| If you make or sell physical products, controlling your | | | | units of each item. The number of units of each |
| inventory is an essential element for success. You | | | | different item will be used in the actual calculations |
| certainly don't want to lose anything by having it | | | | used to classify the items, but here we're just trying |
| grow legs and walk out the door. You don't want | | | | to get across the concept of how we classify items |
| things to get damaged, pass their expiration date, or | | | | by value. So if you've got that concept down, let's |
| become obsolete while sitting around waiting to be | | | | jump into the calculations of how we determine the |
| sold. You don't want to have too many or too few | | | | classification of our inventory items. |
| items on-hand. So you actively manage your | | | | Here's the steps we're going to take with the |
| inventory, put policies, procedures and physical | | | | calculations: |
| controls in place to ensure that your inventory | | | | 1) Determine the annual usage for each item |
| management system supports your organizational | | | | 2) Determine the annual usage in dollars for each item |
| goals. | | | | 3) Rank the items in descending order of value |
| One aspect of inventory management that | | | | 4) Calculate the cumulative value, cumulative % of |
| organizations often struggle with is ensuring the | | | | value, and cumulative % of items |
| accuracy of the reported inventory by their | | | | 5) Classify the items as A, B, or C |
| inventory management system. Inventory accuracy | | | | The annual usage for each item should be the annual |
| means that the quantity and location of inventory | | | | quantity needed. You might determine that quantity |
| items reported by the inventory management | | | | from actual sales, demand (the quantity that |
| system matches the actual physical quantity and | | | | customers wanted, not what you actually gave |
| location of the items. If your system reports that | | | | them), or the quantity used in the manufacture or |
| you have 100 units in stock, but you actually have 90 | | | | assembly of other items. Depending on the systems |
| or 120 units when you physically count them, your | | | | you have in place, this may or may not be an easy |
| inventory records are not accurate. If your system | | | | number to determine. The annual usage in dollars is |
| reports 100 units in location A, but they're physically | | | | simply the annual usage, that was just calculated, |
| found in location B, again, your inventory records are | | | | multiplied by the unit cost of the item. |
| not accurate. | | | | Inventory item #1:annual usage = 500 unitsunit cost |
| Why is inventory record accuracy so important, and | | | | = $1.00 per unitannual dollar usage = 500 x $1.00 = |
| why should you spend the time and money to | | | | $500 |
| ensure accurate records? There are three primary, | | | | To rank the items in descending order of value, list |
| and very good reasons. | | | | the items from top to bottom from highest annual |
| 1) It will cost less to keep your records accurate | | | | usage in dollars to lowest annual usage in dollars. The |
| than it does to operate under your current conditions. | | | | next step is a little trickier, but not too much. The |
| 2) Your customer service will improve. | | | | cumulative value of all inventory is the total annual |
| 3) You'll increase revenues through your improved | | | | dollar usage of all the inventory items on the list. The |
| customer service. | | | | cumulative value of each item is the value of that |
| It will cost you less is to keep accurate records. The | | | | item plus all the other items listed above it. So the |
| record accuracy program, cycle counting, becomes a | | | | first item's cumulative value is just the annual dollar |
| part of the job. Just as processing orders, picking and | | | | usage of that item. The cumulative value of the |
| packing, and shipping are part of the job, cycle | | | | second item on the list is the value of the first item |
| counting becomes part of the job. It's not a separate | | | | plus the value of the second item. |
| or additional expense, though the initial ramp up and | | | | Inventory item 8, Annual Usage in $'s = $10,500 |
| training will require a small investment. | | | | Inventory item 23, Annual Usage in $'s = $ 8,700 |
| Your customer service will improve. When you tell a | | | | Inventory item 17, Annual Usage in $'s = $ 6,200and |
| customer that you have the units in stock and can | | | | so on, to |
| ship them right away, you can be sure that you do | | | | Inventory item 1, Annual Usage in $'s = $ 500 |
| have the units in stock and can ship them right away. | | | | After you rank all your inventory items by value, |
| No more failed promises, frustration, or mad | | | | take the top 20% of the items or top 80% of the |
| scrambles due to inventory record errors. Your | | | | total value, and make them the A items. Take the |
| employee satisfaction will grow too, because of this. | | | | next 30% of the items or 15% of the value, and |
| You'll increase revenues through improved customer | | | | make those the B items. The rest will be C items. |
| service. Keeping promises is a key element of | | | | This is just your starting point, or an easy guide to |
| top-notch customer service. When you keep | | | | get you started. You can move items into a different |
| promises because you know what you have and | | | | classification than is indicated by this calculation. Hard |
| where it is, customers will notice. They'll choose you | | | | to obtain items are probably A items, even if their |
| over the competition who can't make and keep | | | | annual dollar value doesn't put them there. Or if a |
| those promises. | | | | particular item has a very high unit cost but low |
| You also make many decisions based on reported | | | | usage, you probably want to place more control over |
| inventory balances. You make daily ordering decisions | | | | that item. |
| for different items, including raw materials, purchased | | | | This is all well and good, you're saying to yourself, |
| components, and resale merchandise. You make | | | | but what do we do with it? Now that we've got all |
| production planning and scheduling decisions and | | | | our items classified as A, B, or C, what do we do? |
| shipping and delivery decisions depending on your | | | | One thing is to set the levels of physical and |
| type of business. And you make long-range strategic | | | | procedural control over the items. Maybe you want |
| decisions based on inventory balances and trends. Do | | | | to place all A items into a location with more physical |
| you want to trust these decisions to inventory | | | | controls (i.e. locks), or require different paperwork to |
| records that you can't depend on and don't trust? I | | | | be filled out for A and B items. With C items, you |
| didn't think so. | | | | often need very few physical controls, and little |
| So what is Cycle Counting, and how do you get | | | | paper trail requirements. Remember those nails? Just |
| started? The first, and most important thing, to | | | | give out as many boxes of nails as the crew needs |
| remember is that the purpose of cycle counting is to | | | | for the day and be done with it. |
| discover the sources and reasons for inventory | | | | The other thing that the A, B, C classifications does |
| errors, then eliminate or fix these causes so they | | | | is determine the count frequency of each item, or |
| don't recur. Cycle counting is not, as some people | | | | how often each item will be counted. It's called cycle |
| seem to think, just counting items more often and | | | | counting because you count different items in a |
| updating the records with whatever you've counted. | | | | recurring pattern based on the A, B, C classification. |
| That's just extra work that accomplishes nothing. | | | | You have to count each inventory item and compare |
| Find the causes of errors, and eliminate those causes, | | | | the physical count with the reported record count to |
| that's what it's all about. The primary steps in the | | | | find out if there is any error. If there is no error, you |
| cycle counting process are: | | | | move on to the next item. If there is an error, you |
| 1) Find the causes of errors in the inventory records. | | | | research the cause, put policies and procedures in |
| 2) Correct or eliminate the causes of errors so they | | | | place to eliminate the cause so it doesn't happen |
| don't happen again. | | | | again, then fix the reported records to reflect the |
| 3) Adjust the inventory records. | | | | physical count. |
| Steps 1 & 2 include more detailed process steps, | | | | The usual pattern, or frequency, for counting items is: |
| of course, but remember these three, and their | | | | A Items - 12 times per year (once a month) |
| proper order, and you'll be well ahead of your | | | | B Items - 4 times per year (once a quarter) |
| competition. | | | | C Items - 1 time per year |
| One of the basic concepts of cycle counting, and | | | | Depending on how many different inventory items |
| inventory management in general, is that not all | | | | you have, this could be a lot of work. But, it's less |
| inventory items are of equal importance and they | | | | work, less disruptive, and provides better results than |
| don't all need the same level of control. So what we | | | | an annual complete physical inventory. |
| do is classify all of the different inventory items as | | | | The frequency shows A items being counted once a |
| either A, B, or C items. A-class items are the most | | | | month, B items once every three months, and C |
| important or need the most controls in place. C-class | | | | items once a year. But here's the thing, that doesn't |
| items are the least important, at least on an individual | | | | mean that you set aside one day a month to count |
| unit basis, and need the least amount of control. | | | | all the A items. The idea is that you count a few |
| B-class items fall somewhere in the middle. If that | | | | items every day. Yes, that's take a physical |
| sounds a little nebulous, it is, but don't lose any sleep | | | | inventory count of a few different inventory items |
| over it, and you'll see why. A-class items are items | | | | every day. There are several ways you can go |
| that are high-cost, have long procurement lead-times, | | | | about that, but one way to start is to set up a |
| or are difficult to obtain. C-class items are low-cost | | | | schedule. Of course, if you only have 10 different |
| and easy to get. If you're building houses, A items | | | | items, as in the first example, it's pretty easy. But |
| might be the chandeliers for the dining room, and C | | | | most companies have many more than ten different |
| items might be the nails that you use to put the | | | | items. You might have hundreds, thousands, tens of |
| frame of the house together. If you lose an | | | | thousands, or more. |
| expensive chandelier or two, that's a big deal. If you | | | | Say you've got 1,000 different items. If they fall |
| lose a few hundred nails, nobody will even notice. | | | | neatly in line with the 80/20 rule, you'll have 200 A |
| To get started classifying all our items as A, B, or C, | | | | items, 300 B items, and 500 C items. If you're going |
| we usually start with classification by value. This is | | | | to count your A items once a month, or 12 times a |
| because it is often found that a large percentage of | | | | year, that's 200 items x 12 = 2,400 counts. That |
| the total inventory value comes from just a few | | | | means that over the course of the year, you have |
| inventory items. You might know this as the 80/20 | | | | to perform 2,400 separate counts of your A-class |
| rule, or Pareto's Law. We use this as an initial basis | | | | items. Say you work 240 days a year, that means |
| for classifying our items. | | | | you have to count 10 different A-class items every |
| 20% of inventory items = 80% of inventory value = | | | | single day. Then you've got all the B and C items, and |
| A classification | | | | you can see that you've got your work cut out for |
| 30% of inventory items = 15% of inventory value = | | | | you. But again, this is better than not doing it this |
| B classification | | | | way. |
| 50% of inventory items = 5% of inventory value = | | | | And you always have to remember, the point is not |
| C classification | | | | just to count items and update the records with |
| Or, if we have 10 different inventory items with a | | | | what you've counted. The whole point is to discover |
| total inventory value of $10,000, two of the items | | | | any causes of any errors, and fix them so they don't |
| will have a value of $8,000. Then three of the items | | | | happen again. If you fix all the causes of errors, you |
| will have a value of $1,500 and the other five items | | | | won't have any errors. Then when you count the |
| will only have a value of $500. You can see from this | | | | inventory, the records will match the count, and you'll |
| example that those two items probably justify a | | | | be done. Then you can rely on those records, trust |
| greater level of control than the five items with only | | | | them, and reap the benefits of having accurate |
| $500 of total value. Just to be clear, we're talking | | | | records. So get started! |
| about different inventory items, not the number of | | | | |