Inventory Record Accuracy – Its Significance for Business Success

Ask yourself the following questions about your business: • Do you find yourself with more inventory errors than normal? • Do you often find yourself coping with emergency rush orders to fill stock, or suffering stock outs? • Are your records met with skepticism rather than trust? • Do you pay more than you’d like in freight and carrying costs? • Would you be confused about how to measure and improve inventory accuracy in your business? The majority of people in the business can answer “yes” to at least one of the above questions, which signifies a critical problem with Inventory Accuracy. What Defines Inventory Record Accuracy Inventory Record Accuracy (IRA), or Inventory Accuracy, as it is commonly known, is concerned with gauging how closely official inventory records of a business are in accordance with its physical inventory. Though IRA is often equated to cycle counting, there are other more important dimensions to it than simply counting. There are two measurement units associated with inventory accuracy, i.e. dollar based or count based, and there are different purposes to which these alternative units are used. This also leads to variation in the focus for improvement within an organization. Auditors and Financial Managers are more interested in dollar-based inventory analysis, so that it can help them equate book values and actual tax returns at an aggregate equal level. To them, item-based individual discrepancies are of meager concern if the positive and negative discrepancies round up equal in approximation and the overall values remain almost the same. On the other hand, for operations and material management officials, count based inventory is of more value, so that they can maintain and balance individual SKUs. What are the reasons companies strive for high Inventory Accuracy? Financial Reasons • Investors need to ensure the accuracy of the book value of the Inventoryrn• Taxation issues also often get affected by inventory value. Any variations in the value can lead to overpayment or underpayment of taxes. Overpayment results in profit reduction, while underpayment leads to penaltiesrn• Poor inventory skills in a business lead to further expenditures on rectifying inventory. It is for such reasons that inventory often ends up devouring the largest capital share of an enterprise Operational Reasons • Stockouts result in production and delivery delaysrn• Search for missing or misplaced inventory items consumes labor as well as introducing time delaysrn• Overall manufacturing efficacy is also affected with inventory shortagesrn• Very high inventory accuracy (95% - 99%) is required by systems like ERP and MRP to perform well Reasons For Inaccuracy The inventory accuracy of a business can go wrong for many reasons; from entering incorrect data, not processing transactions to using incorrect location codes when moving stock. These can be the typical reasons behind the unexpected and unwanted variation in book values and actual values. These inaccuracies can be either process related or volume related. Process Related Inaccuracies - Every single step leading to completion of a transaction comes with a probability of error, no matter how meager that probability is. To eradicate process-related errors, the process need to be simplified and well documented. Volume Related Inaccuracies- There is an inherent error rate (probability of error) associated with every single transaction due to the structure and/or execution of the process. That translates into more errors with more transactions. This can be curbed through Kanban, Cellular Manufacturing, back-flushing or such other simplification processes, dropping the error rate proportionately as a result. Methods For Improving Accuracy To improve the inventory accuracy, the error rate (errors per 1000 transactions, per week, per month, etc.) needs to be reduced. Different methods are used to improve inventory accuracy mainly by improving the inventory skills of employees in the business through training program in skills such as: Cycle Counting – Physical counting of a limited or small number of items is carried out on regular or random intervals, the results of which are compared with the inventory record on the books. Records are rectified when found and the root causes fixed to prevent re-occurrence. Physical Inventory–In this process, every single item undergoes a physical count, while ceasing normal operations. These counts are then compared with inventory records to ensure accuracy. This method is prone to errors in counting, is expensive and does not enable the fixing of the root cause of the error. Process Improvement– Various techniques such as Pareto analysis, cause and effect diagrams, control charts, check sheets etc. are often used for examination of the inventory transaction processes for the purpose of identifying and rectifying any problem areas. Transaction Reduction–Reducing the number of transactions required for completion of a process also leads to reduction of errors, i.e. fewer transactions lead to fewer errors. Different mechanisms are used for that, such as BOM simplification, Kanban, Cellular Manufacturing and so forth. Remember with New Skills your Future Starts Now