Inventory Record Accuracy

No Excuses, Please

Even after material requirements planning (MRP) and then manufacturing resource planning (MRP II) systems were developed, manufacturing professionals were discovering, much to their dismay, that all expensive hardware and custom MRP software in the world could not guarantee that they would have the right parts in the right quantities to complete customer orders on time. Safety stock was "rediscovered" and the inventory levels in many companies ballooned. Needless to say, the financial folks in manufacturing companies were not pleased with that turn of events.

The norm was to use the annual physical inventory to tell us just how far off the mark we were. In between each round of counting things, making up part numbers when the parts were not marked, and eating far too much cold pizza, we depended on the shop foreman and warehouse supervisors—who had been with the company since day one—to order enough extra stock to keep us out of trouble.


Good and Bad

Given that the financial folks actually "run" most manufacturing companies, a few folks such as Roger Brooks of the Oliver Wight Group and others started working with something called cycle counting as a way to keep up with the day-to-day accuracy of inventory records. These folks also started coming up with ways to measure the accuracy of the bills of material (BOMs), routings, and master production schedules.

The good news is that all of the techniques used by the MRP experts of the 1970s, 1980s, and 1990s worked. The bad news? Close to 50 years after the first "little mrp" system successfully ran, many manufacturing companies still depend on an annual physical inventory and the associated inventory reconciliations to determine what they have on hand. Many manufacturing companies still do not perform basic cycle counting let alone monitoring the accuracy of BOM accuracy levels or routings.

Cycle Counting

The four reasons for not performing cycle counting follow.

1. Traditional cycle counting requires that we hire people for full-time work as cycle counters. And unusually, not just a few of them. This adds overhead, and many companies are trying to reduce head count, not increase it.
2. Many managers do not truly appreciate the relationship between having inaccurate basic records in their MRP systems and having poor on-time delivery performance, lots of expedited purchase orders and manufacturing orders, lots of unanticipated overtime, higher than expected employee turnover, and so forth.
3. Some manufacturing managers like to be continually "fighting fires." After all, what better way to become the hero than be the one who regularly works long hours and handles last-minute emergencies? These types of managers regularly deal with a host of angry vendors, constant schedule changes, and frantic end-of-the-month phone calls demanding expedited shipping to meet plant delivery deadlines.
4. For years, the financial folks have annually created what I call inventory "slush funds" to handle projected inventory problems (write-offs or write-ups). When we complete the annual physical inventory and the reconciliation part, everyone is happy—as long as the combined total inventory dollar value increases or decreases fall within the established guidelines. So what is all the fuss about inventory record accuracy?

Count and Recount

Granted, traditional ABC-based cycle counting can be time-consuming (approximately an hour per part number is usually required) to find, count, recount, and then investigate the root cause(s). For example, consider a manufacturing company has 30,000 active part numbers split along traditional lines: roughly 20 percent (6000) "A" items, 30 percent (9000) "B" items, and 50 percent ( 15,000) "C" items. If we follow tradition counting the "A" items four times a year, the "B" items two times a year, and the "C" items one time, and if we assume, on average, an hour per part with a problem, we would require somewhere around 5 to 10 full-time cycle counters initially, and about 3 to 5 over the long term. For many managers, justifying such an expense is very difficult, so it just does not happen.

Now, to make matters even worse, companies that do not actively engage in using a true cycle count program and instead depend on the good old yearly wall-to-wall effort, will at best, achieve 70 percent inventory record accuracy the day after the physical. It goes down hill fast from there. Starting from that level, a company using a cycle count approach based on the traditional ABC approach, will typically take close to one full year to achieve an inventory record accuracy (IRA) of 95 percent or higher.

Available Solutions

The good news is that there are several simpler and much less time-consuming approaches to cycle counting available today and in wide use. These approaches focus on cycle counting, zero locations, linear, and obvious errors.

Each of these techniques work and if used properly, each one can help a manufacturing or distribution company rapidly achieve an IRA level of 95 percent or higher in a much quicker time frame.

Focused cycle counting is one of the simpler techniques. Companies using this approach have achieved 98 percent record accuracy in three to five months.

So, there is a way to achieve a very high inventory record accuracy and not break the bank.

What is your excuse now for not using cycle counting?

—William L. Cure, CFPIM, CIRM, CSCP, managing director, W.L. Cure & Associates, can be reached at (713) 826-5010 or via e-mail at B101544@yahoo.com.

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