Inventory Counts are Never Accurate: How It Happens and What To Do About It
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Inventory management remains one of the largest business challenges. Not enough of this; too much of that. Why is it so hard?
As someone who gets into the details of inventory challenges on behalf of clients, I know when the technology should not be obeyed. Life would be great if every item you sold had a constant demand, all of your suppliers delivered raw materials to you on time and no-one ever changed a product regulation on you... but that never happens. Everything is dynamic.
Since products have a lifecycle, you are likely carrying a mix of new products that are being introduced to your customers, older products that are being phased out of the market and products somewhere in between. For new products, the volume of demand is unknown. At best, you have a forecast based on the historical performance of a similar item. For products being phased out, the goals are:
to be left with as little inventory of these products as possible when demand stops, and
to orphan a minimum amount of raw materials. [An orphaned raw material is a component you have in stock but you no longer have any finished goods calling for it.]
I recently posted a poll to my YouTube Channel to see which of the following issues were most frequently encountered. Of course, as a math person, I must admit that this poll was a casual one and in no way scientifically designed.
How does inventory become inaccurate?
The most popular challenge was that inventory counts are never accurate. It seems that every company I know shares this challenge. So, how does inaccuracy happen?
Some inventory count errors happen when a product is received. Whether that product is a finished good ready for resale or a raw material needed for production, the paperwork on the shipment does not always match the actual number of units in the shipment. Short of opening every box in the shipment and counting the items, errors can easily occur. In the interest of productivity, it will never be an efficient use of time to open and count all received products.
Let’s look at an example to demonstrate the impact of inaccurate receiving. Suppose your number one product is a liquid detergent and it consists of the detergent, a bottle, a label and a cap. Suppose you purchased 15,000 caps for a production run of this product and that the caps are unique to this item. Your team diligently makes the detergent, fills the bottles, applies a label and starts feeding the cap machine with the 15,000 caps that the computer system says they have. Before all bottles are capped, you run out of caps. In reality, you physically had 13,500 caps but digitally, the computer system said you had 15,000.
Another example of how inventory counts become inaccurate is when inventory is misplaced or miscounted. If you look at the inventory count history of an item and see frequent manual adjustments, that may be a sign that some of this item’s inventory is often missed in official counts.
Over the past year, I have been monitoring the inventory level of a specific item to be phased out, i.e., no additional inventory of this item would be purchased. The inventory count began around 35,000 units and it slowly declined as the months passed. However, after an inventory count, the unit count went up. This means that at least one box of this item was missed in a prior inventory count.
What Can You Do About Inventory Accuracy?
As previously mentioned, it would not be practical to open all inbound boxes and count the number of items when the quantities are very high. It is also not practical to count physical inventory every day when the typical item has 10,000 to 100,000 units in stock. So, what can you do?
· Conduct an ABC Analysis to prioritize the importance of each inventory item. The most important items are cycle counted more often. You can watch this video for an explanation of an ABC analysis.
· Restrict the number of people who are authorized to change inventory counts in your system. When people don’t understand the impact of making frequent adjustments, they can send the company into a repeated cycle of corrections only to have someone else correct the correction.
· Audit your bills of materials (BoMs) periodically to ensure they are correct. Incorrect BoMs will allocate incorrect parts or incorrect quantities of parts to production runs. Your computer system will then reduce the inventory of BoM items and quantities even though these parts or amounts are not actually being used. Your production team may know which parts to really use but if the computer system doesn’t know, it will throw off your inventory counts.
No matter which company I work with, I find that people do not always understand the large impact to the business that inaccurate data produces. To most employees, if inaccurate data doesn’t impact their day-to-day activities, they don’t see the issue. Helping them see the impact to other areas of the business and the large costs to the business is key.
I will explore the other poll issues in a future blog. You can sign up here to get the blog sent directly to your Inbox.
Tracey Smith, Numerical Insights LLC
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