The road to accurate inventory

It’s an average day at the mill. There are multiple, highly productive meetings being held, continuous improvement projects reporting excellent results, and people performing outstanding work in defined roles.

Suddenly, a critical section of the manufacturing system fails, and half of the mill is now down. The maintenance group responds quickly to this emergency. After reviewing the breakdown, they realize that parts are needed quickly. The maintenance coordinator checks the computerized maintenance management system (CMMS) for the items the job needs and finds these are stocked items because the equipment in distress is extremely critical. The work order is generated and parts ordered from stock. The storeroom receives the emergency request on its printer and quickly proceeds to pick the items from stock.

During the pick, the storeroom clerk realizes that some of the items that should be in stock are in quantities insufficient for the requirements. She quickly notifies the storeroom supervisor to assist in rectifying the situation. The supervisor contacts the maintenance coordinator to report the items that aren’t available in the storeroom, even though the CMMS indicated they were in stock. The maintenance coordinator stresses that the missing items are required immediately to get the critical equipment running again. The storeroom supervisor contacts the purchasing manager to expedite acquisition of the missing items. The suppliers are contacted and have advised that most of the items can be delivered within eight hours of the call. One item will take two weeks to be on-site. Purchasing and the preferred supplier start checking with other sources to see if they have the item available. Engineering is notified of the crisis and asked if they can work with maintenance to find an alternative solution for the longer-lead-time item. Maintenance and engineering review the options and determine that they can fix the unit temporarily, but it will run at a slower rate. Maintenance begins work by preparing the unit for the missing parts arriving in eight hours along with the temporary solution for the longer-lead-time item. The system is expected to be down for 12 hours. The mill manager is notified of the crisis and the unplanned events the inventory inaccuracy caused.

This scenario emphasizes one reason why inventory accuracy is of great importance. Although the costs aren’t laid out, it’s obvious that many personnel from many departments were pulled from their normal jobs to focus on this situation. Other personnel are waiting for the system to be restored before performing work. Freight costs are likely higher for the expedited delivery requirement, and lost production reduces the revenue stream. If you assume $20,000/hr for the lost production, the mill has lost $240,000 exclusive of the maintenance, shipping and parts costs.

There are numerous other reasons why inventory accuracy is so important:

• Planners will have confidence that the system quantities are in stock for future planned jobs. This stops, or at least diminishes, the need to pull items from stock early to ensure they’ll be available for the job. Early stock replenishment is reduced, saving cash outlay to suppliers before it’s truly required.
• Calls to the storeroom after checking the system for stock aren’t necessary to verify that material is really available. This is an extra step that wastes both the caller’s and the storeroom clerk’s time.
• It avoids stocking excess items in inventory to safeguard against shortages caused by inventory inaccuracy.
• It reduces obsolescence costs caused by writing off the additional quantities held in inventory as a safeguard.
• It reduces the time financial auditors and the mill’s personnel spend to verify system quantities for the inventory assets are indeed accurate. An annual physical count of inventories is generally eliminated and replaced by a sample count for confirmation.

Immediately following this crisis, the mill manager called a meeting to discuss what needs to be done so this never happens again. The participants included the maintenance manager, storeroom supervisor, purchasing manager, engineering manager, accounting manager and human resources manager. Known costs associated with the crisis were reported during the meeting. The meeting ended, and the storeroom supervisor was charged with finding a solution.

After the storeroom supervisor and the assigned inventory accuracy team members carefully investigate, they determined that a full-cycle counting program is required. The Association for Operations Management (APICS) defines cycle counting as “an inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. A cycle inventory count is usually taken on a regular, defined basis (often more frequently for high-value or fast-moving items and less frequently for low-value or slow-moving items). Most effective cycle counting systems require the counting of a certain number of items every workday with each item counted at a prescribed frequency. The key purpose of cycle counting is to identify items in error, thus triggering research, identification and elimination of the cause of the errors.”

Why is cycle counting better?

A physical inventory generally uses inexperienced personnel, and actual counts are more likely to be inaccurate. It’s rare to investigate why the counts are different than the CMMS indicates. It’s too difficult to determine why an error that occurred sometime during the previous year; plus there are too many items to review, so accuracy never improves. It requires that production and storeroom operation cease during the count.

Cycle counting uses experienced counters of inventory. It offers an opportunity to determine reasons why errors occur, as fewer items are counted each time but more often, so there’s less time lapse between accuracy and error. It offers an opportunity to correct the reasons why the errors occur — thereby increasing overall accuracy.

The counts can be made while the mill and storeroom are operational. It maintains high accuracy and can eliminate the auditor’s end-of-year full inventory count.

The PowerPoint slides illustrate how this can be done. Each time an item count doesn’t match the system quantity, perform an investigation of the reasons for the error. This is root cause analysis (RCA) and is performed for any unacceptable variance, which is anything above management’s predetermined acceptable tolerance.

RCA is a technique that determines the reasons for errors, so that corrective actions can be established to remove the recurrence of this problem for items in stock. The basic steps for RCA are:

1. Define the problem that occurred, meaning that the count was higher or lower than the system quantity.
2. What are the symptoms that caused this problem? Supplier shipped the wrong quantity; we received the wrong quantity; the supplier sent the wrong item; we didn’t perform the issuing transaction; we made a human error issuing the item.
3. What is the effect of the problem? As with the above scenario, there can be many costs associated with the immediate issue or misuse of financial and human resources’ valuable time. But there also are costs added following the issue like maintenance carrying informal inventories of specific items to ensure that their immediate needs are met from their own unrecorded stock.
4. Record the possible causes of the variance, also known as causal factors. These can be determined from simple brainstorming techniques, “five whys” technique, cause and effect diagrams and with other tools as needed.
5. Determine the problem’s root cause such as insufficient training to ensure recording accuracy, suppliers not performing accurate checks before shipping, items taken from stock after hours and not recorded because the current system takes too long to processes.
6. Recommend solutions along with costs and benefits to management for approval.
7. When needed, develop a containment process while implementing long-term solutions. These would include such practices as verifying specifications for items received from suppliers instead of just trusting the packing slip, second counting items received to ensure that what is being recorded in the CMMS matches physical count and so on. Note that containment generally requires temporary investment in additional human resources and equipment.
8. Implement solutions and monitor counts to ensure that the same situation does not arise again. If it does, then the solution provided is incorrect and RCA will need to be performed again.

The approach to immediate results for inaccuracy reasons that happen most often is to establish a control group of items, as described below.

Control group for initial kick-off

The mill management approved the approach, and cycle counting was implemented immediately. Accuracy has continued to improve leading to lower cost of storeroom operations along with reduced costs associated with stock shortages.

Sandy Cater, BAS, CSCP, PMP, C.P.P., CPIM, CIRM, is a materials management consultant at ABB Inc.