The Basics

• Attitude
• Process Definition
• Procedure Documentation
• Employee Training
• Employee Testing
• Monitoring Processes for Compliance
• Setting Standards
• Tracking Accuracy
• Accounmtability
• Count, Count, Count
• Re-Evaluate

There is nothing revolutionary about my list of "The Basics", it's simply a series of steps which define a process for achieving higher levels of inventory accuracy.  Your success or failure will be determined by your implementation of these steps.  This is not something that should be rushed, throwing a quick fix approach together to alleviate an immediate need may be more damaging in the long run since the success of this plan requires a cooperative effort by many people within your organization.  If your first attempt fails you will find it more difficult to get a high level of cooperation for your next try.  Take the time and do it right.

Attitude.  Maintaining inventory accuracy must be an integral part of the attitude of the organization.  Like quality and, customer service, accuracy must be promoted throughout the organization as everyone's responsibility. This attitude must start at the top levels.  Yeah I know all of you managers and owners out there want an accurate inventory but are you doing your part through your decisions and business practices to promote it? Processes are often shortcut in the name of "Customer Service" (this also applies to processes for Quality, Inventory Management) that reduce or eliminate the effectiveness of the plan, which in the long run will reduce your ability to service your customers.  Remember that these plans are designed to meet the needs of the customer, don't compromise them.  

Process Definition.  You'll struggle to make any progress if you have not clearly defined the processes throughout the organization that affect inventory.  While defining the processes you should be looking for opportunities for errors and implementing changes to eliminate or reduce them. Even the most accurate employee will make errors; I suggest placing formal checks in place for critical operations.  Get as many people involved in this step to ensure you have a complete and accurate understanding of the processes.  Anything missed in this step will require new procedures and additional employee training later so once again "take the time and do it right".

Procedure Documentation.  This is the part where you use the previously defined processes to document the procedures the employees will follow to maintain inventory integrity.  The procedures documented here should not be limited to inventory issues; they should be the complete procedure including quality, physical aspects, and safety.  This documentation should be as clear and comprehensive as possible. It should be written for a specific task within a specific job responsibility, it should include everything the employee needs to know to complete the task and nothing else.  For example:  if a stock clerk's responsibility is to notify the supervisor of any discrepancies, that is all it should state in the procedure for the stock clerk even though there will be additional procedures for dealing with the discrepancy.  Procedures should also include the correct method for filling out and processing paperwork, the sequence and timing of entering data, and any checks that are required to be performed.  If there are any exceptions to a procedure they should be specified in the document, allowing undocumented exceptions to a procedure will decrease its effectiveness.  Be realistic, procedures are not a "wish list", they are the documentation of the requirements of a specific task.  You must be prepared to enforce compliance to all procedures. Once you are completed with the documentation, I suggest you first distribute the procedures to a few key employees, then take a couple of weeks for you and the key employees to monitor existing operations to see if anything was missed or if anything is incorrect.  Once this is done the procedures should be officially put into effect and distributed to all employees.

Employee Training.  Handing out a written procedure does not constitute employee training.  It is important to set a training schedule to go through all of the procedures with groups of employees.  Take whatever time is necessary to ensure they have a thorough understanding of the procedures.  Make it clear that the procedure document is the only way to perform the task.  If you did your job correctly in defining the processes and documenting the procedures you shouldn't run into many surprises during the training.  Try to refrain from making changes or exceptions to the documentation at this time (unless there is a critical error).  Last minute changes or exceptions will cause confusion and diminish the value of the documents.  Make notes for possible future revisions of the procedures instead. Set a timetable for publishing and putting into effect revisions (every quarter or six months).  Frequent revisions of procedures tend to cause confusion and make it difficult to enforce adherence.

Employee Testing.  I am a big advocate of formal testing of employees on procedures.  This is the only way to know if they understand them (or have even read them).  Be prepared, this will scare the hell out of your staff.  Do not make the tests too difficult, I suggest multiple choice questions and maybe some true/false. You may also need testing which requires the employee to perform the task in the presence of the tester. Make a point to include items in the test that are known to have been issues in the past.  There should not be any penalties for incorrect answers on the test.  Any incorrectly answered questions should be discussed with the employee to ensure that he/she now understands the correct answer. You may need to make arrangements to conduct the test verbally for employees with inadequate reading skills or other arrangements if language is an issue.

Monitoring Processes for Compliance.  You must begin to monitor the processes for compliance to the procedures immediately.  Any actions observed which do not comply with the written procedures must be addressed immediately with the employees involved.  As stated earlier, the written procedures are the only way to perform the task.  Allowing employees to "do it their own way" (even if their way is a better way) will make it impossible to enforce compliance on other issues and also creates problems when changes are made to processes.  If they have a better way, consider it for the next revision at which point it would then become "the only way".

Setting Standards.  I am also a big advocate of setting minimum accuracy and production standards wherever feasible.  Do your research to ensure the standards set are high enough and yet still achievable.  You will have to enforce these standards so it is critical to set them correctly.  If in doubt, set them lower, you can always increase them later when more data is available.  If you set them too high you have put yourself in a difficult position when it comes time to enforce them.  Standards should be set for the specific task being performed. For example, the accuracy standard for a stock clerk stocking in random storage area would be lower than for one stocking in fixed locations. Setting standards requires tracking of the accuracy and productivity of the tasks being performed which makes it more viable when you have several people performing the same tasks.  

 Tracking Accuracy.  Whether you have set standards or not I still suggest you track accuracy organizationally and individually.  Accuracy tracking should always be measured as a percentage of total transactions.  Tracking accuracy as flat numbers (number of errors) puts your more productive employees at a disadvantage and at an organizational level will be skewed by variances in business activity.  Accuracy tracking should be communicated to staff in a positive manner; it is a tool to facilitate improvement in processes and people. I have found that by just simply tracking and communicating accuracy to employees you will see immediate reductions in errors even if standards are not set.  The fact is we all want to be accurate; the problem is we all think that we are accurate and it's always the other guy who is making all of the mistakes. 

Accountability.  People must be held accountable for following documented procedures.  You have spent the time to document the procedures, provide the training, and the testing.  If someone is not following the procedures they must be dealt with appropriate disciplinary action.  It's that simple.  You may be amazed as to how much just one individual not following procedures can screw up your inventory.  If you don't hold the employees accountable you may as well throw out everything you have done to this point. Mistakes are mistakes and everyone makes them, however not following a specified procedure is a conscious decision made by the employee to not do what he/she was instructed to do.

Count, Count, Count.  We would like to believe that since we have taken the above steps we should now assume our inventory is accurate.  Not necessarily. You will have to count it to determine the accuracy as well as determining areas needing additional evaluation.  Year-end physical inventories are tools used by accountants and do very little for inventory accuracy.  You should count your inventory on a continuous bases (cycle counting) to maintain high levels of accuracy.  This is one of the best ways of identifying problem areas on a timely basis and providing an environment conducive to continuous improvement.  The way you count and the frequency of your counts should be designed for your specific type of operation. 

Re-evaluate.  You should be regularly re-evaluating your processes and procedures.  Results of your cycle count program should point you in the direction of areas where enhancements are needed.  Business conditions often change and new processes are added which will require evaluation. As previously mentioned try to refrain from frequent revisions to procedures (the memo of the day), it is more effective to plan a revision date and group multiple revisions into a revised release of the procedures.  These revisions should be implemented with the proper training and testing as was done during initial implementation.

 As you may have noticed, each of the above steps is highly dependant on the successful implementation of the previous steps.  Although this process for improving inventory accuracy is not very complicated, the implementation can prove to be demanding.  Depending upon the environment you are working in, it can sometimes seem to be an insurmountable task to change the attitudes of people towards inventory accuracy.  It will require a high level of effort and diligence to ensure success. 

Additional Recommendations

The following are some other suggestions that may help in your quest for a more accurate inventory.  

Dedicate positions for managing inventory.  Make sure you have control of which employees are affecting your inventory. Once you come to this realization it is easy to see the benefits of putting your inventory and material handling responsibilities in the hands of people whose primary responsibility is inventory.  You should limit the people doing miscellaneous type inventory adjustments.

Control employee turnover.  I know, easier said than done.  You've invested the time into training them, now figure out what you need to do to keep them.  Once you have gotten your processes and procedures under control you will find that new employees will become your #1 source of errors.  My experience shows a new employee generally makes 2 to 5 times as many mistakes as a one-year employee and 5 to 10 times as many mistakes as a five-year employee.  These numbers are based on operations that track accuracy and promote continuous improvement.  If you're not tracking accuracy, your five-year employees may be making as many mistakes as they did during their 1st year.  Also high employee turnover results in operations that are frequently short staffed which will almost always lead to increased errors.

Be prepared to dismiss or reassign employees.  It may sound like a contradiction to the previous suggestion.   However, if you have made every effort to assist an employee in improving their accuracy and insufficient progress is being made you will need to get them away from your inventory.  Again, don't underestimate the damage that can result from just one employee's errors.

Don't be afraid to put Checks in place.  Some people feel that checking or rechecking work is admitting failure or is a waste since it "should be done right the first time", so I'll say it once again, everyone makes mistakes, that means everyone.  If you find there are certain areas that are highly prone to errors (such as random stocking areas) or critical parts of your operation where a mistake can have significant detrimental effect, consider putting checks in place.  A check may be an employee checking their own work or a specific checking operation.  Outbound shipments should always have some type of a check in place, the type of check will vary from operation to operation.  In a high-volume, low-value shipping operation a simple looking over the shipment may be all that's feasible, while in  a lower-volume, high- value shipping operation I've had as many as three people performing redundant checks of each shipment prior to loading.

Storage Areas.  How you store your product will also affect accuracy.  Crowded unorganized areas become "black holes" for missing product.  Crowded areas also cause increase damage to product that is often disposed of without inventory corrections being made.  High density storage makes it very difficult to accurately count the product. Maintaining proper lighting, shelf and product labeling, and organization makes it easier to stock, pick, and count product thus increasing levels of accuracy.

Know your inventory system.  The more you know about how your specific inventory system works, the more successful you'll be in optimizing its features.  Computer systems are regularly blamed for things that are usually turn out to be human error.  The only way to determine the source and correct these problems is to have a thorough understanding of how your system is set up and how the specific programs process the information.  The bigger advantage to acquiring a high level of system knowledge lies in the amount of information you'll be able to extract from your system.  Inventory software systems maintain enormous amounts of data and contain far more functionality than most users realizes. Managers need to be taking more active roles in system set up and implementations if they want to optimize the system to meet their business needs.  The days of leaving it all up to the IS department are gone, the staffing levels of most IS departments are inadequate to deal with the complexity and the enormity of software packages today. IS personnel tend to spend the majority of their time making sure the system runs rather than optimizing its features.

The end result in accuracy improvement will be directly related to the effort put forth to achieve it.  Building a sound consistent inventory accuracy plan will get people in the habit of being accurate, as the entire organization gets in the habit of being accurate you will find the accuracy plan starts to run itself.  Until then it will require a lot of work by those implementing it.

Cycle Counting Can Eliminate
Your Annual Physical Inventory!

Develop Your Count Schedule

On what specific days should each product be counted? The geographic method and the ranking method. The geographic method is a wall-to-wall count in which each product is counted four times per year. The ranking method counts those items with the most dollars moving through inventory more often than slower moving items.

To develop a count schedule for a geographic program, first calculate the number of products you will have to count each day. We will use an example of a company with 10,000 products in its salon:

10,000 items counted four times per year = 40,000 counts
40,000 counts / 250 counting days = 160 products counted per day

Start at one end of your salon, assign the first 160 products to "Day 1," the next 160 products to "Day 2," and so on until the last 80 products on the list, along with the first 80 products, are counted on "Day 63." On the next day products 81-240 are counted and the process continues. Cycle counting is one job in your company that should never be completed. There will always be products to count tomorrow!

You should count all locations for an item on the day that item is scheduled to be counted. So, when you count the primary location for a product, be sure to count all surplus and bulk storage locations as well.

What happens if there is a situation one day which prevents you from counting all of the scheduled items? Well, you need to count more items on the next day in order to "catch up" to where you should be in the schedule. Catching up may require you to have one or two people work some additional overtime. But, this is a small price to pay to ensure that the inventory availability information in your computer is accurate.

The old Pareto principle, that approximately 20% of inventory items account for 80% of sales, applies to most distributors’ inventories. Let’s look at a sample rank-based count schedule. Once more there are 10,000 items in his salon:

2,000 "A" items counted six times per year = 12,000 counts
3,000 "B" items counted three times per year = 9,000 counts
4,000 "C" items counted twice per year = 8,000 counts
1,000 "D" items counted once per year = 1,000 counts

Total of 30,000 counts / 250 counting days = 120 products counted per day

Here is a rank-based cycle counting schedule for the distributor that will attain the desired number of counts for each product. Note that on some "transition days" items from two groups will be counted:

As with the geographic method, when you get to "Day 250," go back to the beginning. It’s like painting the Golden Gate Bridge, the work is never completed!

Reconciling Cycle Counts

As we discussed, cycle counting should be performed by knowledgeable, experienced people, during "off-hours" when material is not moving.

While it is important to process all sales orders, stock receipts, and customer returns in a timely manner, it is not always possible to complete all paperwork before starting the cycle count for the day. For this reason, the shelf count must sometimes be adjusted before it is compared to the on-hand quantity in the computer. While the specific adjustments will vary depending on when quantities are updated in your computer, there are some general rules to follow, and some situations to look for:

Sales orders that have been filled, but have not been confirmed in the computer. The confirmation process reduces the on-hand quantity in the computer by the quantity shipped on the sales order. If a customer order or outgoing transfer has been filled but not confirmed, the quantity shipped of the item must added to the quantity physically counted before that amount is compared to the on-hand figure in the computer.

Stock receipts entered in the system, but not yet placed in the proper bin location. Again the quantities on these stock receipts must be added to the counted quantity before being compared to the on-hand amount in the computer.

Stock receipts placed in the proper bin location, but not yet entered in the system. These amounts must be subtracted from the counted quantity before that amount is compared to the on-hand quantity in the computer.

"Floating" paperwork is the most common reason for cycle count discrepancies. To facilitate the count process, it is a good idea for counters to receive a list of open transactions for the items being counted each day.

You now have the knowledge necessary to conduct physical inventory and cycle counting programs to maintain accurate stock balance information in your computer. If you think cycle counting is not worth the trouble, you need to reflect on the value you place on your stock inventory. After all, some people feel that it’s actually worth some money.

Why Weekly Forecasting?

(Part One)

Recently I received a call from a distributor who had a dilemma. They were running out of a particular popular product every month. The buyer's frustration vibrated through the phone line as I spoke to her.

She explained, "We're doing a pretty good job at estimating future demand of the product. The average difference between the forecast demand for the month and actual usage is less than 10%."

I explored another area. "How consistent are the lead times? Could shipment delays be causing the stock-out problems?"

"No," she sighed, "the vendor always delivers four business days after we order the product."

"How many customers do you have for the item?"

"We have several large customers who place a large order for the item each month, and several smaller customers who pick up a few pieces when they need them."

"When do you receive the large-customer orders?"

"Usually in the first 10 days of the month."

The buyer had just uncovered the problem. Her replenishment system forecast demand of future usage by month. For example, in September it predicted sales of 550 pieces or about 25 pieces per business day (assuming 22 business days in the month). Actual usage was 539 pieces. Her system automatically calculated the following order point for the item:

Order Point = Anticipated Lead Time Demand + Safety Stock
Anticipated Lead Time Demand = 25 pieces/day x 4-day lead time = 100 pieces
Safety Stock = 50% of lead-time usage = 50 pieces
Order Point = 100 pieces + 50 pieces = 150 pieces

The order point is a "minimum" quantity for the product, and is equal to anticipated demand during the lead time plus a safety stock quantity. Safety stock is insurance inventory to protect customer service from unusually large usage or shipment delays during the time it takes to replenish inventory. When the stock level falls below the order point of 150 pieces, a replenishment shipment would be issued to the vendor.

The problem is that the distributor does not sell 25 pieces per day throughout the month. Here is the weekly usage recorded for the September:

The majority of the demand for the product (324 pieces, or 60.1% of total monthly usage) occurs in the first week of the month. The order point of 150 pieces represents less than a two-day supply in the busy first week of the month. If we reorder a product when there is a two-day supply on the shelf and it takes four days to receive a replenishment shipment, it is not surprising that the item experiences regular stock-outs.

We recommended that the company change the time period of their forecast from months to weeks. Analyzing history over the past 12 months, we found that a formula that averaged usage for the same week in each month over the past four months resulted in the least forecast error. We went back and reforecast the five weeks of September. Note that the fifth week included one business day for September and four business days for October (i.e. the start of the next high volume time period):

Each week would have had its own order point:

Each new order point becomes effective at a date equal to the first business day of the week minus the lead time. So, four business days before the start of week one, if the stock level of the product was less than 497 pieces, a replenishment order would be issued. If the stock level was equal to or greater than 497 pieces, the buyer would leave the item alone because he has plenty of stock available to see him through the first week of the month. The result: The distributor will have this critical item available when their customers want it. Also notice that the order point drops during the period of the month with less usage activity. We are not ordering the material far in advance of when it will be needed. This will help improve the inventory turnover and overall profitability of the distributor.

Weekly forecasting works well for products that experience cyclical patterns of usage throughout a month. Next month, we will examine two additional applications for weekly forecasting: new stock items and products whose sales or usage is dependent on a particular event.

Why Weekly Forecasting?

Part Two

"What you sold or used in the past is usually a good indication of what you will sell or use in the future". This is one of the basic "truths" of forecasting future demand of stocked items. In our last article, "Why Weekly Forecasting (Part One)," we examined why, for some products or industries, maintaining usage history by week rather than by month will result in more accurate forecasts. These tended to be items whose usage followed a cyclical pattern throughout the month. For example look at a bar graph of the usage, by week, of this item over a three-month period:

Notice that 50% - 53% of total usage each month occurs in the first week of the month. If we are to base our stocking decisions on selling an average of 5.0 - 5.6 pieces per day, we would probably not have enough stock for the first week in each month where usage is 10.7 to 12.9 pieces per day. As a result, the demand forecast for this item should be based on weekly usage. There are other situations where maintaining usage by week is necessary for accurate forecasts of future demand. In this article we will look at two of them: new stock items and products whose usage is dependent on a specific event.

New Stock Items

It is common for new stock items to have a spike in sales or usage volume soon after they are introduced. This temporary high volume may be due to:

·         Promotions for the new item or salespeople featuring the new item in sales calls.

·         Customers wanting to try the new product.

·         Customers establishing a normal stock quantity of the product in their inventory.

Whatever the cause, this spike in sales is often followed by a dramatic decrease in usage:

Though the duration of the temporary increase will vary, it can usually be measured in weeks rather than months. Look at the usage of a specific new item that was added to inventory in January:

The item will be overstocked if we base the stocking decision for February on January's usage of 295 pieces. Because it is hard to predict when the "peak" of the new item usage will occur (as well as the subsequent "trough"), buyers should review the usage of new items every week (and make any necessary adjustments to replenishment parameters) until a consistent pattern of usage is observed.

Items Associated with a Specific Event

Lights for Christmas trees, fireworks for the Fourth of July, and pumpkins carved for Halloween are examples of items associated with a specific event – but all specific-event items are not necessarily "holiday goods." Several of our clients sell industrial supplies. Many of their manufacturing customers schedule plant shutdowns and maintenance around July 4th and the week between Christmas and New Year's Day. Again, for many items, we see a usage pattern in which the quantity sold in one or two specific weeks in July and December is very different from the usage in other weeks of the month:

As in our other examples, if we were to stock based on monthly usage (i.e., four or five pieces per day), we would not be adequately stocked for the scheduled plant shutdown weeks. Accurate forecasting for these seasonal events again requires examining weekly usage – that is, the quantity sold or used in the same week last year, adjusted for increasing or decreasing trends in business.

An accurate demand forecast allows use to meet or exceed customer expectations of product availability with the least amount of inventory. While few demand forecasts are 100% accurate, we must continue to strive to reduce the forecast error (i.e., the difference between the forecast and actual usage) to better predict future demand of products. After all, no major league baseball player has ever achieved a batting average of 1,000 – but this fact does not stop them from trying to improve and play better baseball. Shouldn't you also continually do your utmost to improve the profitability and productivity of your investment in inventory? One of the ways to do this is to apply forecasts based on weekly usage whenever it is appropriate.