Inventory Cycle Counting

One of the first things a company does when implementing Manufacturing Resource Planning, is to review the accuracy of their inventory records. This is done primarily to ensure that the information resulting from the universal equation of materials requirements planning is trustworthy; nobody disputes the notion that your plans are as good (or bad) as the information you put into them. In pursuing the goal of getting above 95% in Inventory Record Accuracy (IRA), many companies have adopted the traditional ABC Cycle Counting methodology. To a great extent, this selection has been influenced by auditors (both internal and external) as well as by the availability of computer logic already present in computer packages.

However, when ABC Cycle Counting is analyzed more carefully, and the costs associated with counting parts, wasted resources, loss of productivity, etc., are properly measured, one wonders if the price paid is actually too high for the benefits derived.

First of all, lets define what we mean by ABC Cycle Counting. It is a frequency selection method that arbitrarily sets the numbers of counts for a particular item (all items are to be counted) according to the weight given by an ABC classification that groups parts primarily according to their annual monetary usage. This results in "A" items being counted more times than "B" items, which in turn are counted more frequently than "C" items, the frequency per category is usually constant. The question of when to count is typically answered by a timetable based on when the item was last cycle counted (see Table 1).

ABC Cycle Counting addresses two requirements. First, the whole inventory is counted at least one time during the year. By doing so, the auditors are satisfied with the accuracy of the book value of the inventory and therefore the Materials Management Department (or whoever in the organization is responsible for inventory and warehousing) is no longer required to take a complete annual physical inventory. Second, together with the first requirement, a measurement of the accuracy of the whole inventory is obtained.

In reviewing these requirements one has to question if they are completely valid.

1. Number of items counted. Cycle counting all items at least one time during the year is equivalent to a taking a physical inventory. Although it can be argued that this type of

sequential physical inventory is more efficient than the annual procedure, the reasoning behind it does not improve operational or financial accuracy.

2. Accuracy of the total population. No doubt that it is important to have an estimate of accuracy of the whole inventory. However, this approach attempts to measure the accuracy of the inventory balances in the warehouse, not the accuracy of the process that produces errors in the inventory balances. In fact, what it's really necessary is to assure that the process, that is, the inventory transaction processing system works in such a way that no errors are ever made. If we were able to demonstrate this (Process Capability in Total Quality terminology) the implication is that the inventory balances will be accurate at all times, not just when a cycle count is taken.

With these definitions, lets explore the areas where waste and excess costs occur. The primary costs of taking a physical count are associated with time; how long are human and material resources tied up.

When a cycle count is performed on a fixed time schedule, based on the frequency of counts according to the respective ABC classification, 100% of the effort is waste attributable to the cycle counting process, since none of it translates to any value added, other than the cycle count itself.

Further analysis will uncover that even more waste is generated. When, and if an error is detected, a thorough investigation should be carried out to identify the true causes of the error in order to immediately eliminate them. Typically, with this set up, an unpredictable number of transactions would have to be reviewed to identify the real cause of error. Under these circumstances, a lot of unnecessary work is added to the auditing function (for instance, an "A" item cycle counted 6 times per year with an average of 240 transactions annually results in the review of 40 transactions on average).

To be Continued

Lean Six Sigma Training   Thinking Out of the Box   
Balanced Scorecards  Strategic Tactical Planning  
Supply Chain Inventory Management  Total Quality Management Principles
Lean Manufacturing Implementation  Lean Manufacturing Principles