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Inventory
Accuracy in 60 Days - White Paper
By George
Miller, revised &
updated by Paul Deis
INTRODUCTION
Despite great advances in manufacturing
technology and management science, thousands of
organizations still don't have a handle on basic
inventory record accuracy. Many companies don't even
measure it properly, or at all, and lack corrective
action programs to improve it. This paper offers an
approach that has proven successful a number of times,
when companies were quite serious about making
improvements. Not only can it be accomplished, but it
can likely be done within 60 days per area, if properly
managed. The hardest part is selling people on the need
to improve and then keeping them motivated.
The net cost of
such a program? Very likely free, when one considers
the benefits gained, which usually far exceed the
costs. Inventory accuracy benefits help: provide
excellent customer service, determine purchasing and
manufacturing priorities, reduce operating costs, and
provide accurate data for financial records.
The author also addresses the gap in
contemporary literature in the area of accuracy program
features for repetitive, JIT, cellular, process and
project-oriented environments.
Do you have
inventory accuracy problems? Typical symptoms:
• Lots of
inventory errors
• Surprise
backorders, unplanned shortages, "lost material"
• Nobody
believes the records-- numerous calls to "check" on
availability
• Air
freight bill exceeds the national debt
• Nasty
financial reporting "surprises"
• Lack of
consensus on importance of accuracy
• Lack of
consensus on how to measure it
•
Inability to reconcile inventories, cycle counts
• Error
causes largely unknown
• Weak/no
company tradition of data accuracy
• New
systems/software implementation causing more confusion
Solution recommendations are presented as
follows…
ORGANIZE PROJECT
Results are
usually best when there is a bit of a crisis atmosphere
established. Business as usual won't usually serve to
get serious inventory accuracy problems fixed within two
months. Sometimes a humbling blow, such as losing
millions in an inventory "write-down", or an unfavorable
"write-up" by a customer, is helpful to shatter the
status quo and energize an organization to begin work in
earnest on a solution. Top level executive action works
best to motivate and mobilize people. At a minimum,
perception of a costly problem is needed, with some
realization of a need to correct it.
Try to tie
company goals and objectives to project objectives, to
help ensure that people “buy-in” to the project and will
be measured and rewarded on the results.
Once the
initial goals are attained, don't just declare victory
and go home. Set up a lower key ongoing maintenance
effort to ensure that the problem stays fixed and that
further improvements are made.
·
An Executive Sponsor
is needed, someone with the clout to keep resources and
attention focused on the problem until completion.
Results are usually directly proportional to the
strength and commitment of the executive sponsor.
Sometimes it's not possible to get a sponsor until a
case is made that there's a problem.
·
A Project Leader and Multi-Disciplinary
Team
is required, preferably from Operations,
Materials, Finance, Distribution and possibly, Process
and Design Engineering (depending upon the problems
identified). In a large organization, a full time
project leader may be needed. People will be needed for
inventory verification, cycle counting and
reconciliation. The amount of manpower needed is
dependent upon organization size, complexity and
magnitude of the problem. For example, one 500,000 sq.
ft. process plant with about 4000 items and 30+%
inventory accuracy needed a full time coordinator, four
full time cycle counters and two part timers for six
months, tapering off after that. Often, consultants and
corporate auditors participate to make projects more
successful.
·
A Project Plan
is needed, incorporating recommendations from this paper
and other company-specific activities. This plan, along
with a running list of accuracy related issues and
actions, should be used to drive the project and focus
efforts on activities needed to attain accuracy
goals. Issues should be identified, put on a master
issues list, assigned to appropriate personnel to solve,
then discussed and tracked at every weekly meeting for
the duration of the initial improvement project.
The plan should
contain specific activities, responsibilities and dates.
It needs to be followed and managed competently. Unless
carefully managed, a substantial amount of project time
will be spent trying to figure out what the problems
are, and getting resources assigned to them.
Regular Review
Sessions
Initially
weekly, these sessions will help the team to stay
focused. It's strongly advisable to have the sponsor
there at least every other meeting. Missing participants
should send bonafide, participating, decision-making
delegates if they cannot themselves attend. The
standard agenda is the project plan and the issues list,
which should be updated and distributed well before each
meeting. Copies should go to key executive and
management people, who should ask probing questions,
offer help and show some interest in the project. The
effect of management "mindshare" on the results of such
projects cannot be over-emphasized.
Education
An inventory
accuracy seminar/workshop, delivered early in the
project life cycle to the project team and key
operating/administrative personnel, will improve help
quality and schedule performance, often dramatically.
The workshop should cover accuracy criteria, needs,
inventory system approaches, needed changes, cycle
counting and physical inventories.
It should focus
less on how to cycle count than how to set up a good
inventory system to avoid problems in the first place.
As a result, with some coaching, the team will be able
to set accuracy criteria, install diagnostics, design
system improvements, write and make procedure
improvements and institute performance measurements.
There needs to
be ongoing instruction on inventory/material control
principles, techniques and specific company policies and
procedures.
Publicize
Program and Performance
Get the word out. The program goals,
objectives, general approach and performance need to be
communicated orally and in writing to company staff,
most employees, and even suppliers and customers, if
they are involved in the effort. Large posters can be
displayed around the facilities to communicate project
goals and current status. Orientation meetings can be
conducted and employees educated in problem areas and
procedures to help remedy them. Contests and other
events can be used to raise awareness of problems and
goals, and even to make it fun. Successes should be
celebrated, failures used as lessons learned and
applied.
Choose Your
Battles
Realize that
there are limited resources available, and that these
cost money, so prioritize by tackling issues offering
the best payback and those that can be won.
Actual
examples:
·
For one company, it was very hard to keep
track of color concentrates, since they were ladled out
of barrels, were kept out on the floor, and didn't cost
all that much anyway. So, these and other similar items
were placed on "two bin" order control and expensed,
eliminating a whole class of inventory record problems
with little more than a stroke of a pen.
·
Another firm had three storerooms. The
first one contained fabrics for airline seats and was
very well organized and well run, so minimal effort was
expended to improve it. The second one was a poorly
controlled raw material storeroom with a short-timer
supervisor about to retire. Material lead times were
only a few days, so the effect of errors was less
serious. We elected to wait out his retirement, which
was only a couple of months away. The third storeroom
contained purchased parts and specialty fabrications.
Lead times were long, costs were high and the
consequences of errors were serious, so we elected to
initially focus on this area. To narrow scope even
further, we initially concentrated only on items needed
within the lead time horizon and ignored obsolete and
excess materials.
·
The VP, Finance in still another
manufacturing company agreed to waive physical
inventories for areas demonstrating that accuracy goals
were being met, freeing up resources for more productive
purposes.
·
In general, controlled storerooms are the
easiest to improve, since they are often physically
restricted areas, have supervision more oriented to
accuracy concepts, transactions less subject to
process-related errors and they can be more easily
counted. Then attack work-in-process areas, which are
generally more challenging.
·
One team uncovered dozens of accuracy
issues. These were prioritized so that problem-solving
resources could be focused on the best payback items
with the greatest chances of resolution.
·
A few companies we worked with have
gotten almost immediate payback by conducting location
audits. Simply check each location and compare it to
your records. Physical locations not in the records may
be exciting windfalls. The opposite case is cause for a
corrective cycle count adjustment. This approach
requires far less resources than a physical count
inventory.
·
Most companies
observed weren't able to reconcile all errors,
especially in the beginning. They were advised not to
even try. It's like attempting to bail out the ocean,
because errors were being made faster than inventory
balances could be corrected, let alone diagnosed and
reconciled. So, they focused on eliminating the
principal CAUSES of errors initially. Every time a cause
is identified and corrected, it may likely eliminate
dozens, hundreds or even thousands of future potential
errors. This concept may be difficult to sell to some
accounting personnel, who have been conditioned to
balance every debit and credit to the penny. Choose
your battles!
DEFINE INVENTORY ACCURACY
Why
This sounds
simple enough, but experience has often proven
otherwise. Before convincing people to fix inventory
problems, they must first believe that there are
problems and a need to fix them. Before establishing
the existence of a problem, it helps to have standards
to measure performance against.
What It Isn't
We have often
been told by representatives of various companies that
their inventory accuracy was high, even "world class,"
95, 98 or even 99+%, when in fact, there were surprise
backorders, unplanned material shortages and unexplained
excess inventories. When asked about inventory accuracy,
shop floor and stores personnel would just smile and
tell us their inventory horror stories.
So why does
this happen? There are different ways of measuring it.
For example:
· One firm thought their inventory records
were outstanding because they were accurate within
$20,000 for a $6MM inventory, or 99.7% accurate, they
boasted. Well, it turned out that this was merely an
arithmetic sum of the financial errors and that the
absolute value of the individual errors was actually
$900,000. Even this sounded like 85% accuracy.
But, operations
people know that products are built with specific
components and that customers are shipped specific
products or services, not dollars. When other factors
like posting cut-offs, location errors and part number
errors were considered, it was calculated that accuracy
was actually only 66%!
Inventory
accuracy is the probability of finding the right items
in the right location and quantity that the books say
are there. 66% accuracy means that 34% of items surveyed
had quantities, locations or part numbers significantly
differing from "book" records. Looking at it another
way, for a ten item order, there would be only a 15%
probability of finding all parts corresponding to what
the books said was there. Is that any way to run a
business? By the way, it's sad to say that 66% is about
average.
Another reason
for the accuracy credibility gap is that people delude
themselves, occasionally even lie. The author once had
to fire someone who was falsifying counts. The sad news
came out of a routine audit designed to check the
effectiveness of the cycle counting system. More often,
people just rationalize that things are much better than
they really are. Example:
· At one company, a survey taken showed 47%
inventory accuracy, only a month after the annual
physical inventory. The Inventory Manager, after
challenging the methodology, integrity and ancestry of
the auditors, claimed that it should be adjusted to 73%,
because not all of the unposted transactions, some more
than a month old, had been factored in. Hmmm.
What It Is
95% accuracy is
said to be the minimum acceptable level to run a formal
system. Our experience is that 95% is a lot better than
the average company, but it’s nowhere near what is
required to run a world class operation, where 98 or
99+% is more appropriate. Going from 66% to 90% is
easier than going from 90 to 95%, which is easier than
going from 95 to 97%. When a company sets a goal of 95,
98 or 99+% inventory accuracy, what should that mean? We
usually recommend the following accuracy criteria,
subject to company special requirements:
·
Quantity of book to
reconciled physical inventory to be accurate, for
example, within 1% for "A" items, 3% for "B" items and
5% for "C" items. These targets should reflect relative
value of the material and the limits of counting process
capabilities. Most firms compare physical to reconciled
book quantity error vs. book quantity to measure
accuracy, for convenience of computations. Sometimes we
recommend comparing the calculated error to the weekly
or monthly usage quantity, because it's statistically
more valid, especially in a high-volume, low inventory
environment.
·
Item identification must be
correct, or it counts for two errors, since if it isn't
what the records stated it was, then it must be
something else. Unless inventory people are very
thorough and knowledgeable about item identities, these
errors often go unrecognized until detected by an
inspector, production operator, or even a customer. We
recommend item verification before storage or movement
to the next process station. It is helpful to post item
specifications and photos and train employees in their
use to reduce such errors.
·
Item must be physically in
the exact "book" location or it is considered an error.
If you can't find it, that's even worse than not having
it at all, because it cost money and it's taking up
valuable space. Make sure you define item locations
neither too detailed nor too general. If too detailed,
it will be burdensome to maintain the records and
control material.
·
Timeliness of records -
Must be posted by some deadline, such as immediately
when moved, within an hour, or by the end of the shift
when transaction was physically executed. This greatly
improves the timeliness of information and improves
"cut-off" control for reports and reconciliations.
·
Accuracy percentage =
(number of items sampled meeting above criteria/all
items sampled) x 100. We sometimes convert performance
measures to error parts per million (PPM), to make
measurements more compatible with companies' quality
systems.
MEASURE ACTUAL PERFORMANCE
Why It's
Difficult
This too, is
more difficult than it sounds. Many companies are
simply unable to reconcile book to physical inventory
because they:
· Have multiple, incompatible
inventory systems.
· Can't master the timing
"cutoffs" for count reconciliation.
· Poorly define and enforce
material and transaction flow procedures and policies.
· Don't have people assigned
to and/or schooled in inventory records reconciliation.
Initial Survey
You'll need an
initial survey to assess the level of accuracy. This
is recommended, even if there is an ongoing system in
place, to help verify how well it is working. To assess
the level of inventory accuracy, pick a representative
and statistically valid sample of items, crossing
different product lines, processes and areas. Consult
an expert in QC or SPC (Statistical Process Control) if
not sure how to do this.
Make sure you
have agreement on what is to be measured and how. Get
agreement on the measurement criteria (see section II,
above). If there is more than one inventory system,
agree on which one(s) you will be reconciling to. Be
aware of how these systems are updated and enlist the
cooperation of those involved in their operation and
maintenance.
Better results
will be obtained if all transactions are posted before
counting, especially if the inventory system is in poor
working order. This helps eliminate a very common source
of errors, "cut-off" timing. In particular, watch out
for items in staging areas, QC, Shipping, Scrap, Bond,
etc. It's best to do the survey while operations are
shut down, since it further reduces the chance of
transaction cut-off problems.
For improved
objectivity, it is recommended that people who are
removed from "ownership" of the current system be used
to audit or even supervise this survey. Bias may be
inadvertently or intentionally introduced otherwise.
The survey
should be used to help establish "baseline" accuracy by
area- for instance- "Store Room #1, "Shipping Area", QC
Hold #3", "Disk Assembly," and "Total." Publish the
results after careful verification, then discuss and act
on them. The initial survey often helps to establish the
dialogue that propels successful projects. It is
possible that some diagnostic work can be done during
the survey, but in general, we have found that
diagnostics are problematic at best for a poor inventory
system without baseline figures, good procedures in
place and regular cycle counts.
Wall-to-wall
physical inventory
For some
reason, many people love these and think that they
provide "better control. " Although better numbers can
often be obtained in this manner in companies with poor
inventory systems, complete inventories are often
disruptive, very expensive, time-consuming, introduce
errors of their own and do little to correct the
underlying problems contributing to inaccuracy. They
are often done in a state of near-anarchy, with
inadequate training, policies and procedures, using
unmotivated people who don't want to be there.
However, the
majority of manufacturing companies still take a
periodic wall-to-wall inventory, often annually, usually
to reconcile the books for financial statements.
Unfortunately, these are not necessarily beneficial to
organizations needing accurate operational perpetual
inventory numbers to do business with.
Improve how
physicals are done, since they may in themselves be a
significant source of error, as well as expensive and
time-consuming. Procedures might need to be reviewed
and upgraded, along with training. The cutoff,
reconciliation and posting approaches employed are
common sources of errors.
FIX THE SYSTEM
Institute
Improved Policies and Procedures
Procedures are
often in need of a major overhaul. Many are poorly
documented, unworkable or cumbersome. The project
diagnostics, team meetings, cycle count results,
conference room pilot and employee suggestions can all
funnel information to the people who revise procedures.
Identify every
single transaction and procedure potentially affecting
inventory accuracy. Review and, if necessary, enhance,
simplify and document them, then thoroughly train all
applicable personnel in their use. Keep simple concise
procedures available for employees' ready access. Have
employees practice/drill in procedure use. An inventory
system test or "demo" database is a good tool to
practice with.
·
New procedures/changes should be reviewed
with users in advance, thoroughly tested and documented
prior to implementation.
·
Procedures should cover all aspects of
inventory transactions: receiving, inspection, stores,
issues to floor stock, production, substitutions,
transfers, scrap, rework, return to vendor, completions
to stock, shipments.
Set Up Basic
Inventory Movement Structure and Controls
Most companies
lack a common understanding on how inventory
transactions- material and paperwork - should flow. One
of the first evident symptoms of this is an almost total
inability to reconcile cycle counts of active items, due
to transaction "cut-off" problems attributable to
unpublished/unenforced transaction document flow times.
Forget about a full cycle counting program until this is
corrected. First, establish, implement and enforce:
·
Inventory "transaction flow map"
showing all work centers/cells/stores areas, material
and paper flows, transaction types and account numbers,
so that people will know what should happen. When people
see a graphical depiction of system flow and have it
explained to them, it often helps them to decode the
mysteries of a system.
·
Flow times
- How long it
should take to receive a part, move it to stores, issue
it, move it between operations. Publish these flow
times, post them, and get people accustomed to working
with them. Highlight transactions missing flow time
targets.
·
Cutoff times
- How long it should take to post a transaction after it
physically occurred. Publish and highlight similar to
the above item.
·
Drop points
- Where material and transaction documents should be
placed. Mark these areas plainly to reduce confusion.
Painted lines on the floor, signs, sometimes even
fences, may be needed to get the point across.
·
Logging and batch controls,
especially for key "gateway” transactions such as
receiving and shipping. Comparing daily posted
transactions to the logs often helps detect missing or
erroneous data. Logs can also be useful in
reconstructing "crashed" systems.
Write Cycle
Counting Procedure
Cycle counting
should be the principal ongoing performance measurement,
diagnostic and problem-solving approach, basically "SPC
for inventory control." It is a procedure to help
determine if the other inventory procedures are
working. The procedure needs to fully reflect the
overall systems flow and timing. For instance, if
inventories are updated daily by MIS, it may be
necessary to adjust for unposted transactions prior to
completing reconciliation.
·
In a high-volume repetitive production in
a backflush environment, It is necessary to log
production occurring between backflushes and to know
precisely when these were performed. In addition,
knowing the whereabouts of discrepant material routed
for inspection and alternate processing, but still
unposted, is vital, since counts of material in the area
may omit it.
Consignment
inventory rules sometimes need revision to facilitate
cycle count reconciliation as well.
Run a Control
Group
Once the
program is underway, team members often want to quickly
start an ambitious, large scale program of cycle
counting. Some people come running out of cycle
counting seminars, flushed with enthusiasm, wanting to
use their new tools immediately to vanquish the demons
of inventory error. In general, don't. Why? Because
in most cases the infrastructure isn't yet in place to
support an effective cycle counting system. Make sure
it is in place BEFORE starting regular cycle counting,
or you're in for some big disappointments and loss of
credibility.
In the
meantime, use the initial survey population as a
"control group" to help regularly and frequently assess
the propagation of errors. Count and reconcile these
items over and over again until you start to get the
hang of what's wrong. Chances are, this will be a very
tough chore initially, because of the many things wrong
with the system. Don't be surprised if you can't
identify many item error causes with certainty in the
initial period. As you count them more frequently,
there will be shorter intervals between counts,
increasing the likelihood that error causes can be
isolated. As the basic controls identified above are
established, they will eliminate many errors and make it
simpler to identify those that remain. Make sure that
problems are posted to the issues list, prioritized,
assigned for resolution, discussed at meetings,
completed, documented and resolved.
At some point,
when the team feels that they have basic controls in
place and have mastered control group diagnostics, they
can turn the cycle counts loose on a larger scale.
Remind your
people that control group accuracy levels are about as
representative of all items as MENSA members and
basketball players are of the general human population.
By definition, the control group is skewed, because it
receives inordinate attention and care as a diagnostic
tool. We've actually seen companies boast about the
control group accuracy as representative of all items,
declare victory, then go home smiling. The control
group only indicates the level of propagation of errors,
and if you work at it, their cause. Even that could be
wrong, since employees quickly discover which items are
measured in the control group and pay special attention
to them. Rotate items occasionally.
When the
control group is running in the mid 90% accuracy range,
it's time to turn on large scale cycle counting.
Companies trying to turn it on too early may get swamped
by massive numbers of irreconcilable errors. Some even
compound the errors when they start posting corrections
before they've got reconciliation/posting procedures
working satisfactorily.
Most error
causes can be found and resolved during the initial
control group period.
Make Physical
Changes
Paint lines on
floors to indicate drop points and department
boundaries. Record tare weights on all containers used
in weigh counting. Use bar code or other accurate,
efficient data acquisition methods. Deploy counting
scales where appropriate. Isolate obsolete inventory for
final dispositioning. Assign designated drop points for
discrepant or "hold" status material. Ensure that there
is adequate and appropriate material handling and
storage equipment. Sometimes something as simple as
lines on the floor, a fence or a gate can make a
significant difference. Consider a move to a
process-related flow, which may greatly simplify
material/inventory control.
A comprehensive
facility location system is essential for success in
locating material quickly and efficiently when it is
needed All inbound and in-transit material should be
directed to locations, or they should be assigned upon
arrival. If the location system is simple enough,
materials might be automatically routed. Reduce the
number of possibilities to make mistakes. The location
codes should be plainly marked all around the facility,
so that there is no confusion about the location.
Isolate/purge excessive, obsolete and damaged inventory.
Make
Information Systems Improvements
Sometimes
computer, software and MIS operational problems
contribute to inventory problems. System users tend to
overstate these, although we have seen them over and
over.
Make sure to set up system tables/data fields properly,
or they will generate erroneous transaction data. For
example, if bill of material codes weren't set right,
then certain inventory transactions wouldn't process.
Once the system is set up wrong, these errors may take
months to detect and diagnose. These can't simply be
changed with impunity, but require careful prior testing
and well coordinated changes, usually with the
assistance of MIS and/or software suppliers.
Computer batch
update processes are sometimes set up improperly or fail
to execute as planned, creating erroneous or untimely
postings. This is especially critical to three shift
operations, where mission critical systems can't be down
long and botched batch updates can significantly impede
company operations. Ensure that they're set up, tested
and properly operated. Ensure that there are recovery
procedures in place in case things don't always work
properly.
At one company,
there were several major bugs not detected in the early
conference room pilot, which was done before
enhancements were made to the software. The system
pilot testing was not very rigorous compared to the one
the team did during the inventory accuracy project, when
every single process and option was simulated on line,
with an exhaustive review and rewrite of procedures done
concurrently, followed by employee retraining. Examples
of problems found and corrected: scrap transactions
costing improperly, move tickets failing to print
properly, improper costing with alternate routings,
system parameters set up incorrectly causing backflushes
to not calculate correctly.
Ensure that
software documentation is made site-specific, so that
sufficient simple, clear instructions applying to local
conditions are made available to personnel, who should
be thoroughly trained in these procedures.
Don't Forget
Accounting Systems
Even if a
system is "integrated," there may still be a few things
that it does differently to accounting than to
operations, such as scrap transaction costing,
adjustments, etc. In addition, Accounting might have
developed some "hand journal vouchering" procedures that
circumvent the purpose of the system. Run tests to
ensure that operations and accounting reports balance
and that all transaction types process correctly and all
transactions are accounted for.
Sometimes,
system reports are too cumbersome to be helpful to the
reconciliation effort. For example, in one company,
Finance received a huge 16 inch thick report every month
that didn't balance and didn't lend itself well to
analysis. They worked to get better inventory cost
sub-ledger/account data, better suited to check against
other cost and operations data and reconciled in more
frequent intervals.
System set-up
concerns cited above are equally applicable to
Accounting.
Conduct Control
Studies
Many
industries, like wire manufacturing, for example, have
complex wrinkles. For example, the way wire strands are
twisted and compacted, wire customer requirements and
the shape of wire drawing dies, can all have a
significant effect on material consumption and
inventory. Even when these are brought under control,
the way transactions are reported can also affect
accuracy.
To test the
system out on a real life basis, conduct a limited
number of highly structured "control studies," count and
double check everything issued, everything consumed, all
scrap, rework, and compare that to what the computer
transactions/database thought was happening. It may be
discovered that some bill of material, process,
tolerance and transaction problems, need correction.
Product lines with unacceptable process capability and
tolerancing issues may be identified and targeted for
correction, usually by a separate project.
Other Useful
Things
·
Conduct frequent walking
tours through the facility with the project team, local
officials and employees. Listen to what they say and
look for obvious problems. Make assignments or take
action on the spot. A picture is worth a thousand words,
and the real thing is worth a thousand pictures.
·
Focus on housekeeping. A
sloppy, crowded, disorganized area is a warning that
there are deficient attitudes, procedures or that
facilities and equipment aren't up to the job. These
things don't always stand out in reports. There's no
substitute for being on the spot. Attack housekeeping
problems head on. Consolidate material, improve marking
and labeling, have a proper place for everything, work
on rescheduling/re-routing materials to alleviate
congestion. If housekeeping can't be resolved by
checklists and new emphasis on orderliness, then go
deeper down into the root causes and start solving the
underlying problems.
PROCESS-RELATED DIFFERENCES
Most inventory
accuracy literature uses conventional discrete
manufacturing as a model. Repetitive, JIT, cellular
flows, process and project-oriented models all introduce
some special requirements. This section provides a brief
overview of these.
Repetitive, JIT,
Process-Oriented Flows
Repetitive
process inventory control needs some different
approaches. It's about 80% the same as discrete,
but that other 20% is extremely important. Much of the
product moves so fast that it's hard to even verify. To
summarize some key differences:
·
Yields require much more
attention, especially where process capability is an
issue.
·
Because of high volume and
more continuous flow, small errors, even one or two
percent, quickly add up to massive variances.
·
"Backflush" automated
component relief needs to be watched closely, due to the
above two items and also if there are component
substitutions, bill-of-material errors, or discrepant
material moves. In some cases, it may be advisable to
go to discrete, counted material issues, then reconcile
yield upon completion.
·
A process flow or cellular
layout/management approach makes it much easier to
control inventory than for a functional or job shop
scheme. Many companies realize this and are gradually
shifting to a cellular paradigm for this and other
reasons.
·
In a process with many
activities, don't try to count and reconcile every
activity. Instead, reconcile various "pay point" or
milestone activities, or even logical stocking points.
If there are persistent discrepancies, consider
extending controls into the upstream activities of most
likely error sources until the causes are found and
corrected.
·
Trends in repetitive
manufacturing indicate a move towards point of use
delivery and storage, supplier-managed inventories
(including consignments), backflush and work-orderless/paperless
activity control, including "rate-based schedules."
Some companies periodically close and reconcile
rate-based master orders, to help determine performance.
·
Some process plants are
actually continuous process operations. Inventory
control may be accomplished with check points, such as
periodic meter readings, or with production rate
monitoring. Material consumption may be checked against
product characteristics such as specific gravity,
density, durometer, coating thickness, etc. If one
parameter is off, it can significantly affect other key
parameters or resource consumption.
·
Cells and dedicated lines
generally have process-oriented flows and focus on
families of similar items. Such facilities are
inherently easier to control. Often, cells are largely
self-managing, so employees will handle their own
inventory control.
·
Simplified control
techniques, such as visual methods (Kanban, calibrated
containers, two-bin), average inventory estimates,
gateway/paypoint, and zero inventory make to order-only
are becoming more common.
Project
Oriented Industries
Make to order
businesses often plan and control activities by job,
project, order, or even lower level "work packages." It
is commonplace to track inventory and costs by one or
more of those entities. Such work is more likely to be
engineered to order as well. In addition, customers
sometimes have ownership/control over inventories and
even designs and specifications.
·
Project/job, work package,
configuration, lot and serial number control are often
additional tracking requirements. This makes inventory
accuracy more difficult, because these may be included
in inventory control, cycle counting and reconciliation.
·
Inventory costing may get
more complex as well, since actual or average costs are
often maintained and the same item may have different
costs for different projects/work packages, etc.
·
It often makes sense to
cycle count by project in these types of businesses. The
ideal time to count is when maximum benefit will be
gained, which is just before major decisions affecting
cost and schedule are made, such as planning and
procurement, or at the end of a project phase, when
residual inventory must be determined and dispositioned.
·
Since customers sometimes
own all or part of the inventory, accountability
standards are sometimes higher. It's not so easy to
"write off" a loss of material. In cases of adjustments
for common-use inventory, who pays is a burning issue.
CONCLUSIONS
As with most major change efforts,
inventory accuracy needs strong, continuing management
support to change the culture and practices.
·
Very little happens in some companies
until top management makes poor results unacceptably
uncomfortable to those failing to deliver.
·
Even after that, things sometimes don't
improve until meaningful performance measurements and
improvement mechanisms are implemented.
·
Strong project leadership is the next
most important factor, along with a sound approach and
an implementation plan.
·
The price of continued inventory accuracy
success is eternal vigilance. When programs lose
"mindshare," results often quickly deteriorate.
·
Inventory accuracy is a permanent state
of mind, not a quickie, one-time project. Periodic
backsliding needs constant attention. This is one area
where zealots and dictators are needed!
Successful
inventory accuracy efforts often have five phases:
1.
Realization that there is a problem
2.
Agreement on a solution approach
3.
Problem-solving phase
4.
Records correction
5.
Ongoing cycle counting/maintenance
·
Inventory accuracy doesn't really improve
by counting things. It only improves when basic systems,
procedures and training improve.
·
Identifying issues and resolving them so
that they never occur again is the key to achieving
accuracy goals.
·
Leadership and peoples' attitudes are the
two most important factors for success.
There are some significant differences in
attaining inventory accuracy in non-discrete, process,
repetitive, cellular and project-oriented enterprises.
Learn them well
and adapt to their needs. Realize also that most
companies are a mix of different environments, so mix
approaches if warranted.
ABOUT THE AUTHORS --
George J. Miller,
CFPIM, is Founder of PROACTION. Prior to selling
the company to Paul Deis, George had worked with dozens
of companies in assignments involving productivity,
quality and service improvement, business systems,
change management, acquisitions, divestitures, expert
witness testimony, and others. Prior to founding
PROACTION in 1986, he was Vice President of
Marketing for Western Data Systems; Director of Planning
and Development and Assistant Director--Operations for
Purolator Technologies (PTI); Consultant for Booz-Allen
& Hamilton, and Manufacturing Systems Manager for
Becton-Dickinson.
Paul Deis, CFPIM, is CEO, PROACTION.
He brings over 25 years of consulting and senior
executive experience to his work, including detailed
work with nearly 60 companies. Prior to acquiring
PROACTION, Paul’s experience includes running a small
ERP software company, leading other consulting
businesses, prior work with PROACTION, Manager at
Deloitte & Touche, VP Manufacturing at Raypak, Inc.,
where he was very successful with an early Lean
management initiative, and dozens of projects in the
areas of enterprise software, operations management,
crisis resolutions, in a wide variety of industries,
business types, and scales.
For information about the authors, please
visit the
Team page.
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