The Inventory Isn’t There! – How to Fix Your Inventory Accuracy in Six Steps

Article #3 in a 14-Part Series by Jim Correll and Jim Bentzley

Introduction

The world-class standard for inventory record accuracy today stands at 99.5 %.  Very few organizations can claim they are performing at or above this standard; the harsh reality is that most companies are still struggling with very inaccurate inventory records.

Imagine if Amazon.com had only 90% inventory accuracy. Would customers accept that 10% of their orders would be shipped later than the two-day delivery promise that comes with their Prime membership? Also consider traceability which is becoming required at more and more companies. How can you have good traceability processes if your inventory isn’t accurate. What about your customers and your company? Benefits from more accurate inventory records at all levels of the bill of material include: improved on time delivery internally and to customers, improved manufacturing efficiency due to the reduction or elimination of material shortages causing delays, less expediting throughout the supply chain, lower inventory carrying costs, less obsolesce, lower levels of slow-moving or excess inventory on hand, and the elimination of costly and often inaccurate physical inventories.

The goal is not only to start measuring inventory record accuracy but to continuously improve upon it. To start the improvement process, this white paper will describe a six-step program that will enable the reader to achieve 95% accuracy or better with less cost.

A Case Study

One of our clients - a multi-billion dollar corporation - had been operating with high levels of inventory accuracy with very successful bottom-line results. However, a new management team thought they could save money by reducing and then eliminating cycle counting (12 people). Initially, they did achieve the savings, and the Six Sigma Team was well rewarded. But then they began to miss deliveries because of shortages. To compensate for the shortages, expeditors were hired (40 people). Even with the additional expeditors the situation continued to get worse.

They called us back for assistance. When we started to work with them on their inventory record accuracy, our goal was not only to restore the accuracy quickly, but to assure it was sustainable over time. Together, we defined sustainable as: documented systems (processes and software) that are designed to operate at the lowest possible cost; measurements that identify the root causes of inventory discrepancies and address any lack of discipline in the systems and a documented education and training program that cascades throughout all levels of the organization.

Measurement

We also had to bring back the inventory record accuracy definition.  This  measurement requires that the item number, quantity, and location all be accurate for each item checked. If any one of the three is incorrect, it is an inaccurate inventory record. In organizations requiring traceability, the addition of lot code or other unique identification codes as a fourth element for auditing would be appropriate.

The calculation for inventory accuracy is:

Inventory Accuracy =Number of Correct Inventory Records/ The Number of Inventory Records Checked

The Finance department was pleased with this measurement because it was absolute (pluses and minuses didn’t cancel each other). From a financial perspective, whenever the defined measurement was at 95 percent or better, the accuracy of the organization’s financial projections were above 99 percent.

The business’ initial goal was to achieve a minimum of 95-percent inventory record accuracy. Their longer-term objective (beyond the first year) was to increase their minimum acceptable level to 99.5 percent, which is world class.

Six Steps to Better Inventory Record Accuracy

In the future, as RFID technology becomes more accepted, counting inventory will no longer be required. Until that time, we recommend six straightforward steps to achieve inventory accuracy. The process is relatively simple, but the implementation is another story. The new process is a disciplined approach and one in which individual and company behavior requires significant change – the real issue.  

The six steps to better inventory accuracy are:

Step 1: Education & Training

Education is the most critical step – if people don’t understand “why” they are doing something they will not embrace it. Education must start at the very top of the organization, flowing down to the rank and file. Senior and middle management must understand in order to give the proper direction, and the rank and file must understand because they are the “doers.”  Next is training.  Training is the “how” to accomplish the task. Below are 6 Steps – the “how”.  A good education and training process that addresses the needs of each level of the organization is the best way to quickly achieve your inventory accuracy goal. It addresses the question; “What’s in it for me?” at each and every level of the organization. Once that connection is established, the culture change will begin.

Step 2: Assign Accountability - Inventory accuracy starts with recognition of its importance by all levels of the business. That means all employees must live the culture. For example, when you go to a bank, there is no doubt about accuracy; it is part of their culture!

The same culture must exist in your business. It starts with a business policy stating the importance of inventory accuracy, affirming that it is the foundation of all the planning and execution processes that will eventually come into play. The policy also must clearly state that disciplinary action will be forthcoming if the policy is not adhered to. Finally, the policy statement must be signed by the top person in the organization who must “walk the talk.”

An important lesson to remember: A basic principle of good management is to hold people accountable for only the things they can and do control. This means that the manager of a function, such as production, must be held accountable for the accuracy of the inventory in their area because only they can exert both direct and indirect influence over the personnel in that department. To reinforce that, inventory accuracy should be included as part of the job description and be a part of the reward system.

Step 3: Identify Inventory Areas - Clearly identify every area in the facility that contains inventory, and assign an “owner” to it. This is often done for stockrooms but must be expanded to all areas. That means production, quality, in-transit; anywhere inventory resides must be considered.

An easy test to determine if this step has been taken is to walk through the facility, and where inventory is present, ask the location’s identity and who “owns” the inventory. Who do you ask? Not management, but the workers in the area. If they say they don’t know, the area fails the test.

As a part of the identification step, the owner of the area needs to be held accountable for it to be clean and organized (5S).  In addition, it should have display boards showing the current inventory accuracy performance for the area and at least the previous three months’ results. One of my clients hangs pictures of the people that own a particular area along with a posting of the inventory accuracy. These are small electronic parts but the average inventory accuracy as measured above is 99.8%.

To emphasize culture and ownership, we are reminded of when we worked for a heavy equipment manufacturer.  Initially getting employees to adopt this new culture was a challenge. I wanted to fence off an outside area where components were stored for the welding department. The General Manager was against it because it was between two buildings and would make movement between them difficult. I gave in but got him to sign a policy noted in Step #2 above. The stock keepers told me it would never work without a fence – I was doubtful also. We spent the weekend arranging a third of the area and putting parts away double checking accuracy and clearly marking the area as a “Controlled Stores Area.”  The stock keepers encouraged us to come to the area first thing Monday morning. The welding supervisor walked out, waved to us and then took a part (one that he could lift and didn’t need) and carried it into the weld shop. We raced to the GM’s office to report it. The Plant Manager was there. The GM said that he would take disciplinary action but the Plant Manager interrupted saying that the supervisor was the only one that knew how to weld the frames so they would come out within required tolerances. The GM told the Plant Manager he had better start training someone and then told his assistant to go get the supervisor. Everyone was watching. When the supervisor arrived the GM informed him that he was putting the offense in his file and would fire him if he did it again. When other employees questioned the supervisor on why he took the part, he said he was just testing the resolve and would never take anything again. We never had a problem with people taking parts after that.

Step 4: “Simple” Systems - A “simple system” (process/software) is one that a computer-literate person can learn and operate effectively with a reasonable amount of training.

For example, one business we worked with initially implemented their system with 27 different inventory transactions. The result was that, due to the system’s complexity, the people doing the transactions were constantly making mistakes. The number of transactions was reduced to five (issue, receive, stock to stock, scrap, hold), after which, inventory accuracy skyrocketed. Once again, educate the individual first, and then train them on the processes and the software transactions.

Step 5: Easy to Count - For inventory to be accurate, it must be counted. For people to count it accurately, it must be easy to count. Take eggs as an example. How long would it take to count a case full of eggs if they were randomly put in the case? Consider how long it takes to count them as a store receives them - 12 to a carton, 20 cartons to a case - 240 eggs. If a particular internal or external supplier has packaged their product so it is easy to count and has historically been 99.5 percent accurate, only auditing needs to be done.

Typically, the first answer to the challenge of making inventory easy to count is to have the packaging specialists start defining the packing requirements for each item. This is great for items that require special packaging for protection but is absolutely the wrong answer for the majority of items. It pushes a simple process into the bureaucracy and all the delays that go with it. This is not a “Six Sigma” project; it is a “One Sigma” project. Anyone who handles inventory can make it easy to count with a little education and training.

One excuse for not addressing the easy-to-count initiative is that it will cost more. Our experience is just the opposite. When people understand and do it right the first time, it doesn’t cost more. The fact is that significant cost can be saved throughout the supply chain when the inventory is easy to count.

Step 6: Adopt Cycle Counting - In a bank the teller balances his/her “inventory” at the end of each day to the penny.  This is not possible in a manufacturing environment because each SKU would have to be balanced.

Consequently, some type of cycle-counting process must be used. However, be forewarned that cycle counting itself does not improve inventory record accuracy. The reason for doing cycle counting is to locate and identify the root cause of inventory errors and, then, to correct the root cause of the error. Solving the root causes of errors is what drives significant improvement in inventory record accuracy.

There are numerous cycle-counting processes. Considering that 99% of the reason for cycle counting is to identify errors, drive root cause analysis/resolution, and be cost effective, only one cycle-counting process meets all criteria; “Process Control Cycle Counting.” This methodology gets its efficiency from sequential counting by location. “Process Control Cycle Counting” allows the cycle counter to spend time efficiently counting and not moving from one location to another. “Process Control Cycle Counting” combined with Step 5 (easy to count), allows a cycle counter to perform more than 300 counts per day.  As inventory accuracy levels approach and exceed 95 percent, a large number of counts are required to find enough errors to do a root cause analysis.

Below is a simple example of Process Control Cycle counting. The process starts with a print out by location as shown below with room to record the result.

Principals:

·        Easy to count – count it

·        Obvious error – count it

·        Not obvious error/hard to count – audit

Methodology:

·        Location 100 is easy to count so counting is quick and efficient. 

·        Location 101 is easy to count because it is in boxes of 100 – Four boxes of 100 and three loose – so count it.

·        Location 102 items are just lose in the bin but it is obvious that there are nowhere near 229 in the bin – so count it (when counting, consider placing some into packaging so next time it will be easy to count and request purchasing or factory to package in the future).

·        Location 103 is not easy to count because items dumped into the bin but it looks reasonably accurate so will recorded as an audit – not included in the accuracy count (when counting, place in packaging so next time it will be easy to count and request purchasing or factory to package in the future).

Note: If properly educated the cycle counters can do an incredible job of estimating.

Once the errors are found, root cause analysis and problem resolution is next. Cycle counting and root cause analysis is a waste of time if the problem is not resolved. Therefore, going back to Step 2 (assign accountability), the person who is responsible for the area’s inventory accuracy must have the inventory cycle counter(s) report to them.

Once the system (process/software) is validated, the errors are almost always due to a lack of discipline. Discipline must be addressed by the owner of the area. It is much easier to take corrective action when direct reports are exposing problems rather than someone else from another organization exposing them. Defensiveness is automatically resolved. 

Audits

To assure that an unbiased inventory accuracy measurement is achieved, audits must be done. Audits, conducted by internal non-owners of the inventory (for instance some companies’ will use finance, quality, etc.), are done to determine whether or not the systems are in control (valid and followed) and not to improve the accuracy itself. The auditors should not be allowed to change the inventory number; it must be done by the people who operate the area.

Conclusion

Customer expectations for high on time delivery rates and low prices have increased and corporate bottom lines are more focused. With these added pressures there is no excuse not to have at least a performance of 95-percent accuracy using the definition above, with the norm being much greater.  The six-steps described above is a perfect way to begin.

Six Sigma levels of inventory record accuracy are an achievable goal, if the process is designed correctly and people are adequately educated and trained on the process. Specific training on cycle counting, root cause analysis and empowerment to resolve problems is a requirement for this step.

For more information about improving inventory record accuracy, we recommend “Inventory Record Accuracy: Unleashing the Power of Cycle Counting, Second Edition,” by Roger B. Brooks and Larry W. Wilson, John Wiley & Sons, 2007.

About the Authors:

Jim Correll is an author, a certified Fellow of APICS and former Chairman of Oliver Wight Consulting who has more than 30 years of experience helping companies with improving their supply chain processes through education and coaching. Connect with Jim Correll at (503) 329-6607.

Jim Bentzley is an end-to-end Supply Chain Executive and Consultant who has worked in the Medical Device, Electronics, CPG and Food Manufacturing industries implementing IBP (Advanced S&OP) and other process improvements to deliver bottom line results.