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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Wal-Mart: Radio Tags Keep Shelves Stocked

Thu Oct 27, 3:24 PM ET

Wal-Mart Stores Inc. said its fast-growing use of radio-transmitting inventory tags has helped boost sales by keeping shelves better stocked with key merchandise.

The use of RFID, or radio-frequency identification tags, has reduced out-of-stock merchandise by 16 percent at the company's stores that have begun to use the technology over the past 12 months, Linda Dillman, Wal-Mart's chief information officer, said at the company's annual analyst meeting Wednesday. Wal-Mart has been able to restock RFID-tagged items three times as fast as non-tagged items, she said.

The world's largest retailer began its rollout of the technology with a handful of stores and distribution centers in Texas last year, focusing on tagging cases and pallets of higher-priced and faster-moving merchandise. As of Oct. 31, Wal-Mart expects that 500 stores will be using RFID tags, Dillman said.

Earlier this year, a formatting standard was agreed upon for an electronic product code, or EPC, to replace the old UPC bar code, clearing the way for mass participation by manufacturers of all kinds, Dillman said. Suppliers also have become more enthusiastic about the tags as their price has dropped, now selling for between 10 and 30 cents on average, compared with 20 to 50 cents a year earlier.

"We expect more suppliers to tag more items as tag prices fall," Dillman said.

The Bentonville, Ark., retailer now has more than 130 major suppliers shipping merchandise to its distribution centers with RFID tags attached, with about 5.4 million tags received at Wal-Mart distribution centers during the past year. The company expects to add another 200 suppliers to the list by January, with about 1,000 stores and warehouses ready to receive their tagged goods, Dillman said.

Wal-Mart also plans to ramp up an RFID-based system at its Sam's Clubs next year that will help it better locate pallets, she said. The company plans to bolster the RFID program with yet another group of suppliers, which will number about 300, in January 2007, Dillman said.

The company continues to expand its use of the technology despite pockets of resistance from consumer-privacy groups. On Saturday, a group organized by CASPIAN, or Consumers Against Supermarket Privacy Invasion and Numbering, picketed a Wal-Mart supercenter in Dallas, protesting Wal-Mart's tagging of printers and document scanners from Hewlett-Packard Co. being sold at the store.

"This will make objects — and the people wearing and carrying them — remotely trackable," said Katherine Albrecht, a spokeswoman for the consumer group. "We have rock-solid evidence that they are already devising ways to exploit that potential."

Associated Press

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Asia Differs From U.S. in Supply Chain Practices

Oct 25, 2005

By a margin of almost 3 to 1 compared to their counterparts in the United States and Europe, business leaders in Asia say they have turned to outside experts to manage their supply chains, according to a UPS-sponsored survey.

Asian business leaders are also much less likely to view "customer loyalty" as a business problem. Some 14% of the U.S. and European executives surveyed listed customer loyalty as the most important business issue they faced, compared to only 2% of the Asian executives. The latter say a much more important business issue facing them is "expanding to new markets."

The Asian leaders addressed those and other business issues in a survey conducted by Harris Interactive for UPS. The executives, more than three-quarters of whom are director- or vice president-level managers, were in attendance at the Longitude '05 symposium, co-sponsored by UPS, last week in Shanghai. Their answers then were compared to those of business leaders who attended three earlier Longitudes conferences in Chicago, Paris, and New York City.

In discussing their embrace of outside expertise in running supply chains, 29% of the Asian executives said they had moved "very extensively" or "completely" to outsourcing. In contrast, only 11% of the U.S. and European executives had gone so far.

Some 27% of the U.S. and European business leaders said their embrace of supply chain outsourcing was "not extensive at all." The corresponding number for Asian executives was just 9%.

The survey results suggest, according to UPS, that executives who have made the leap to reliance on outside supply chain partners are able to focus on a different set of business problems than those who run their own supply chains.

There was one topic on which all the executives, regardless of location, agreed: whether you manage your own supply chain or rely on outside expertise, the most common problem with supply chain management right now is "difficulty accurately forecasting demand." Some 77% of the Asian leaders listed this as a problem, just as did 76% of the U.S. and European leaders.

From an email on indologistician mailing list

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The Organizational Structure of a Supply Chain Transformation

Oct 25, 2005
By: Tim Carroll

Aligning organizational structures, roles, and skills with a supply chain transformation strategy is perhaps the most challenging and critical--yet underestimated--factor in a successful operational transformation. Many companies that have embarked on operational transformation to achieve and end-to-end supply chain integration have fallen short of their goals largely because they maintained their non-integrated functional organizational structures. Successful companies realize that organizational design is the critical element for ensuring that day-to-day execution effectively maintains alignment of strategy, process, and performance. Such compannies include organizational transformation as an integral part of their overall effort. This column describes how IBM used an organizational structure in its divestiture of 11,000 employees across 66 countries to Lenovo earlier this year.

Less than five months after IBM announced the sale of its PC business to Chinese computer maker Lenovo on Dec. 7, 2004, phase one of the transition was complete with the final changeover in the most complex divestiture in IBM history completed on April 29. Nearly 2,500 people from IBM and Lenovo worked day and night during the transition period to enable processes and systems, transfer thousands of applications and Lotus Notes databases to the new company, and to customize systems and infrastructure to support sales and marketing, human resources, and an entirely new ledger system -- all without disrupting either company's clients.

One of the earliest decisions that the IBM/Lenovo Project Transition Team made was that all major decisions would work through a single project management office, using systems and processes developed by IBM Business Consulting Services. We treated the transition as a virtual corporation, with its own reporting structure and IT infrastructure. For example, we established a comprehensive management system that looked at three layers: functional, country/geography, and business process and we used a common Lotus Notes team room, so when information was pulled for IBM project reviews, we were using the same data Lenovo was using to report to its teams.

From the beginning we also determined that we would not get involved in contract negotiations. We felt that contract negotiations would be a huge distraction that we could not afford if we had any chance of meeting our aggressive schedule. Using a methodology based on IBM's own procurement processes, if we weren't clear on what the contract said, or if there was a dispute, we immediately turned it back over to the negotiating executives. Rather than debating about what we weren't sure about, we agreed that negotiating teams would do their jobs while we focused on executing those
things that were clear. This may sound trivial, but contract disputes are notorious for squandering weeks from a project.

Defining the Organization

To complete the actual work of separating process and operations from IBM and integrating them into Lenovo, we developed a "three-by-three" management system. The first part of this entailed establishing responsibilities around "send and operate," managed by IBM; "carve out," handled jointly by IBM and Lenovo; and "receive and operate," controlled by Lenovo.

In send and operate, the job was to separate the 22 functional entities from IBM (e.g., finance, accounting, development, etc.) while assuring IBM remained operational for its remaining businesses. Receive and operate involved Lenovo bringing up the processes on its side. Carve out was the work that needed to be done to make those two things possible, while ensuring that both companies continued to operate smoothly and efficiently, because the excuse, "sorry your order is late Ms. Customer, please understand that we are going through a transition," just wasn't going to cut it.

Once all the 'three-by-three' work was done, we set up comprehensive readiness reviews. Worldwide functional leaders had to sign off that they were ready for the switch. In addition, country general managers and their respective chief financial officers had to sign off that their countries and their processes were ready for the cut over as well. On Thursday, April 21, we had commitments from 120 executives across the two companies and from that point it was full speed ahead. We established a Unified Command Center to manage through the cutover that was 24/7 around the world, which did a magnificent job of what I call "identify, quarantine, and resolve." The transition went so smoothly that we had some suppliers and customers wondering if we actually had done the cutover.

Challenges

Our biggest challenge was breaking apart the International Information Products Company (IIPC, a joint venture between IBM and Great Wall, Ltd.) facility in Shenzhen, China. The PC part of the plant had to be transferred to Lenovo, but we also had to manage the remaining IBM hardware production that resides in Shenzen -- most notably in our xSeries eServer product line -- so essentially IIPC had to be split in two. To accomplish this, we established a new joint venture between IBM and Great Wall, Ltd., called International Systems Technology Company (ISTC), which had to be physically separated as well as transferring contracts/relationships of IIPC with contract manufacturers and component suppliers to Lenovo.

The second biggest challenge is transitioning the remaining 45 countries to Lenovo for phase two. These 45 countries represent less than 10% of the affected revenue and less than 10% of the affected employees. While these are small numbers, the task is somewhat trickier due to the distinctive nature of doing business in countries with unique laws and business expectations and where they have a limited skill set. Either way, if the customers are in France or the Republic of Congo, we can't afford disruptions.

Lessons Learned

The greatest takeaway is that you have to first begin and end with the client. Then, never lose sight of the end objective for both companies, which is successful execution on behalf of clients, shareholders, and employees. From there, quickly establish the ground rules of how the teams will interact to achieve their joint objectives. Once you have that, it comes down to laser focus and sheer determination -- working as a team.

The other major lesson is that when you have two great companies enter into a partnership with a willingness and trust in building solid business relationships, the ability to accomplish great things is limitless. The precision execution of the separation is just the beginning.

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Logistics Firm Exel on Road to Profits Growth

24/10/2005 - 13:08:10

Logistics firm Exel today reported a strong trading performance as it finalises plans for a £3.7bn (€5.5bn) takeover by DHL owner Deutsche Post.

The UK-based firm said its contract logistics division – which manages company supply chains – boosted its showing for the three months to September 30.

The business was lifted by recent acquisitions such as Tibbett & Britten and Power Packaging, as well as strong organic growth.

Exel said: “Trading performance in the third quarter has been strong and the directors remain confident of delivering another year of strong growth in the business.”

The update came as Exel posted details of the proposed takeover to shareholders ahead of a meeting aimed at gaining their support next month. The acquisition is expected to be completed in mid-December.

Exel has more than 110,000 staff worldwide and is best known for handling logistics operations for retailers such as Boots, Morrisons and Sainsbury’s.

The consumer and retail sectors account for around 60% of the firm’s European contract logistics business after it paid £328m (€485.3m) for Tibbett & Britten last year.

It also has a freight management operation, whose performance “significantly” improved during the third quarter.

Profitability was hit by slower airfreight volumes, up 2%, but strong seafreight revenues and increased operating margins led to strong organic profits growth.

Exel also reported an “encouraging” performance from drinks logistics provider Tradeteam, with net contract wins up significantly on the same period last year.

The proposed tie-up with Deutsche Post is expected to create a company with a combined workforce of around 500,000 people.

Deutsche Post is keen to combine Exel’s strong position in the UK and United States with its smaller logistics arm, which operates in Europe.

During the past 15 years, it has transformed the business from a government-managed agency to a multi-national group. Around 40% of its revenues now come from domestic and international courier, parcel and express delivery services, including through DHL.

[Source]

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Lowering Logistics Costs

From Jeff Ashcroft,Your Guide to Logistics / Supply Chain.

Expense saving strategies for the logistician

For those firms who have yet to wring all possible benefits from their supply chain, significant low hanging benefit opportunities may be waiting in the Logistics area.

This is especially true in the growing number of firms where other companies have been merged or acquired resulting in potential synergy benefit opportunities. And as more firms explore and then exploit this area, other firms who do not will find themselves at a distinct competitive disadvantage.

Steps to Lower Logistics Costs

These steps provide a rough outline of the steps to take when lowering logistics costs.

1. Identify the customer service targets and business goals. This is a collaborative effort including all stakeholders within the organization and key customers, carried out on a participative basis to ensure consensus and buy-in on the results.

2. Calculate current logistics costs. While accurately identifying logistics costs may sound like a simple task, doing so by incorporating all business costs impacted by logistics functions, taking into account all support costs and transfer credits can often be a more difficult task than any imagine before when they undertake such a forensic calculation.

3. Benchmark costs against the best companies in similar business and industry areas.

4. Develop, plan and implement the lowest cost supply chain methodology capable of meeting these core business needs.

An Alternative Approach

Another approach to driving costs down is to use Activity-Based Costing (ABC) methodologies and tools such as CAST dpm which assist in the benchmarking and cost calibration process, followed by the creation and validation of lower cost logistics strategies to meet the service goals of the organization.

Such approaches can even be taken to the individual task and volume level to ensure that your firm is meeting specific metrics for warehouse operating tasks. The use of such a task comparison method can assist firms in targeting specific cost reduction opportunities in the logistics function to even further reduce overall logistics costs.

In fact, low cost tools built upon these metrics are now available from firms like Vision Logistics which offers a Benchmark Resource and Budget Planning Model in support of such projects.

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