ERP Brilliant Basics – Part 3: Inventory Management

This is Part 3 of an ongoing series describing how to apply the principle ‘keep the system and physical worlds aligned’ to various aspects of your ERP system. Today’s topic is inventory management.

Of all the topics we have and will discuss in this series, inventory management is probably the most obvious and natural fit for our key principle. Applied literally, it means ‘the inventory in the system should be an accurate representation of the physical inventory on hand’. This statement is something I almost never get challenged on because all organizations - whether thriving or struggling – seem to know and accept this concept as the minimum expectation for any ERP system. After all, they have had it drummed into their heads by almost every ERP consultant they’ve ever met. So, I don’t feel the need to ‘sell’ this concept, but I do think it is worth spending a little time discussing exactly what this means and implies.

Before delving into what it does mean, let’s talk a little about what it does NOT mean. 

·        It does NOT mean: “As long as we physically have at least as much inventory on hand as the system says, we should be okay.”

·        It does NOT mean: “As long as we get the inventory correct by month-end, we should be okay.”

·        It does NOT mean: “As long as the total dollar amount of inventory is correct, we should be okay.”

These are all comments that I occasionally hear from some struggling organizations.

What it does mean is that, at any point in time (allowing some reasonable time to perform material movements), the inventory in the system should match the physical inventory, at the individual bin level, in terms of:

1.      Material

2.      Batch/Lot/Pallet

3.      Quantity

4.      Location

When that situation exists, an organization can confidently accept a rush order from a customer knowing that, if the system says the inventory exists, then it truly does exist, and that it can be located and picked quickly because it is exactly where the system says it is. Thriving organizations do this well. Struggling organizations do not.

The well-known and accepted gold standard metric used to characterize how well the system inventory matches the physical inventory is Inventory Record Accuracy, or IRA. To be effective, IRA needs to consider each of the four individual aspects of inventory characterization mentioned above. In other words, a ‘hit’ on IRA only occurs when Material, Batch/Lot/Pallet, Quantity AND Location all match. Conversely, an IRA ‘miss’ happens when any one of those four aspects does not match.

The also well-known and accepted gold standard process for measuring IRA is via cycle counts. Thriving organizations typically have a very structured way of performing cycle counts that enables them to count all materials and areas, over time, with more frequent counting done on the higher priority materials. 

With struggling organizations, you might be surprised to hear me say that it’s actually a bit of a mixed bag with cycle counting. Certainly, some organizations struggle because they either don’t do cycle counting at all, or their approach tends to be a bit less structured and more ad hoc. But there are many struggling organizations who actually do a fairly decent job at performing cycle counts, but don’t seem to improve the way thriving organizations seem to. That begs the obvious question, ‘why?’.

In my experience, when it comes to inventory management, the biggest differentiator between thriving organizations and struggling organizations is what they do AFTER performing cycle counts. Thriving organizations categorize the inventory errors they encounter, perform root cause analysis on them, and apply correction actions to reduce recurrence. In a nutshell, they apply focused improvement techniques and they improve. Struggling organizations simply make the inventory adjustments and move on. No root cause analysis. No corrective actions. Because of that, the same errors appear over and over again, and struggling organizations fail to improve. And when an organization struggles with same issues over and over again, without seeing improvement, that leads to frustration and, worse yet, apathy.

In summary, if your organization is not performing routine cycle counts, you need to start. That’s a no-brainer. If your organization is conducting routine cycle counts, but seems to be stuck in neutral regarding inventory record accuracy improvement, take a good hard look at how you analyze the results of your cycle counts, and what actions you are taking to prevent recurrence. You might just be able to make significant, rapid advances by employing some basic focused improvement techniques.

If you or any of your colleagues would like to learn more about how your organization can improve inventory record accuracy, please reach out to me.