A Quick Test for Inventory Accuracy

By Jon Schreibfeder

Recently our articles have concentrated on inventory management.  That is the planning process.  Making sure you have the right quantity, of the right item, in the right location, at the right time.  Successful inventory management leads you to reorder products when your net available quantity of an item (i.e., ON-HAND – COMMITTED + ON REPLENISHMENT ORDER) is less than or equal to its order point (i.e., ANTICIPATED LEAD TIME DEMAND + SAFETY STOCK).  But what if your available stock quantities are not accurate?  You will either order too late or too soon.  And you won’t be able to reliably inform your customers of what material is in stock and ready for immediate shipment or delivery.

Many organizations try to maintain accurate on-hand quantities with a once- a-year full physical inventory.  That is a “wall-to-wall” count of every piece of every product in your facility.  But even if this counting of every item results in totally accurate on-hand quantities, how long do these counts remain accurate?  Usually until you resume filling orders and receiving stock.  Other organizations will cycle count (counting a certain number of items every day) trying to count every item in stock three or four times a year.  While this may seem like a good idea, there may not be enough available time to maintain the process on an on-going basis.  And it probably is not the most productive way to maintain an accurate inventory.

For most organizations, a small percentage of items account for the majority of picking activity.  It is not unusual for 10% to 13% of inventory items to account for 80% or more of material disbursements.  Usually, these are the products that are most susceptible to on-hand quantity discrepancies.  After all, every time someone goes to a bin location to fill an order for one of these products is another opportunity for a mistake to happen.  And your customers probably count on you consistently having these fast-moving items in stock.  It is extremely important that the on-hand quantities of these “A” ranked items are accurate.  Your slower moving products are probably very accurate.  Warehouse workers rarely access these items.

Many of our clients will try to count “A” ranked items (i.e., those responsible for 80% of disbursements) five to six times a year.  Other stocked products can be counted once a year.

But before you begin a rank-base cycle counting program it is a good idea to perform a quick test to ascertain your current inventory accuracy.  We suggest you select all the items in each of your warehouses that have had usage in all 12 of the past 12 months and count these products twice.  That is, you will count all of these items and then count them again about three weeks after the first count.  If there is a significant discrepancy during the second count, review recent transactions to try to determine the reason for the discrepancy.  We normally consider a significant discrepancy to initially be greater than ± 5% or ± $50.  Eventually most of our clients will lower their tolerance to ± 2% to 3% or ± $30.  It is our goal that no more than 3% of the items you count will experience a significant discrepancy.

In trying to determine the reason for a significant discrepancy for an item:

  • Ensure that all material movement is being properly recorded. Often warehouse workers can identify receipts or disbursements that are “falling through the cracks” of your procedures.
  • Be sure that one item is not being substituted for another without it being noted on applicable paperwork
  • Determine if units of measure are being confused. For example, are cartons rather than pieces being pulled to fill an order?
  • Could you be a victim of pilferage?

Once you have determined your current level of accuracy begin your normal rank-based cycle count program.  Warehouse management should be responsible ensuring that cycle counting is conducted according to the established schedule.  Remember that achieving effective inventory management is impossible without knowing exactly what is in your warehouse(s).