by Donald Clark CFPIM, CSCP, Clients First Business Solutions

When it comes to knowing what a company has in inventory – items, quantities and locations – most companies rely on their ERP systems for this knowledge.  However, how much do people trust the data in their systems?  The answer for many companies is that they do not.If a company is not confident that the actual physical counts match what the system reports, then it is going to have serious problems.  Some of these include:

·         Wasted time looking for product that is not there or not where is it supposed to be

·         Missed shipments, backorders and lost sales which may lead to lost customers

·         Excess inventory and too much money tied up in that inventory

·         Huge amount of expediting activities

·         Inaccurate inventory valuation statements

·         Excess time spent in the system correcting errors

There are two ways to bring together the physical and system counts:  periodic (usually annual) physical counts and cycle counts.

Since the periodic physical count is prevalent we will examine its characteristics first.   The physical count process usually involves mostly, or completely, shutting down productive activities while the count takes place.  Then large number of people, many of whom are brought in from every area of the company, go about counting, checking, double-checking and auditing the inventory.

Once the company completes the actual count then a team of people enter the counts into the system.  They question these numbers; send people out to check the counts again and ultimately settle upon the “good count” numbers.  At this point, the count will be posted, discrepancy and variance reports printed and the two counts – physical and system – are aligned.

This harmony between the two counts is usually short-lived as the company typically has done little or nothing to address the processes and procedures that created the differences in the counts in the first place.

A cycle count program involves counting a representative sample of the inventory items every day.  The counters select items for the daily count based on predetermined criteria such as value, velocity, scarcity, etc.  Cycle counts are performed without the need for a production shutdown also.

Because counts are maqde daily, cycle counting reveals transaction and procedural errors much more rapidly than the periodic inventory process possibly can.  Once revealed, simple root-cause analysis leads to the source of the error and an opportunity to immediately fix it.

Proper counting helps to assure that inventory records for the counted items are frequently compared and corrected.  However, cycle counting delivers benefits to the company beyond continually reconciling inventory balances – it teaches people how to find and fix problems.  By regularly uncovering errors, the processes that create these errors can be fixed

A common school of thought in such matters says that 98% accuracy between system and physical counts is good enough.  This means that one would expect that the correct item exists in the correct quantity and in the correct location 980 times out of 1,000.

Is this good enough?

·         If ones bank advertised that their transactions are 98.5% accurate for amount and account number — would this instill confidence?

·         If an airline captain announced to the passengers, immediately before accelerating down the runway for takeoff, that the engines are 98% likely to run the length of the flight – would this make one feel calm and safe?

The point is that 98% record accuracy, although it may sound excellent to a great many organizations, is not good enough.

Well-executed and diligently followed cycle count programs help the company drive its inventory accuracy to near 100%.  It is a process, when relentlessly followed, continually improves the company’s record integrity.

Clients First consultants have many years experiences teaching distribution and manufacturing companies in a variety of industries how to design and implement inventory accuracy programs.  They would love to hear how they could help you do the same.