Inventory Management Cycle Counting Building in Inventory Accuracy

Inventory Management & Cycle Counting Building in Inventory Accuracy 9/20/99 DE Purdy 1

Introduction n How Accurate is Your Inventory? n Can you rely on your inventory information to tell you what is currently on hand? n OR Do you have to run out to physically count the inventory? 9/20/99 DE Purdy 2

Agenda n Measurement Accuracy & Inventory Management n What is Cycle Counting? n The Six Common Methods or Types of Cycle Counting n Steps in Developing a Cycle Counting System 9/20/99 DE Purdy 3

Measurement Accuracy & Inventory Management 9/20/99 n How well a business manages its inventory can often be the difference between success and failure. n The Cascading Effect and Inventory Management. DE Purdy 4

Cascading Effect Imagine your company’s gross sales dollars as a river. As sales grow, the current of the river increases. There is a waterfall downstream. The water that cascades over the falls represents your net profits. 9/20/99 DE Purdy 5

Cascading Effect Rocks at the top of the waterfall represent your company’s “cost of doing business. ” They inhibit the flow of dollars over the waterfall and into your bottom line. 9/20/99 DE Purdy 6

Cascading Effect What would happen if the Rocks became too cumbersome and massive? 9/20/99 DE Purdy 7

Cascading Effect List the Positive and Negative effects Inventory Management has on profit? 9/20/99 DE Purdy 8

Cascading Effect Positive effects: Negative effects: Improved Customer Service, High levels of Inventory Adjustments, Increased Productivity, Shrinkage, Lower Investment in Safety Stock, Loss, Fewer Stockouts, Unanticipated Stockouts, Better Cost Control, Changeovers, Valid Data for Inventory Replenishment Material Expediting, Less Obsolete and Excess Inventory & Over commits 9/20/99 Write-offs, Lost Customer Sales, DE Purdy 9

Measurement Accuracy & Inventory Management What Does Your Inventory Management System Consist Of? Inventory Finished Goods WIP Stock Material Handlers Procedures MRP Scheduling Orders 9/20/99 DE Purdy 10

Measurement Accuracy & Inventory Management PREMISE: “If you are not measuring it, then you are not managing it. ” 9/20/99 DE Purdy 11

Measurement Accuracy & Inventory Management n Controls that Complement Measurement Accuracy n Physical Security n Access & Surveillance n Material Flow and Identification n Layout of Inventory Locations n Integrity of Personnel Handling Inventory n In/Out Procedures & Tools/Equipment for Handling n Inventory Personnel Understanding Basis of the Inventory System 9/20/99 DE Purdy 12

Measurement Accuracy & Inventory Management n 9/20/99 Traditionally Measurement Accuracy was Obtained through a Physical Inventory n A Wall-to-Wall count of all items, typically performed once a year n Typically All Material Movement has Stopped n Counting and Adjusting a Stationary Target DE Purdy 13

Measurement Accuracy & Inventory Management n Is it enough to establish the preceding controls and perform a Physical Inventory to assure Measurement Accuracy for today’s fast paced ever changing Customer Requirements? n Is this type Inventory Management System cost effective? 9/20/99 DE Purdy 14

What is Cycle Counting? n Pre-requisites to Establishing a Cycle Counting Program n Define Cycle Counting and its Objectives n Align with the Goals of the Enterprise 9/20/99 DE Purdy 15

What is Cycle Counting? n Cycle Counting is the proven accepted method of achieving high levels (95 – 100%) of inventory accuracy n It is an inspection method that validates the level of control inherent in the inventory management processes n It is a sampling technique in which certain members of a population are selected and a feature of that sample is measured n The resulting measurement is an inferred characteristic of the population 9/20/99 DE Purdy 16

What is Cycle Counting? n n Purposes for Cycle Counting n To eliminate the need for conducting an Annual Physical Inventory count? n To calibrate inventory records and minimize loss? n To identify errors, perform root cause analysis and implement corrective and preventive actions? Prioritization of Purposes impact the design and execution of your Cycle Counting Program 9/20/99 DE Purdy 17

What is Cycle Counting? n Cycle Counting is the practice of counting a small portion of the inventory on a continuing and repeated basis n Some Inventory Systems perform Cycle Counting in conjunction with a “Certified” Physical Inventory n Some Inventory Systems are eliminating the Physical Inventories in lieu of a well established Cycle Counting System 9/20/99 DE Purdy 18

Six Common Methods of Cycle Counting n Block (Physical / Geographic Space) Cycle Counting n Control Group Cycle Counting n Process Control Cycle Counting n Random (Constant / Diminishing Population) Cycle Counting n The Ranking Cycle Counting n A-B-C Cycle Counting 9/20/99 DE Purdy 19

Block Cycle Counting The count is determined by physical space or geographic location n Steps n Counter is given a printed list from the ‘system’ showing all the items in the area to be counted n List n shows the “available” balance Printed list tells the counter to start at a specific bin or row and count every item present until reaching the designated stopping point 9/20/99 DE Purdy 20

Block Cycle Counting Steps - Continued n Counter is taking a “wall-to-wall” inventory of a small portion (block) of the inventory locations n Everything or not n is to be counted, whether it is on the list Counter must count from the ‘shelf’ to the ‘sheet’ and not the other way around n Idea is to find everything, recorded or not n Find exactly where it is located, even misplaced items n Verify quantities 9/20/99 DE Purdy 21

Block Cycle Counting Steps - Continued If the item is on the ‘sheet’ and the count is correct, it gets checked off n If the item is on the ‘sheet’ but the quantity is incorrect, it gets corrected by indicating a ‘+’ or ‘ -’ and the number to correct n n Example: Sheet indicates 100 units, but the count is 105. The counter writes +5 This plus/minus count is used since the corrections may not be entered prior to movements of inventory 9/20/99 DE Purdy 22

Block Cycle Counting Steps - Continued n If a counted item is not on the ‘sheet, ’ it gets written in on the bottom of the page or it gets moved to its proper location if known n The next cycle count will cover a different section or block of the inventory n It is recommended that over the course of a year, all sections or blocks be counted 4 times 9/20/99 DE Purdy 23

Block Cycle Counting Advantages n 100% of the inventory is counted n All of the misplaced, obsolete, very slow moving inventory items are identified 9/20/99 DE Purdy 24

Control Group Cycle Counting n A type of Cycle Counting that is distinguished by having a short interval of time since the last known and accurate count n 9/20/99 Enables an investigation to be conducted as to the precise cause of the error DE Purdy 25

Control Group Cycle Counting Steps n Select the Control Group n Count the Control Group n Compare Counts to Records & Reconcile n Identify Causes of Error n Develop Corrective Action n Publish Results 9/20/99 DE Purdy 26

Control Group Cycle Counting n Select the Control Group n 9/20/99 The control group should include a complete crosssection of the inventory (Usually 50 to 100 Items) n All parts and/or materials n Involving activities in all areas n High cost and Low cost n Hand count and Scale count n High usage and Low usage n Big parts and Small parts n Stockroom and Floor stock n Discrete Issue and Bulk Issue DE Purdy 27

Control Group Cycle Counting n Count the Control Group n Physically count the parts/material of the control group n The counting interval should be no greater than one week n To n readily identify causes of error Actual counting can be done over the week n One-fifth 9/20/99 of the items per day DE Purdy 28

Control Group Cycle Counting n Compare Counts to Records & Reconcile n Special care to assure a clean “cut-off’ of inventory transaction information prior to making comparison n If a discrepancy, first conduct a second count to assure accurate counting n Once discrepancy is verified, an adjustment is made by authorized personnel (reconcile system) 9/20/99 DE Purdy 29

Control Group Cycle Counting n Identify Causes of Error n Determine precise cause of error n Conclusive n Do evidence not Circumstantial not “shoot the guilty party” n But make certain as to who is to take action to fix the problem 9/20/99 DE Purdy 30

Control Group Cycle Counting n Develop Corrective Action n Ultimately there are two causes for error n Procedures that are not adequate to achieve the objectives of inventory management on a regular basis n Human 9/20/99 Error in executing the procedure n Training n Time Pressures n Special Circumstance (Malfunctioning Equipment) DE Purdy 31

Control Group Cycle Counting n Develop Corrective Action- Continued n The tendency is to place blame n The objective is to identify the problem and correct it n If the same errors continue, then address the problem solving process n Do not Accelerate Cycle Counting efforts to eliminate the errors n Accuracy 9/20/99 can not be Cycle Counted into records DE Purdy 32

Control Group Cycle Counting n Publish Results n To the people doing the work n To the management supporting the effort n Include the Statistical Accuracy results n Include the Corrective & Preventive actions 9/20/99 DE Purdy 33

Control Group Cycle Counting n Caution n The Hawthorne Effect n Since a lot of attention is paid to a relatively few items, the same attention may be over looked with the remaining inventory items n Avoid effect by changing Control Group items soon after achieving the level of accuracy desired 9/20/99 DE Purdy 34

Process Control Cycle Counting n n Two Pre-requisites n All parts, quantities, and locations are listed for the counter n Cycle counter is not taking “blind counts” Samples Parts on a Three Tiered Basis n Geographical n Ease of Counting n Obvious error 9/20/99 DE Purdy 35

Process Control Cycle Counting n Geographical Counting n Counter is assigned to a specific area (e. g. aisles, racks, bins, work cells) n Ease of Counting n 9/20/99 In the assigned area the counter verifies every part in every location DE Purdy 36

Process Control Cycle Counting n Ease of Counting - Continued n However, only those parts that are easy to count are counted n Typically either low in quantity or packaged in such a manner that counting can be done in quick multiples n Only those parts that are physically counted are considered “audited” 9/20/99 DE Purdy 37

Process Control Cycle Counting n Ease of Counting - Continued n Those parts that have large quantities and are not physically counted are compared to the inventory records as follows: n Verify Part Identification n Verify Location n Verify Order of magnitude That is, if a part appears to have a couple thousand physically located in the bin and the inventory record shows 2, 279 – skip counting the item 9/20/99 DE Purdy 38

Process Control Cycle Counting n Obvious Error n In the assigned area, if the part is misidentified, mis-located, or if the order of magnitude is obviously in error then that part must be included in the sample and counted n Additionally, if the part cannot be reconciled with a correct transaction in process, it must be considered in error and therefore included in the sample 9/20/99 DE Purdy 39

Process Control Cycle Counting n Concerns n Giving the counter discretion to determine what is difficult to count – leads some to fear that the overall sample will be skewed n. A sample member is a sample member and has equal weight within the sample as do all members 9/20/99 DE Purdy 40

Process Control Cycle Counting n Advantages More efficient (100 to 1, 000 %) than Random Sample or ABC Cycle Counting n Counters are able to count and reconcile 2 to 10 times the number of counts than when performing Random Sample or ABC Cycle Counting n Polling from Oliver Wight Classes n ABC 60 Counts/Person/Day n Random 43 n Process Control 83 9/20/99 DE Purdy 41

Random Cycle Counting n Random sampling is a technique in which certain members of the population are selected at random and measured. n For random sampling to be meaningful, the accuracy of the sample must approximate the accuracy of the population as a whole n Generally, the larger the sample, the more accurately it will represent the whole population 9/20/99 DE Purdy 42

Random Cycle Counting n Constant Population Counting n This technique randomly chooses a predetermined number of items to be counted from the total population n This n process is repeated periodically Diminishing Population Counting n 9/20/99 Similar to the Constant Population Counting, except that once items are selected they are prevented from being selected in future counts DE Purdy 43

Ranking Cycle Counting Research shows that the more often a product is received or shipped, the less accurate its inventory balance. Every time someone goes to the bin is an opportunity for a mistake (an unquality event) to occur. The Ranking Method directs you to count the items with a large number of dollars flowing through inventory (i. e. with the highest annual cost of goods sold) more often than slowermoving products. 9/20/99 DE Purdy 44

Ranking Cycle Counting The Ranking Method is based on Pareto’s Law (Italian economist Vilfredo Pareto) that says 80% of the results of any process is produced by 20% of the contributing factors. Applied to inventory, this means that approximately 20% of your inventory items are responsible for 80% of your stock sales. And for the reasons mentioned earlier you want to count these items more often. 9/20/99 DE Purdy 45

Ranking Cycle Counting n Ranking & Number of Times per Year n “A” Items (80% of Sales) - 6 Times/Year n “B” Items (next 15% of Sales) – 3 Times/Year n “C” Items (next 4% of Sales) – 2 Times/Year n “D” Items (last 1% of Sales or No Sales) Once/Year 9/20/99 DE Purdy 46

ABC Cycle Counting n A Ranking Method with emphasis on the items that generate the greatest annual expenditure n Steps n A report is developed listing by part number n All part numbers n Cost 9/20/99 per Part n Estimated Annual Usage n Estimated dollar expense per part (cost x usage) DE Purdy 47

ABC Cycle Counting n Steps - Continued n Parts are listed in descending dollar amounts n. A column keeps a cumulative total of the annual expenditure n The last line gives the total annual inventory expense n Inventory is divided into “A, ” “B, ” and “C” parts n “A” (80%) – Count 4 Times/Year n “B” (80 to 95%) – Count 2 Times per Year n “C” (95 to 100%) – Count Once/Year 9/20/99 DE Purdy 48

Cycle Counting Exercise Divide into teams and choose a Cycle Counting Method and make plans with the information provided below to begin cycle counting n Typically there are 250 Business Days (50 wks X 5) in a year. n Your inventory consists of 10, 000 items n 2000 Items represent 80% of Sales n 3000 Items represent 15% of Sales Present your plans to the Group 9/20/99 DE Purdy 49

Developing A Cycle Counting System n Big Decisions n Which cycle counting method to use n When cycle counting should be performed n Who should perform the cycle count n How will discrepancies be reconciled 9/20/99 DE Purdy 50

Developing A Cycle Counting System n Development Steps n Educate & Train personnel in the concepts and techniques of cycle counting n Segment Inventory per Cycle Counting Method n Establish Procedure for Cycle Counting n Establish Procedure for Cut-off Control 9/20/99 DE Purdy 51

Developing A Cycle Counting System n Development Steps - Continued n Establish Procedure for Reconciliation n Establish Corrective & Preventive Action Procedure n Educate & Train Personnel in established Cycle Counting Program n Third Party Audit of Inventory Management System 9/20/99 DE Purdy 52