If you have read my book the Lean Game Plan, you know that I talk about having the lean basics in place- Inventory Accuracy, Bill of Material accuracy and 6S before getting more sophisticated. Today, I want to talk about easy ways to improve inventory accuracy.
Palletized.us
I’m sure you have run into the situation, usually at month-end, when you are working hard to ship your product and you run out of parts. How did this happen you think to yourself? The computer said we had plenty on hand when MRP ran. The parts didn’t show up on the PO suggestion or the shortage list. I know they weren’t hung up in receiving inspection or MRB or any of the other places where parts get held up.
The problem is you didn’t have enough on hand. Your inventory wasn’t as accurate as you thought it was. It doesn’t matter if it is a $1000 part or a 5-cent part. If you don’t have it, you can’t build the order.
Another area where inventory accuracy becomes an issue is in the twice-annual physical inventory activities companies conduct. These often occur during the summer and near year’s end when everyone is busy with family activities. The physical inventory activity comes at the worst time possible.
Let’s discuss some ways to improve inventory accuracy. First, I want to introduce cycle counting. Cycle counting involves counting some of your inventory every day. While this may sound like a lot of activity, over time, your inventory accuracy improves, and the time spent cycle counting will decrease.
The first step in developing a cycle counting strategy is to divide your inventory into A, B, and C items. This is done based upon the dollar value of the inventory item. Annual usage x item cost = total inventory dollar value. The items that make up the top 80% of your inventory value become A items. You count all A items once a month. Items with expiration dates are also included in this list.
Items that make up the next 15% in inventory dollar value are the B items. Notice between the A and B items we are now covering the top 95% of your inventory value. B items get counted quarterly. This means you will cycle through the B items once every three months.
The remaining 5% of the inventory value are C items. Count C items once a year. Typically, these are nuts, bolts, and other hardware items. Because the movement of these parts is frequent and the dollar value is small, consider turning these over to a vendor stocking program. In a vendor stocking program, your supplier manages the inventory on a consignment basis.
Warehouse team members can print a report which tells them what items to count daily. Now you might think it will take the warehouse members hours to conduct the inventory. Remember we are counting something every day. It doesn’t take much time to count a few items daily and update the ERP system.
Initially, you may not have great inventory accuracy. As you continue the process your accuracy improves, the time it takes goes down and you eliminate stock-outs because you have a more accurate picture of the inventory. Inventory accuracy is one of the Lean basics that you need in place before trying anything more sophisticated.
As always, it is an honor to serve you and I hope that you and your company are getting better every day!
Follow me on Twitter
Join me on Linked In
Listen to the podcast episode here