<

 

Inventory Cycle Counting

 

PART I. 

 

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.

ABC Cycle Counting

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).

Table 1. ABC Cycle Counting Work Load

ABC Class

Number of Items

Annual Count Frequency

Total Count

A

250

6

1,500

B

1,500

2

3,000

C

4,000

1

4,000

Total 8,500

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.

Pitfalls of ABC Cycle Counting

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


STAY CONNECTED

To stay current on bullet-proofed manufacturing solutions, subscribe to our free ezine, "The Business Basics and Best Practices Bulletin." Simply fill in the below form and click on the subscribe button. 

We'll also send you our free Special Report, "Five Change Initiatives for Personal and Company Success."

  Your Name:

  Your E-Mail:

 

                              

Your personal information will never 
be disclosed to any third party.


Manufacturing leaders have a responsibility to educate and train their team members. Help for developing a self-directed, World Class Manufacturing training program for your people is just a click away:


http://bbasicsllc.com/training-modules.htm

You are welcomed to print and share this bulletin with your manufacturing teams, peers, suppliers and upper management ... better yet, have them signup for their own copy at:

http://bbasicsllc.com/subscribe.htm

With the escalating spam-wars, it's also a good idea to WHITELIST our bulletin mailing domain via your filtering software or control panel: 

bizbasics@getresponse.com



This will help guarantee that your bulletin is never deleted unexpectedly.


Manufacturing Knowledge you’ll not find at offsite 
seminars nor in the books at Amazon.com


Lean Manufacturing - Balanced Scorecard 
ISO 9000:2000 - Strategic Planning - Supply Chain 
Management - MRP Vs Lean Exercises - Kaizen Blitz 
Lean Six Sigma - Value Stream Mapping

All at one Website: Good Manufacturing Practices

 


World Class Manufacturing Menu

 Assembly Line Simulations

Lean Manufacturing Training Articles

Best Manufacturing Practices Archives

Manufacturing Best Practice Bulletin Archives

Linear Operations Survey

Lean Manufacturing Consulting

Lean Manufacturing Consultant

Kaizen Management

World Class Manufacturing Certificate Program 

Resources Links


Lean Manufacturing Training for anyone ... anywhere ... anytime
Business Basics, LLC
6003 Dassia Way, Oceanside, CA 92056
West Coast: 760-945-5596

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

Email: Click here  Privacy Policy