I was at an event last week where I met a guy who works for an electronics contract manufacturer. He was telling me about a physical inventory they were doing at the plant. Apparently the physical inventory was revealing a lot of inventory discrepancies. This surprised me because I knew the company had procedures in place to do regular cycle counts. As I dug a bit deeper, I discovered some things that made it really easy to understand why there were problems;
- The driver behind the cycle count was financial reconciliation. The key was ensuring that the inventory values tallied to what was on the books in aggregate. So, if part A was down a bit and part B was up a bit, overall, things balanced!
- There was no follow up to identify the root cause of the discrepancy. And no changes put in place to prevent similar issues from happening again. In fact, the inventory clerks would simply adjust the inventory balance to reflect the correct values.
So… what’s wrong with this approach? It’s all about the money, right? Right. It IS all about the money. However, how much money can you make if you can’t make the parts you want to sell? How much money can you make if your profits are all eaten by the added expense of expediting? An incorrect inventory quantity on a component that costs a fraction of a cent can prevent a multi-million dollar unit from shipping on time. Take a word of advice. Get the finance guys out of the stockroom and change the focus to true inventory accuracy. A cycle count needs to ensure that the right quantity of the right part is in the right location. The interesting thing about focusing on inventory accuracy is that the financial accuracy will improve automatically. It’s win win!
The other problem with this company’s approach was that people were not following up to determine the cause of the cycle count discrepancies. In a former life I used to support our inventory control staff as they tried to figure out why their values weren’t tallying. In many cases, the cause of the error turned out to be systemic in nature; Backflushing errors, BOM errors, incorrect allocations, etc. Fixing these prevented the same problem the next time this part was made. In some industries (electronics, pharmaceuticals. etc) , where parts could have black market value, establishing root cause is critical to ensuring that pilfering is caught and dealt with quickly.
So what are some best practices for cycle counting? Jeff Rose at Tomkins Associates put together a very informative guide to implementing cycle counting which outlines the goals, benefits and steps to implementing a world class cycle counting program. In my opinion this is a must read for anyone who manages inventory.
Do you have inventory horror stories you want to share? Inventory practices and processes put in place for all the wrong reasons? Share them with us so we all can learn!