush" automated component relief needs to be watched closely, due to the above two items and also if there are component substitutions, bill-of-material errors, or discrepant material moves. In some cases, it may be advisable to go to discrete, counted material issues, then reconcile yield upon completion.

• A process flow or cellular layout/management approach makes it much easier to control inventory than for a functional or job shop scheme. Many companies realize this and are gradually shifting to a cellular paradigm for this and other reasons.

• In a process with many activities, don't try to count and reconcile every activity. Instead, reconcile various "pay point" or milestone activities, or even logical stocking points. If there are persistent discrepancies, consider extending controls into the upstream activities of most likely error sources until the causes are found and corrected.

• Trends in repetitive manufacturing indicate a move towards point of use delivery and storage, supplier-managed inventories (including consignments), backflush and work-orderless/paperless activity control, including "rate-based schedules." Some companies periodically close and reconcile rate-based master orders, to help determine performance.

• Some process plants are actually continuous process operations. Inventory control may be accomplished with check points, such as periodic meter readings, or with production rate monitoring. Material consumption may be checked against product characteristics such as specific gravity, density, durometer, coating thickness, etc. If one parameter is off, it can significantly affect other key parameters or resource consumption.

• Cells and dedicated lines generally have process-oriented flows and focus on families of similar items. Such facilities are inherently easier to control. Often, cells are largely self-managing, so employees will handle their own inventory control.

• Simplified control techniques, such as visual methods (Kanban, calibrated containers, two-bin), average inventory estimates, gateway/paypoint, and zero inventory make to order-only are becoming more common.

Project Oriented Industries

Make to order businesses often plan and control activities by job, project, order, or even lower level "work packages." It is commonplace to track inventory and costs by one or more of those entities. Such work is more likely to be engineered to order as well. In addition, customers sometimes have ownership/control over inventories and even designs and specifications.

• Project/job, work package, configuration, lot and serial number control are often additional tracking requirements. This makes inventory accuracy more difficult, because these may be included in inventory control, cycle counting and reconciliation.

• Inventory costing may get more complex as well, since actual or average costs are often maintained and the same item may have different costs for different projects/work packages, etc.

• It often makes sense to cycle count by project in these types of businesses. The ideal time to count is when maximum benefit will be gained, which is just before major decisions affecting cost and schedule are made, such as planning and procurement, or at the end of a project phase, when residual inventory must be determined and dispositioned.

• Since customers sometimes own all or part of the inventory, accountability standards are sometimes higher. It's not so easy to "write off" a loss of material. In cases of adjustments for common-use inventory, who pays is a burning issue.

CONCLUSIONS

As with most major change efforts, inventory accuracy needs strong, continuing management support to change the culture and practices.

• Very little happens in some companies until top management makes poor results unacceptably uncomfortable to those failing to deliver.
• Even after that, things sometimes don't improve until meaningful performance measurements and improvement mechanisms are implemented.
• Strong project leadership is the next most important factor, along with a sound approach and an implementation plan.

• The price of continued inventory accuracy success is eternal vigilance. When programs lose "mindshare," results often quickly deteriorate.
• Inventory accuracy is a permanent state of mind, not a quickie, one-time project. Periodic backsliding needs constant attention. This is one area where zealots and dictators are needed!

Successful inventory accuracy efforts often have five phases:

1.Realization that there is a problem
2.Agreement on a solution approach
3.Problem-solving phase
4.Records correction
5.Ongoing cycle counting/maintenance

• Inventory accuracy doesn't really improve by counting things. It only improves when basic systems, procedures and training improve.
• Identifying issues and resolving them so that they never occur again is the key to achieving accuracy goals.
• Leadership and peoples' attitudes are the two most important factors for success.

There are some significant differences in attaining inventory accuracy in non-discrete, process, repetitive, cellular and project-oriented enterprises.

Learn them well and adapt to their needs. Realize also that most companies are a mix of different environments, so mix approaches if warranted.

George J. Miller, CFPIM, is Founder of PROACTION. Prior to selling the company to Paul Deis, George had worked with dozens of companies in assignments involving productivity, quality and service improvement, business systems, change management, acquisitions, divestitures, expert witness testimony, and others. Prior to founding PROACTION in 1986, he was Vice President of Marketing for Western Data Systems; Director of Planning and Development and Assistant Director—Operations for Purolator Technologies (PTI); Consultant for Booz-Allen & Hamilton, and Manufacturing Systems Manager for Becton-Dickinson.

Paul Deis, CFPIM, is CEO, PROACTION. He brings over 25 years of consulting and senior executive experience to his work, including detailed work with nearly 60 companies. Prior to acquiring PROACTION, Paul's experience includes running a small ERP software company, leading other consulting businesses, prior work with PROACTION, Manager at Deloitte & Touche, VP Manufacturing at Raypak, Inc., where he was very successful with an early Lean management initiative, and dozens of projects in the areas of enterprise software, operations management, crisis resolutions, in a wide variety of industries, business types, and scales. Website: PROACTION - Generating Best Practices

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By: Bob Hamilton | 14/11/2009
If you own a dollar store don’t ever allow the dollar store merchandise in your store to run so low that these types of issues arise. Maintain solid relationships with your primary dollar store suppliers. Have plans in place should there be an order mix-up. One of the best solutions is to know the dollar store suppliers located close to your store. While they may not carry all the in-demand items for your store they will offer a good variety of items to get the shelves partially refilled.

Stand Over the Crowd with the Dollar Store Merchandise you Sell

By: Bob Hamilton | 14/11/2009
With such high dollar store sale volumes and the tight margins tied to those sales, everything possible must be done to curb costs. Yet at the same time it is important to continually grow your dollar store sales. The bottom line is the very success of your business depends on the products you carry and the job you do at reducing the costs associated with those products.

Key Actions to Starting a Dollar Store

By: Bob Hamilton | 14/11/2009
Once you have decided you are definitely starting a dollar store and you have developed a plan of action, invest the time required to find the perfect location. The good news is in today’s marketplace there are many outstanding locations available. The other side of the coin however is in today’s economic environment you must find a great location; second-tier is not acceptable. Be sure there are oodles of your targeted prospective customers in the vicinity of your prospective location.

The Conventional and Unconventional Uses of Shipping Containers

By: Marcus Sen | 14/11/2009
The uses of shipping containers are expanding from serving traditional purposes such as loading and transportation to being used in constructions of museums and even luxury residential unit.

Ambient Media Advertising

By: scollinsevan | 14/11/2009
As we all know ads depends more on budget and the targeted audience.

How To Start A Mail Order Business At Home

By: Brian Clark | 14/11/2009
Trying to start any business requires time management and pretty much a desire to succeed so with that being said I present to you a step by step guide on how to start a mail order business from home.

Inventory Accuracy in 60 Days

By: Paul Deis | 15/08/2006 | Small Business
Despite great advances in manufacturing technology and management science, thousands of organizations still don't have a handle on basic inventory record accuracy. This paper offers an approach that has proven successful a number of times, when companies were quite serious about making improvements. Not only can it be accomplished, but it can likely be done within 60 days per area, if properly managed. The hardest part is selling people on the need to improve and then keeping them motivated.

Process Improvement - a How to Guide

By: Paul Deis | 15/08/2006 | Strategic Planning
This paper first defines key terms, then discusses how to improve inputs to the process, the improvement process itself, and wraps up with some "lessons learned" advice. Although production and manufacturing terms are employed, nearly everything herein works for service businesses and office operations.

Lean and Erp - Can They Co-exist?

By: Paul Deis | 11/08/2006 | Strategic Planning
Some pundits have opined that ERP is dead and Lean replaces it. That's like saying that the car chassis is replaced by the new engine. ERP is the backbone system of a modern enterprise, for integration of supply chain and administrative activities. Lean is a management philosophy, with supporting tools and techniques to run a business much faster, cheaper better. They are NOT mutually exclusive, but Lean ERP must differ from the traditional approach.

Erp Implementation Lessons Learned

By: Paul Deis | 10/08/2006 | Strategic Planning
Despite great advances in manufacturing technology and management science, thousands of organizations still don't have a handle on basic inventory record accuracy. This paper offers an approach that has proven successful a number of times, when companies were quite serious about making improvements. Not only can it be accomplished, but it can likely be done within 60 days per area, if properly managed.

Reengineering: 40 U$eful Hints

By: Paul Deis | 10/08/2006 | Strategic Planning
Business Process Reengineering (BPR) principles have been around for a long time, and in recent years they started coming together as a discipline, incorporating world class business principles and focusing on quantum improvements. BPR is the complete or partial "reinventing" of how business processes are done, to attain major performance improvement. This article will contribute by stating and helping to clarify a number of important principles, plus useful insights, techniques and hints.

The New Conference Room Pilot

By: Paul Deis | 10/08/2006 | Strategic Planning
This article looks at the definition and role of the conference room pilot in success of major business system projects. Most importantly, the article discusses how to set up and operate a CRP.

A Guide to Inventory Reduction

By: Paul Deis | 10/08/2006 | Strategic Planning
Inventory is the largest single asset on the balance sheet of many manufacturers and distributors. It is usually the most expensive asset to own and maintain. This paper addresses how to manage Inventory investment to optimum levels, which means a reduction or major redistribution of it in most companies.