The importance of an accurate inventory can not be overstated. Without an accurate knowledge of what raw materials are available for production, the production schedule becomes more of a wish list that a statement of action. Lack of materials can lead to poor on-time delivery performance, actual penalties for late deliveries, and a longer production lead time than is necessary. Many firms use cycle counting to increase the accuracy of the inventory information. However, the real benefit in cycle counting is the identification of the causes of the errors and the corrective measures to prevent re-occurance of these errors.
The APICS Dictionary defines cycle counting as “An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year”. The definition goes on in more detail, but the last sentence in this definition is most important: ” The key purpose of cycle counting is to identify items in error, thus triggering research, identification, and elimination of the cause of the errors.”
Many firms establish cycle count programs as a means of improving inventory accuracy. These firms conscientiously set up a process of determining which parts numbers to count and how frequently to count them; Classifying their inventory as A,B or C based on value and frequency of use; Setting a count tolerance for each level of inventory (A,B & C); and assigning personnel to conduct the counts and correct the inventory data. However, all this effort is wasted because the these manufacturing firms stop after the inventory count is made correct. These companies focus on simply correcting an incorrect count and don’t appreciate the need to correct the causes of the inaccuracies.
When people only correct the count they are only correcting a small sample of the part numbers. The same erroneous transactions are still continuing for all the remaining part numbers!
A better process is to focus on identification of the causes of the errors and taking corrective action to eliminate these causes. This is, initially, a time intensive process but within a year it will yield huge benefits in terms of inventory accuracy. First, select a sample of part numbers to include A, B and C level parts. Second, cycle count these parts each time period (a weekly cycle count of the same parts has been shown to work well). After the count is completed, the real work begins in the third step. Knowledgeable personnel must trace the errors and find the causes of the errors. The causes of inaccurate inventory could be poor warehouse discipline; poor, or no, marking on parts; poor bin location marking; software entry problems; incorrect tolerance limits on C level parts; and poor training for personnel who handle the inventory. Step four; make a list of all the errors and tally the number of occurrences of each error. Then develop corrective actions for each of the major causes of errors. Once the corrective actions have been implemented, you start the process over again. By sampling the same part numbers you will have a chance to see if the corrective actions have a positive effect. You will be looking at a relatively small number of transactions in a short period of time and finding the errors will be relatively easy.
As you chart the accuracy level of the inventory you will begin to see dramatic improvement. At the next annual physical inventory you should see major improvement in the inventory level. As the accuracy level improves you will notice fewer production disruptions due to inventory problems. This is the best measure of your efforts.
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