Inventory Accuracy in 60 Days

INTRODUCTION				MEASURE ACTUAL PERFORMANCE
Do you have inventory accuracy problems? Typical				Why It's Difficult
symptoms:o Lots of inventory errorso Surprise				This too, is more difficult than it sounds. Many
backorders, unplanned shortages, "lost material"o				companies are simply unable to reconcile book to
Nobody believes the records-- numerous calls to				physical inventory because they:o Have multiple,
"check" on availabilityo Air freight bill exceeds the				incompatible inventory systems.o Can't master the
national debto Nasty financial reporting "surprises"o				timing "cutoffs" for count reconciliation.o Poorly define
Lack of consensus on importance of accuracyo Lack				and enforce material and transaction flow procedures
of consensus on how to measure ito Inability to				and policies.o Don't have people assigned to and/or
reconcile inventories, cycle countso Error causes				schooled in inventory records reconciliation.
largely unknowno Weak/no company tradition of data				Initial Survey
accuracyo New systems/software implementation				You'll need an initial survey to assess the level of
causing more confusion				accuracy. This is recommended, even if there is an
Solution recommendations are presented as follows...				ongoing system in place, to help verify how well it is
ORGANIZE PROJECT				working. To assess the level of inventory accuracy,
Results are usually best when there is a bit of a crisis				pick a representative and statistically valid sample of
atmosphere established. Business as usual won't				items, crossing different product lines, processes and
usually serve to get serious inventory accuracy				areas. Consult an expert in QC or SPC (Statistical
problems fixed within two months. Sometimes a				Process Control) if not sure how to do this.
humbling blow, such as losing millions in an inventory				Make sure you have agreement on what is to be
"write-down", or an unfavorable "write-up" by a				measured and how. Get agreement on the
customer, is helpful to shatter the status quo and				measurement criteria (see section II, above). If there is
energize an organization to begin work in earnest on a				more than one inventory system, agree on which
solution. Top level executive action works best to				one(s) you will be reconciling to. Be aware of how
motivate and mobilize people. At a minimum, perception				these systems are updated and enlist the cooperation
of a costly problem is needed, with some realization of				of those involved in their operation and maintenance.
a need to correct it.				Better results will be obtained if all transactions are
This article is also available on our website:				posted before counting, especially if the inventory
PROACTION - Generating Best Practices. It is an				system is in poor working order. This helps eliminate a
excerpt of a paper originally written by George Miller,				very common source of errors, "cut-off" timing. In
Founder of PROACTION. It has been modified and				particular, watch out for items in staging areas, QC,
updated by Paul Deis, PROACTION CEO.				Shipping, Scrap, Bond, etc. It's best to do the survey
Try to tie company goals and objectives to project				while operations are shut down, since it further
objectives, to help ensure that people "buy-in" to the				reduces the chance of transaction cut-off problems.
project and will be measured and rewarded on the				For improved objectivity, it is recommended that
results.				people who are removed from "ownership" of the
Once the initial goals are attained, don't just declare				current system be used to audit or even supervise this
victory and go home. Set up a lower key ongoing				survey. Bias may be inadvertently or intentionally
maintenance effort to ensure that the problem stays				introduced otherwise.
fixed and that further improvements are made.o An				The survey should be used to help establish "baseline"
Executive Sponsor is needed, someone with the clout				accuracy by area- for instance- "Store Room #1,
to keep resources and attention focused on the				"Shipping Area", QC Hold #3", "Disk Assembly," and
problem until completion. Results are usually directly				"Total." Publish the results after careful verification, then
proportional to the strength and commitment of the				discuss and act on them. The initial survey often helps
executive sponsor. Sometimes it's not possible to get				to establish the dialogue that propels successful
a sponsor until a case is made that there's a problem.o				projects. It is possible that some diagnostic work can
A Project Leader and Multi-Disciplinary Team is				be done during the survey, but in general, we have
required, preferably from Operations, Materials, Finance,				found that diagnostics are problematic at best for a
Distribution and possibly, Process and Design				poor inventory system without baseline figures, good
Engineering (depending upon the problems identified). In				procedures in place and regular cycle counts.
a large organization, a full time project leader may be				FIX THE SYSTEM
needed. People will be needed for inventory				Institute Improved Policies and Procedures
verification, cycle counting and reconciliation. The				Procedures are often in need of a major overhaul.
amount of manpower needed is dependent upon				Many are poorly documented, unworkable or
organization size, complexity and magnitude of the				cumbersome. The project diagnostics, team meetings,
problem. For example, one 500,000 sq. ft. process plant				cycle count results, conference room pilot and
with about 4000 items and 30+% inventory accuracy				employee suggestions can all funnel information to the
needed a full time coordinator, four full time cycle				people who revise procedures.
counters and two part timers for six months, tapering				Identify every single transaction and procedure
off after that. Often, consultants and corporate				potentially affecting inventory accuracy. Review and, if
auditors participate to make projects more				necessary, enhance, simplify and document them, then
successful.o A Project Plan is needed, incorporating				thoroughly train all applicable personnel in their use.
recommendations from this paper and other				Keep simple concise procedures available for
company-specific activities. This plan, along with a				employees' ready access. Have employees practice
running list of accuracy related issues and actions,				drill in procedure use. An inventory system test or
should be used to drive the project and focus efforts				"demo" database is a good tool to practice with.o New
on activities needed to attain accuracy goals. Issues				procedures/changes should be reviewed with users in
should be identified, put on a master issues list,				advance, thoroughly tested and documented prior to
assigned to appropriate personnel to solve, then				implementation.o Procedures should cover all aspects
discussed and tracked at every weekly meeting for				of inventory transactions: receiving, inspection, stores,
the duration of the initial improvement project.				issues to floor stock, production, substitutions, transfers,
The plan should contain specific activities,				scrap, rework, return to vendor, completions to stock,
responsibilities and dates. It needs to be followed and				shipments.
managed competently. Unless carefully managed, a				Set Up Basic Inventory Movement Structure and
substantial amount of project time will be spent trying				Controls
to figure out what the problems are, and getting				Most companies lack a common understanding on
resources assigned to them.				how inventory transactions- material and paperwork -
Choose Your Battles				should flow. One of the first evident symptoms of this
Realize that there are limited resources available, and				is an almost total inability to reconcile cycle counts of
that these cost money, so prioritize by tackling issues				active items, due to transaction "cut-off" problems
offering the best payback and those that can be won.				attributable to unpublished/unenforced transaction
Actual examples:o For one company, it was very hard				document flow times. Forget about a full cycle counting
to keep track of color concentrates, since they were				program until this is corrected. First, establish, implement
ladled out of barrels, were kept out on the floor, and				and enforce:o Inventory "transaction flow map"
didn't cost all that much anyway. So, these and other				showing all work centers/cells/stores areas, material
similar items were placed on "two bin" order control				and paper flows, transaction types and account
and expensed, eliminating a whole class of inventory				numbers, so that people will know what should happen.
record problems with little more than a stroke of a				When people see a graphical depiction of system flow
pen.o Another firm had three storerooms. The first one				and have it explained to them, it often helps them to
contained fabrics for airline seats and was very well				decode the mysteries of a system.o Flow times -
organized and well run, so minimal effort was				How long it should take to receive a part, move it to
expended to improve it. The second one was a poorly				stores, issue it, move it between operations. Publish
controlled raw material storeroom with a short-timer				these flow times, post them, and get people
supervisor about to retire. Material lead times were				accustomed to working with them. Highlight
only a few days, so the effect of errors was less				transactions missing flow time targets.o Cutoff times -
serious. We elected to wait out his retirement, which				How long it should take to post a transaction after it
was only a couple of months away. The third				physically occurred. Publish and highlight similar to the
storeroom contained purchased parts and specialty				above item.o Drop points - Where material and
fabrications. Lead times were long, costs were high				transaction documents should be placed. Mark these
and the consequences of errors were serious, so we				areas plainly to reduce confusion. Painted lines on the
elected to initially focus on this area. To narrow scope				floor, signs, sometimes even fences, may be needed
even further, we initially concentrated only on items				to get the point across.o Logging and batch controls,
needed within the lead time horizon and ignored				especially for key "gateway" transactions such as
obsolete and excess materials.o The VP, Finance in still				receiving and shipping. Comparing daily posted
another manufacturing company agreed to waive				transactions to the logs often helps detect missing or
physical inventories for areas demonstrating that				erroneous data. Logs can also be useful in
accuracy goals were being met, freeing up resources				reconstructing "crashed" systems.
for more productive purposes.o In general, controlled				Write Cycle Counting Procedure
storerooms are the easiest to improve, since they are				Cycle counting should be the principal ongoing
often physically restricted areas, have supervision				performance measurement, diagnostic and
more oriented to accuracy concepts, transactions less				problem-solving approach, basically "SPC for inventory
subject to process-related errors and they can be				control." It is a procedure to help determine if the other
more easily counted. Then attack work-in-process				inventory procedures are working. The procedure
areas, which are generally more challenging.o One				needs to fully reflect the overall systems flow and
team uncovered dozens of accuracy issues. These				timing. For instance, if inventories are updated daily by
were prioritized so that problem-solving resources				MIS, it may be necessary to adjust for unposted
could be focused on the best payback items with the				transactions prior to completing reconciliation.o In a
greatest chances of resolution.o A few companies we				high-volume repetitive production in a backflush
worked with have gotten almost immediate payback				environment, It is necessary to log production occurring
by conducting location audits. Simply check each				between backflushes and to know precisely when
location and compare it to your records. Physical				these were performed. In addition, knowing the
locations not in the records may be exciting windfalls.				whereabouts of discrepant material routed for
The opposite case is cause for a corrective cycle				inspection and alternate processing, but still unposted, is
count adjustment. This approach requires far less				vital, since counts of material in the area may omit it.
resources than a physical count inventory.o Most				Consignment inventory rules sometimes need revision
companies observed weren't able to reconcile all				to facilitate cycle count reconciliation as well.
errors, especially in the beginning. They were advised				Run a Control Group
not to even try. It's like attempting to bail out the ocean,				Once the program is underway, team members often
because errors were being made faster than				want to quickly start an ambitious, large scale program
inventory balances could be corrected, let alone				of cycle counting. Some people come running out of
diagnosed and reconciled. So, they focused on				cycle counting seminars, flushed with enthusiasm,
eliminating the principal CAUSES of errors initially. Every				wanting to use their new tools immediately to vanquish
time a cause is identified and corrected, it may likely				the demons of inventory error. In general, don't. Why?
eliminate dozens, hundreds or even thousands of				Because in most cases the infrastructure isn't yet in
future potential errors. This concept may be difficult to				place to support an effective cycle counting system.
sell to some accounting personnel, who have been				Make sure it is in place BEFORE starting regular cycle
conditioned to balance every debit and credit to the				counting, or you're in for some big disappointments and
penny. Choose your battles!				loss of credibility.
DEFINE INVENTORY ACCURACY				In the meantime, use the initial survey population as a
What It Isn't				"control group" to help regularly and frequently assess
We have often been told by representatives of				the propagation of errors. Count and reconcile these
various companies that their inventory accuracy was				items over and over again until you start to get the
high, even "world class," 95, 98 or even 99+%, when in				hang of what's wrong. Chances are, this will be a very
fact, there were surprise backorders, unplanned				tough chore initially, because of the many things wrong
material shortages and unexplained excess inventories.				with the system. Don't be surprised if you can't identify
When asked about inventory accuracy, shop floor and				many item error causes with certainty in the initial
stores personnel would just smile and tell us their				period. As you count them more frequently, there will
inventory horror stories.				be shorter intervals between counts, increasing the
So why does this happen? There are different ways				likelihood that error causes can be isolated. As the
of measuring it. For example:o One firm thought their				basic controls identified above are established, they will
inventory records were outstanding because they				eliminate many errors and make it simpler to identify
were accurate within $20,000 for a $6MM inventory,				those that remain. Make sure that problems are
or 99.7% accurate, they boasted. Well, it turned out				posted to the issues list, prioritized, assigned for
that this was merely an arithmetic sum of the financial				resolution, discussed at meetings, completed,
errors and that the absolute value of the individual				documented and resolved.
errors was actually $900,000. Even this sounded like				At some point, when the team feels that they have
85% accuracy.				basic controls in place and have mastered control
But, operations people know that products are built				group diagnostics, they can turn the cycle counts loose
with specific components and that customers are				on a larger scale.
shipped specific products or services, not dollars.				When the control group is running in the mid 90%
When other factors like posting cut-offs, location errors				accuracy range, it's time to turn on large scale cycle
and part number errors were considered, it was				counting. Companies trying to turn it on too early may
calculated that accuracy was actually only 66%!				get swamped by massive numbers of irreconcilable
Inventory accuracy is the probability of finding the right				errors. Some even compound the errors when they
items in the right location and quantity that the books				start posting corrections before they've got
say are there. 66% accuracy means that 34% of				reconciliation/posting procedures working satisfactorily.
items surveyed had quantities, locations or part				Most error causes can be found and resolved during
numbers significantly differing from "book" records.				the initial control group period.
Looking at it another way, for a ten item order, there				Make Physical Changes
would be only a 15% probability of finding all parts				Paint lines on floors to indicate drop points and
corresponding to what the books said was there. Is				department boundaries. Record tare weights on all
that any way to run a business? By the way, it's sad				containers used in weigh counting. Use bar code or
to say that 66% is about average.				other accurate, efficient data acquisition methods.
Another reason for the accuracy credibility gap is that				Deploy counting scales where appropriate. Isolate
people delude themselves, occasionally even lie. The				obsolete inventory for final dispositioning. Assign
author once had to fire someone who was falsifying				designated drop points for discrepant or "hold" status
counts. The sad news came out of a routine audit				material. Ensure that there is adequate and appropriate
designed to check the effectiveness of the cycle				material handling and storage equipment. Sometimes
counting system. More often, people just rationalize				something as simple as lines on the floor, a fence or a
that things are much better than they really are.				gate can make a significant difference. Consider a
Example:				move to a process-related flow, which may greatly
What It Is				simplify material/inventory control.
95% accuracy is said to be the minimum acceptable				A comprehensive facility location system is essential
level to run a formal system. Our experience is that				for success in locating material quickly and efficiently
95% is a lot better than the average company, but it's				when it is needed All inbound and in-transit material
nowhere near what is required to run a world class				should be directed to locations, or they should be
operation, where 98 or 99+% is more appropriate.				assigned upon arrival. If the location system is simple
Going from 66% to 90% is easier than going from 90				enough, materials might be automatically routed.
to 95%, which is easier than going from 95 to 97%.				Reduce the number of possibilities to make mistakes.
When a company sets a goal of 95, 98 or 99+%				The location codes should be plainly marked all around
inventory accuracy, what should that mean? We				the facility, so that there is no confusion about the
usually recommend the following accuracy criteria,				location. Isolate/purge excessive, obsolete and
subject to company special requirements:o Quantity of				damaged inventory.
book to reconciled physical inventory to be accurate,				CONCLUSIONS
for example, within 1% for "A" items, 3% for "B" items				As with most major change efforts, inventory
and 5% for "C" items. These targets should reflect				accuracy needs strong, continuing management
relative value of the material and the limits of counting				support to change the culture and practices.o Very little
process capabilities. Most firms compare physical to				happens in some companies until top management
reconciled book quantity error vs. book quantity to				makes poor results unacceptably uncomfortable to
measure accuracy, for convenience of computations.				those failing to deliver.o Even after that, things
Sometimes we recommend comparing the calculated				sometimes don't improve until meaningful performance
error to the weekly or monthly usage quantity,				measurements and improvement mechanisms are
because it's statistically more valid, especially in a				implemented.o Strong project leadership is the next
high-volume, low inventory environment.o Item				most important factor, along with a sound approach
identification must be correct, or it counts for two				and an implementation plan.o The price of continued
errors, since if it isn't what the records stated it was,				inventory accuracy success is eternal vigilance. When
then it must be something else. Unless inventory people				programs lose "mindshare," results often quickly
are very thorough and knowledgeable about item				deteriorate.o Inventory accuracy is a permanent state
identities, these errors often go unrecognized until				of mind, not a quickie, one-time project. Periodic
detected by an inspector, production operator, or even				backsliding needs constant attention. This is one area
a customer. We recommend item verification before				where zealots and dictators are needed!
storage or movement to the next process station. It is				Successful inventory accuracy efforts often have five
helpful to post item specifications and photos and train				phases:
employees in their use to reduce such errors.o Item				1. Realization that there is a problem
must be physically in the exact "book" location or it is				2. Agreement on a solution approach
considered an error. If you can't find it, that's even				3. Problem-solving phase
worse than not having it at all, because it cost money				4. Records correctionv
and it's taking up valuable space. Make sure you define				5. Ongoing cycle counting/maintenanceo Inventory
item locations neither too detailed nor too general. If too				accuracy doesn't really improve by counting things. It
detailed, it will be burdensome to maintain the records				only improves when basic systems, procedures and
and control material.o Timeliness of records - Must be				training improve.o Identifying issues and resolving them
posted by some deadline, such as immediately when				so that they never occur again is the key to achieving
moved, within an hour, or by the end of the shift when				accuracy goals.o Leadership and peoples' attitudes are
transaction was physically executed. This greatly				the two most important factors for success.
improves the timeliness of information and improves				There are some significant differences in attaining
"cut-off" control for reports and reconciliations.o				inventory accuracy in non-discrete, process, repetitive,
Accuracy percentage = (number of items sampled				cellular and project-oriented enterprises.
meeting above criteria/all items sampled) x 100. We				Learn them well and adapt to their needs. Realize also
sometimes convert performance measures to error				that most companies are a mix of different
parts per million (PPM), to make measurements more				environments, so mix approaches if warranted.
compatible with companies' quality systems.

POS

Inventory Accuracy in 60 Days