A solution to the inventory accuracy problem is called “sneaker net.”  You put on your sneakers, go to the stockroom and look around.  That’s not very efficient.

What you need is a solid inventory record accuracy program so you can easily and immediately answer the question, “Do I have any of this on hand?”

The best tool I’ve seen for insuring a high level of inventory accuracy and for maintaining that high level is an old tool, cycle counting.  But before you start a cycle count program, you must gain control of the stockroom.  Otherwise, your efforts are useless.

Building a system that works
The first step is stopping the continual outward movement of inventory through “unofficial” channels.  Lock the stockroom up and put someone in charge.  Then, implement bar codes to get accurate data in your inventory system.  This provides the 99.99 percent record capture accuracy you need.  It takes care of the midnight acquisition and gives you a tool to minimize data transfer errors.

That done, let’s examine the tool that helps you find, control and eliminate the human error side of the problem, cycle counting.

Physically taking inventory is the most inaccurate way to determine what’s in stock.  Basically, physical inventory is an accounting procedure designed for tax purposes.  It does nothing to improve stockroom management.  As long as the numbers come close, the accountants are happy.

Taking physical inventory does nothing to correct the cause of the problem that created inventory errors in the first place.  So next year when you take inventory, you find the same errors, make the same record adjustments and deal with the same problems.  You’ve gained nothing.

Cycle counting allows a higher level of inventory record accuracy and lowers the cost of maintaining that accuracy level.  At the same time, it keeps your operation in business.  Remember, you shut down operations to take physical inventory.  With cycle counting, you keep going while doing the count.  Who does the cycle count?  Your stockroom people.  Why?  They have the most knowledge on part numbers and what materials look like.  Having inventories under control makes their lives easier.

Examining cycle, physical
Nothing is free in this world.  Cycle counting comes at a cost, but cost savings can counter them.

Now, cycle counting.  Positives?
1) Timely error detection and correction.
2) Fewer part ID mistakes.
3) Minimal production time lost.
4) Systematic record accuracy improvement.

Cycle counting is fairly easy.  Every morning, you count a portion of inventory.  The cycle counter receives a list of parts to count and provides all available information about the part.  After completing the count, check the record and look for a count match.  If there’s a discrepancy:
1) Check and total counts for all locations.
2) Perform location audits.
3) Recount.
4) Check to account for all unprocessed documents.
5) Check for item identity (part number, description, unit of measure).
6) Recount again, if needed.
7) Investigate error factors (recording, quantity control or physical control problems).
8) Investigate both positive and negative error reasons.

With the count complete and the reason for errors in the records, you just change the records.  Right?  Wrong.  Now that you know the reason for the error, you correct the cause so it won’t happen again.

Added (or value-added) work?
How many times a year do you count your inventory items?  Generally speaking, to meet IRS standards you must count your entire inventory at least once a year.  So that’s what you do to the “C” stock items.  Count “B” stock items twice a year and high-moving, high-dollar items at least four to six times each year.

It sounds like the “extra” inventory counts add a lot of work, but do they?  Here’s the workload for your stockroom people: As an example, assume you have 10,500 parts in your stockroom.  The table below shows auditing activity levels and compares cycle counting with the physical inventory method.

The workload increased by requiring an additional count of 3,500 parts per year.  But examine the workload.  Cycle counting should be done every day.  If your operation works five days a week, 52 weeks a year, you work 260 days a year.  If cycle counting 14,000 parts is divided by 260 days, you count 54 parts per day.  If your stockroom is this size, you probably have three attendants, one per shift.  Dividing by three brings the count to 18 parts per person per day.

When you do a physical inventory, you count all items at the same time.  Some bins are full and some are empty.  On average, they’re half-full.  Therefore, you count an average volume of inventory items.

When you cycle count, even though you count some items more than once a year, you can choose when you do the count.  Count when the bin is at or near empty.  Count accuracy goes up and the workload goes way down when you count the empty bin.  And, think of this: After completing a count, the cause of the error is resolved, so subsequent counts are simple.  The workload goes down.  Also, consider that there are real savings in the cycle count system since the facility is not shut down during the count.

Here’s a list of trigger points to do the cycle count.  These save time, money and minimize inconvenience to the operation:
1) Count when the bin record shows empty.
2) Count at the reorder point (that also verifies the need for the order).
3) Count on off shifts when no receipts are processed.
4) Count in the early morning just after the inventory system is updated and parts aren’t pulled for the day’s operations.
5) Count when a bin record shows “less than needed” for an upcoming job.
6) Count “C” items at the slow point of the year.
7) Do a cycle count on empty bins.  Why would you count a bin that your inventory records show is empty?  That’s where you’ll find that misplaced shipment of gold bricks you’ve been unable to find.

Selling the benefits
After going through this and finding the errors, it’s finally time to correct the inventory bin record.  Accountants may not like this because you change the value of your assets, but a variance account handles this.  And, you discontinue taking physical inventory.

Generally speaking, you’ll need to verify to your auditors that the cycle counting procedures are better than the physical.  It usually takes two cycles to establish credibility.  You’ll be able to show that cycle counting:
1) Eliminates taking physical inventory.
2) Assures timely detection and correction of inventory errors.
3) Stresses problem solving.
4) Develops inventory management specialists in your stockroom.
5) Creates fewer mistakes.
6) Helps maintain accurate inventories.
7) Reinforces a valid materials plan.
8) Means less obsolescence.
9) Means less on-hand inventory.
10) Eliminates inventory writedowns.
11) Leads to a correct statement of assets.