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‫‪Inventory Record Accuracy‬‬

Introduction What Is Inventory Record ? Inventory records are hard copy or electronic documents that reflect how much and what kind of inventories a company has on hand, committed (allocated) to work-in-process, and on order What Is Inventory Record Accuracy? Inventory Record Accuracy(IRA) is a measure of how closely official inventory records match the physical inventory. By keeping accurate and complete records of each transaction, we know where and how much we have at every point in the process.

The importance of record accuracy The Need For Accurate Inventory Records Financial Planning Marketing and Sales Planning

Financial Statements Both internal parties (management) and external parties (shareholders and tax authorities) are consumers of this information.

know exactly what can be sold to customers.

The importance of record accuracy The Need For Accurate Inventory Records New Product Planning

Procurement Planning

Production Planning

timed to roughly coincide with projected depletion of the old product inventory. Knowing what inventory is on hand and on order, to determine the quantity and schedule of future procurements allows a company to utilize its people and production facilities more fully because shortages can be predicted before materials are physically staged Inaccuracies can no longer be hidden by extra stockholding

The importance of record accuracy Causes of inaccurate records There are several known causes of inventory inaccuracy (Gruen & Corsten, 2007; Kang & Gershwin, 2007; Waller, Nachtmann, & Hunter, 2006).

 incorrectly manually adjusted by employees.  products can be stolen

 damaged or spoiled products, when not recorded as such,  returned products that occasionally not ed  a store can receive mis-shipments from the distribution center  cashier error

The importance of record accuracy  Kang and Gershwin (2005) note inaccuracies in 51% of the records used by one retail firm and claim that the proportion of inaccurate records ranges from 30% to 80% across stores,

 In a 2007 study of warehouse management success factors, the Aberdeen Group identified that the adoption of cycle counting was one of 5 characteristics correlated most strongly with “best-in-class” performance.  2008 study conducted by the University of Chicago. Their research found that a whopping 65% of the 370,000 inventory records they studied from 37 different retail stores contained errors.

Tolerances and Measures of Accuracy questions that every manufacturer has to answer

1. What are we going to make? 2. What does it take to make it? 3. What do we have? 4. What do we have to get, and when?

Accuracy is not always absolute.

P/N 1 2 3 4 5 6 7 8 9 10 11 12 13

Physical Inventory Tolerance count record (%) 94 95 96 97 98 99 100 101 102 103 104 105 106 1300

100 100 100 100 100 100 100 100 100 100 100 100 100 1300

±2 ±5 ±5 ±2 ±2 ±2 ±0 ±0 ±5 ±2 ±5 ±5 ±0

Hit

Miss X

X X X

X X X X X

X X X X

Tolerances and Measures of Accuracy Criteria for Setting Tolerances ➤ Usage ➤ Dollar value ➤ Lead time ➤ Level in the bill of material ➤ Criticality ➤ Method of handling ➤ Combinations of the above

How to measure accuracy P/N 1 2 3 4 5 6 7 8 9 10 11 12 13

Physical count 94 95 96 97 98 99 100 101 102 103 104 105 106 1300

Inventory Tolerance Discrepancy unit Discrepancy Accuracy value record (%) % cost ($) 100 100 100 100 100 100 100 100 100 100 100 100 100 1300

±2 ±5 ±5 ±2 ±2 ±2 ±0 ±0 ±5 ±2 ±5 ±5 ±0

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 8/13=0.615

0.94 0.95 0.96 0.97 0.98 0.99 1.00 0.99 0.98 0.97 0.96 0.95 0.94 0.97

10 2 6 13 8 14 7 17 16 6 13 9 2

-64 -11 -25 -40 -16 -14 0 17 31 17 50 43 11 0

Financial measurements

Value discrepancy = Unit stock value* (Quantity on record - Quantity in stock) An inventory record accuracy based on the dollar value is not recommended

How to measure accuracy

Tolerance (%)

No of item included Accuracy(%)

Exact

1

8

±2

2

15

±5

11

85

± 10

13

100

Class

Tolerance (%)

Accuracy target

A

1

95

B

2

90

C

5

80

set targets that can be achieved in the next few months, and then gradually tighten the targets.

Methods For Improving Accuracy

To improve inventory record accuracy, the error creation rate must be less than the error removal rate.

Methods For Improving Accuracy Physical Inventory

In a physical inventory, normal operations cease while a physical count of every item is conducted. The counts are compared to inventory records and, when necessary, the records are corrected. if you were to perform annual inventory checks, then you will find errors, but would have no idea whether errors occurred a week ago or eleven months ago

Methods For Improving Accuracy Cycle counting Cycle counting is a proven method to monitor and check inventory accuracy on a continual basis Replacing annual physical inventories Goals of cycle counting are: 1. To identify the causes of errors, 2. To correct the conditions causing the errors, 3. To maintain a high level of inventory record accuracy, and 4. To provide a correct statement of assets.

(through the proper use of cycle counting, inventory record accuracy above 95% can be consistently maintained) Brooks and Wilson (2004)

Methods For Improving Accuracy Methods of cycle counting aisle to aisle counting this is simple to organize, as counters start at one end of the stores and gradually work along to the other

Methods For Improving Accuracy Methods of cycle counting  aisle to aisle counting Random Sample Cycle Counting

Methods For Improving Accuracy Methods of cycle counting

 aisle to aisle counting  Random Sample Cycle Counting ABC Cycle Counting

Methods For Improving Accuracy Methods of cycle counting

 aisle to aisle counting  Random Sample Cycle Counting ABC Cycle Counting

Methods For Improving Accuracy Methods of cycle counting

 aisle to aisle counting  Random Sample Cycle Counting ABC Cycle Counting Limitations!

Category A B C D* Total

Frequency of stock No. of items per No. of checks/ checks 1000 stock weeks 4-monthly 6-monthly 1-yearly 3-yearly

100 200 600 100

8 8 12 1 29

Use the cycle counting to sort out why the records are going wrong

Three-Phase Approach to Improve Inventory Record Accuracy Published by Roger B. Brooks & Larry W. Wilson

A flawed record-keeping process cannot maintain accurate records; however, perform the process correctly, and you will have every opportunity to succeed. process integrity is an essential ingredient of record accuracy.

Three-Phase Approach to Inventory Record Accuracy

the most important of the three phases This phase designs the operational blueprint for dayto-day action on inventory related activities.

If the tasks within each of these three phases are correctly implemented, inventory record accuracy of 95 percent or better is virtually assured.

Inventory Accuracy As A Quality Issue Record accuracy problem should be treated as a quality problem and resolved using quality tools(brainstorming).

The Fishbone Diagram

Inventory Accuracy As A Quality Issue Record accuracy problem should be treated as a quality problem and resolved using quality tools(brainstorming).

The Fishbone Diagram Pareto Analysis

Accuracy Through Information Technology The development of computer-based records has enabled inventory across an enterprise to be linked Care should be taken to identify specifically what is to be achieved by new technology, Benefits are maximized if the procedures enable the following

• Input of transactions into the computer without having them written out beforehand • Fast and simple updating of records

• Computations by the computer, and not the inputter • Automatic identification of exceptions and inaccuracies.

Accuracy Through Information Technology

The basic requirements for an inventory system, if there is to be the chance of accurate records, are:

• • • • •

Multi location options on the stock record allocation options transfers between locations ABC classification Real-time operation.

Accuracy Through Information Technology

 Bar coding

 Weigh counting  Monitoring manufacturing work in progress by automatic recording devices  Radio frequency identification

improve accuracy should not rely upon information technology for answers. Major improvements will be achieved through better control and procedures before there is the need to spend significant amounts on technology.