- On 01/04/2019
Poor inventory accuracy can wreak havoc on operations and financial accounting. Organizations often make up for inaccurate inventory by purchasing or manufacturing more stock than is necessary. The implications of ineffective inventory management practices can include low customer order fill rates, backorders, long lead times, work stoppages, underutilized labor, frequent wall-to-wall physical inventory counting, inaccurate financial reporting, and excessive cash tied up in inventory. Left uncorrected, the effects of incorrect inventory quantities and costs can permeate the entire business.
A popular view is that adding barcode or RFID technology will provide the missing key to improving inventory accuracy. While such technology solutions can sometimes lead to meaningful improvements, it’s not often the principal issue driving inventory control. Technology can usually improve efficiency by allowing transactions to be performed more quickly. But will an efficiency enhancement likely lead to an inventory accuracy improvement? The short answer is sometimes yes … sometimes no.
Problematic Item Master Data
In many cases, poor item number master data is the root cause of inventory problems. Duplicate item numbers and improper units of measure can make inventory virtually impossible to maintain accurately no matter what process improvements are instituted. This situation can be particularly sticky since many inventory management systems do not allow item numbers or units of measure to be changed in order to preserve transactional history. This means that the situation must be resolved by marking some parts inactive, merging duplicate item numbers, and/or performing database-level operations to recast and convert problematic units of measure. This is generally a non-trivial specialized task with multiple operating and account implications that is best left to an experienced practitioner.
Indirect Materials, Tooling, and Shop Supplies
For manufacturers, one part of maintaining accurate inventory is to appropriately determine what should be an inventory item and what shouldn’t. Material items such as nuts, bolts, paints, and coatings can be a challenge to accurately measure each time they are used in the manufacturing process. As a result, these inaccuracies can compound over time such that calculated system inventory is never reliable.
There is also the issue of whether some items should more be appropriately treated as a direct or indirect material. With these considerations in mind, it is important to know that materials can still be effectively controlled without specifying them in the bills of materials and/or declaring them as inventory-controlled items in the system. There are alternative approaches to managing non-inventory items (e.g., tools, shop supplies, other consumables) that use visual or other tracking methods to ensure that sufficient stock is maintained to prevent shortages and work stoppages at economic levels. In many situations, some materials can be more effectively and accurately managed without the need for MRP as a non-inventory item.
With validated master data in place, the most fruitful path to resolving inventory accuracy problems is to examine all the touchpoints that a material or product undergoes within the organization to ensure that the appropriate transactions are being performed accurately and in a timely manner. This includes reviewing processes such as purchasing, receiving, material consumption (in the case of manufacturing), quality control, and shipping. Physical handling procedures as well as computer-based transactional entries both need to be looked at with a critical eye. The right process improvement, employee training, and management oversight can often transform inventory control practices for the better.
An organization’s accounting and supply chain departments should play principal roles in leading wall-to-wall physical inventory counts. The larger the warehouse and the greater the number of inventory items, the more challenging it can be to accurately count physical stock. The counting event needs to be well organized with a clear and effective procedure to ensure that thousands of dollars (or much more!) of inventory don’t fall through the cracks. The effectiveness of physical warehouse organization also needs to be considered. Here again, an experienced practitioner comes in handy for establishing an effective and sustainable process.
Trading wall-to-wall physical inventory counting in for periodic spot checks is usually a very welcome relief for organizations that have successfully tightened up their inventory control practices and want to keep it that way. These periodic spot checks are often referred to as “cycle counts” or “ABC counts”. This approach relies on systematically verifying on-hand inventory quantities for a statistically-important sample of items that can provide confidence that inventory management as a whole is under control. It also provides an opportunity to routinely review unit costs to ensure that inventory cost accounting, not just item quantities, is accurately maintained.
Altemir Consulting specializes in inventory optimization and control. Contact us today to schedule a free 15-minute phone call to discuss your particular needs and see if we can assist your team in instituting meaningful inventory control and material cost improvements.