Inventory inaccuracy is a critical issue for many companies. It contributes to lost sales, lost profits, lost production, excess inventory, increased costs due to expediting orders, reduced customer satisfaction, and In accurate material planning. With reduced profit margins and companies operating in Just-in-Time (JIT) environments, this problem gets compounded.

Companies take different approaches to solving inventory invisibility with varying degrees of success. Typical approaches tend to be instituting rigorous counting processes in the form of cycle counts and a physical inventory once a year. These are good approaches, but do not address the entire problem. Companies must subscribe to a holistic approach and be persistent to get a handle on inventory issues. An inventory improvement plan allowing for incremental improvements is necessary.

Inventory invisibility factors

Inventory inaccuracy can be traced to four areas:

• human factors,
• information systems,
• processes, and
• Facility designs.

By putting in place methods to tackle these areas individually, inventory inaccuracy can be addressed and avoided.

a. People issues tend to be the most difficult to resolve. These could be training challenges, such as staff not using the system as it was designed to be used. With casual labour in use in manufacturing and distribution, maintaining a high level of competence is very difficult. Training budgets tend to be limited and more focused on quality and safety initiatives. However, lack of training can cause errors in data entry as well as transactions. Good systems have some checks in place, and they must be used, but they don’t go far enough. Many times, inventory accuracy is not a priority, or it’s not even on the radar screen for some employees. However, management team members should make inventory accuracy everyone’s responsibility. People are the key element of any inventory accuracy initiative. High-quality training is the first step to help employees do their jobs better and more effectively; but, inventory accuracy goes beyond training.

Management also should monitor morale within an organization because companies with satisfied employees have less human error. With clear expectations, companies can tie compensation to goals or provide incentives for accuracy. Rewarding and recognising good work and accurate inventory is important to keep morale high and retain enthusiasm for the project. These incentives also can help prevent pilferage.

b. Information systems are another area that should be recognized on the road to inventory accuracy. Information systems require a certain accuracy level in record keeping. If records are not kept properly, issues arise. As inventory transactions take place, they need to be recorded in the system. It’s always tempting to get material from the stockroom and, at the end of the shift, try to enter transactions or pass the task to someone else. This time delay can contribute to inaccurate inventory position; and, as a result, decisions based on inventory may be incorrect. As far as systems go, automation certainly can improve manual systems. Tools such as bar coding and radio frequency identification can immediately note inventory changes in the overall systems, thus eliminating delays in transaction processing and log on.

Business process improvement initiatives must be looked at in conjunction with improving inventory accuracy. Complicated processes and procedures often lead to inaccurate data, especially in the inventory area. When possible, processes should be revisited and simplified. For example, some complicated processes can be split into several, simpler actions. If possible, automation can be introduced to reduce errors.

c. Facility design can help improve inventory accuracy. Time can be wasted searching for misplaced or lost inventory. Good facility design requires warehouses, stock locations, and bins that are arranged according to customer demand. In addition, facility maps should be posted in conspicuous locations, and employees should be trained to use them.

d. Excellent labeling and naming can help tremendously. Knowing the primary location and overflow location is good, but they have to be named appropriately, otherwise it will cause confusion. Item locations and bins should be clearly marked and bar coded. This reduces another source of error.

Bottom-line benefits

Inaccurate inventory not only causes added expense, but also often leads to bigger problems, such as material shortages, disappointed customers, and lower profit margins. The benefits of improved inventory accuracy can be numerous, and as inventory accuracy improves, material requirements planning and advanced planning and scheduling systems are able to provide realistic and more accurate dates. Perhaps the biggest benefit to accurate inventory is the elimination of periodic physical inventories. This can save several days of lost production and the associated costs.

A holistic approach

Inventory invisibility should be addressed in a holistic manner. With just a bit of effort, inventory accuracy of 97 percent or more can be achieved and maintained throughout the year. If 100 percent accuracy equals 100 items, this means that quantity on hand in the business system compared to physical bins should be between 97 and 103 items. Of course, the goal always is 100 percent accuracy.

Inventory inaccuracy can develop from several sources. The strategy should be to take the holistic approach and identify all sources of errors, correct them, set preventive steps, and continuously monitor the results.

Issues with people, processes, business systems, and facilities need to be addressed together and within the framework of a plan involving the steps illustrated in Figure 1.

ABC analysis & Cyclic counts

Various studies have shown organizations running a cycle count program can have inventory accuracy in the high-90 percent range. Cyclic counting is best achieved by using an ABC analysis, where inventory items are classified according to projected dollar volume. “A” items typically represent 10 percent to 20 percent of items with 50 percent to 70 percent of projected dollar volume. “B” items represent 20 percent of items and about 20 percent of dollar volume. “C” items contain 60 percent to 70 percent of items, but only 10 percent to 30 percent of dollar volume. Daily cycle counts will, over a period of time, reduce data errors. Cycle count results should be stored in a history table so further analysis can be conducted. Typical ABC analysis should be combined with inventory error rates from the history table to come up with a counting regimen. Typically, cycle count results are not stored in historical tables. As a result, analysis is severely limited because of the lack of information. One significant analysis that can be performed with historical data is determining how often a part has been counted and how many times its inventory count was adjusted. This information enables the company to set and attain goals of counting parts a certain number of times per year. In addition, it allows material planners to look at existing processes and transactions in order to analyze why certain parts have higher error rates. Furthermore, success rates can be tracked to meet a 100 percent inventory accuracy goal. This information provides inventory accuracy documentation for auditors, possibly enabling a company to eliminate a physical inventory altogether.