Inventory Accuracy is Critical to Your Success
By Jon and Matt Schreibfeder
We are working with a new client whose management is frustrated. The quantities of products on the shelf in their warehouse do not agree with the on-hand quantities in their computer system. As a result:
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- Salespeople cannot tell a customer if the quantity of an item they need is available for immediate delivery unless they run out to the warehouse to visually check stock. Even if the item is on the shelf, they have no idea if it has already been promised to another customer.
- When they perform a physical count, they discover that a lot of material is missing and must be “written off”. Their investors and bank doubt the accuracy of their financial records.
- Many hours of warehouse labor are wasted searching for missing material
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” 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.
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 of 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:
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- 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).