Inventory Accuracy Hints

This 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.

This article is also available on our website: PROACTION - Generating Best Practices

Does your company need to improve inventory accuracy?

Often, writings on inventory accuracyimprovement focus on techniques, such as cycle counting. While this is a very important item in thetoolkit of the inventory or materials professional, cycle counting is onlymainly a measurement and diagnostic tool. Think of it as SPC (Statistical ProcessControl) for inventory accuracy. Youprobably aren't going to cycle count your way to inventory accuracy, withoutalso making major improvements in the material handling, transaction control,reporting and feedback process. For manycompanies, using cycle count adjustments to correct inventory record errors islike trying to bail out the ocean with a spoon, since errors may be made farfaster than they can be economically corrected.

So what should you do?

Aneffective inventory accuracy program should consist of the following elements:

· Inventory accuracy measurement criteria (metrics)- including item/part number identification, quantity and unit of measure,location and posting timeliness. Somecompanies also measure other related data, such as customer/contract number,configuration/revision letter, lot, serial number, grade and expiration date. I have visited companies claiming to have 95,98 or 99+% record accuracy that quickly shrinks to mid-double digits when weapply our uncompromising criteria objectively. Sometimes companies have invalidcriteria, sometimes they deceive themselves, sometimes their employees deceivethem, sometimes unconsciously or unwittingly.

· A clearly defined material anddocument flow, with control and tracking points identified. These should beclearly marked out in the shop and employees should be thoroughlyindoctrinated. A simple flow chart of the desired system is an excellenteducational tool. It should include material, document and transaction routing,"drop points," flow times, logging, batch controls, reports and auditing.

· Adequate facilities, space, storage andmaterial handling systems and other equipment. Good housekeeping practices are a must. Itmight be necessary to physically secure the inventory with fences, gates andlocks, if floor discipline cannot be achieved otherwise. Make sure that there is a place foreverything- materials, equipment, documents, and of course, people. Use signsand markings to make these obvious.

· Effective policies and procedures formaterial handling, storage, identification, packaging, labeling, datacollection, counting and transactions. Use good forms and tools to structurework properly.

· A training/certification/assessment program for all people who handle or track inventory, or who are in a position toinfluence how well that works. Consider PROACTION's Inventory AccuracySeminar. Use APICS materials.

· An ongoing assessment and diagnostic program,such as cycle counting. Such programsmay be administered in any one of several organizations within the company, aslong as the manager in charge is sensitive to the needs of inventory accuracyand earnestly dedicates the needed effort to the program. That being said, webelieve that 3rd party oversight, by an internal or external auditgroup or an outside consultant, is needed to keep the program on track.

· Effective inventory transaction cut-offcontrol and reconciliation procedures, including accounting for alltransaction documents. Don't dare even THINK about real cycle countinguntil you get control of this, although it is recommended that you start earlywith a small control group, to debug the process and begin error diagnostics.Expand to a larger cycle count program only after you know what you're doing.

· Transaction control system to posttransactions and provide inventory status to all departments needing it,preferably via an on-line computer system. Bar code and other automated data collection systems are desirable, ifcost-effective, but are no means mandatory to run an accurate system. Visual control systems, such as Kanban,2-bin, pallet squares, etc, can sometimes reduce or even eliminate the need formost transactions and automated systems, in the proper circumstances.

So, you maybe thinking, all of this is fairly straightforward—why isn't everyone doingsomething like this successfully? It'sactually much harder than it looks—why:

· Attitude: Not everyone agrees thatinventory accuracy is important. I say: Are you satisfied with the alternative?It requires a high degree of consensus on the approach, responsibilitiesand "ownership." In extreme cases,company executive leadership may need to step in to help change the culture andoversee required changes.

· Discipline is needed, day after day, yearafter year. This is not a one timecleanup job that management can declare victory for and just go home. It requires that someone be at least a parttime "Accuracy Czar," to keep the effort focused and permanently active.

Implementation Ideas

Setting up the system:

• Issue executive directive on need for inventoryaccuracy and accountability. Formally announce improvement and maintenanceprogram. Establish management authority and accountability for dataaccuracy/integrity.


• Create transaction and facility flow charts.Train everyone involved.


• Fix and use part numbers (make sure BOMstructured properly), locations


• Write inventory stock keeping and transactionprocedures and training materials- train everyone involved.


• Publish a data integrity policy and work theseconcepts into company procedures and training.


• Review the adequacy of facilities and equipmentto store and handle material. Make needed improvements to support the materialcontrol approach agreed upon—Space, racks, shelves, bins, conveyors, fences,gates, fork lifts, ladders, scales, etc.


• Develop performance measures. Publish themregularly, on paper, bulletin boards, hold people accountable, with appropriaterewards an punishments, reflected in performance reviews, compensation, praise,etc. Use tools, such as cyclecounting/Statistical Process Control.


• Establish an objective auditing program.

Operational Recommendations

• Use PROACTION recommended data accuracy criteriaand cycle counting procedures


• Keep flow charts on nearby walls- refer to themwhen needed


• Maintain locator controls as practical


• Use appropriate storage media—Racks, shelves,bins, pallets


• Make judicious use of automation where feasible—conveyors, automated Storage and Retrieval Systems (AS/RS), automated datacollection, such as bar coding, automated counting/weighing scales, automaticbaggers, pallet wrappers, etc.


• Use standard container sizes, weights,quantities. Mark weights and standard quantities on containers.


• Use authorized sealed cartons- Recounts of these sealed cartons not usuallynecessary


• Use visual control methods- KanBan squares,clear plastic calibrated containers, etc.


• Post transactions as real time as is practical


• Put most frequently used items in the mostaccessible place. Store at point of use, if practical and controllable.


• Practice excellent housekeeping.


• Be careful with descriptions, units-of-measure.


• Purge obsolete, discrepant, unneeded material.


• Use good labeling practices.


• Label, track, monitor shelf life items.


• Array material for easier access and counting.

Inventory Tracking Approaches

• Perpetual- computer or manual transactions


• Discrete issues control


• "Backflush" issues control


• "2-bin", min-max or kanban control, visuallydriven


• "2-bin", min-max or kanban control, perpetualinventory driven


• Job lot control


• Out of control (not recommended)

Verification Methods

• Control group (start with this)


• Periodic inventories


• Cycle counting


• Location audits


• Transaction review

WIP Inventory

• Maintain excellent housekeeping


• Report transactions as timely as possible,including scrap, adjustments, exceptions


• Use hook or station numbers on production lines


• Use standard container sizes, weights. Markweights and standard quantities on containers.


• Have standard bins, racks marked


• Minimize WIP, remove all material not needed forX hours


• Mark quantities on sealed containers


• Assign workers responsibility for monitoringcertain items


• Use feeder lines, cells, make as needed and keepparts on line where practical

ABOUT THE AUTHORS

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.