|
What Is Inventory Record
Accuracy?
 Inventory Record Accuracy (IRA) is a measure of how closely official inventory
records match the physical inventory. Many managers equate Inventory Record Accuracy with
cycle counting, but there is a lot more to it than just counting.
The units of measurement are
either dollar based or count based. These two bases have
different purposes and may give widely differing results.
Accountants and financial auditors
prefer
dollar-based measurements of accuracy. Their concern is to
ensure that the inventory value stated on books and tax returns is
accurate at an aggregate level. Discrepancies on individual items
hold little concern provided that positive and negative
discrepancies are roughly equal and the total value is the same.
Operations and material management people have a
stronger interest in the accuracy of individual SKUs. If one SKU is
short, they can rarely substitute some other part or item that
happens to be long.
Why Is It Important?
The reasons for having accurate records are legion.
Here are a few of them:
Financial Reasons:
-
Investors want to know that the
book value
is accurate.
-
Lenders who loan money with
inventory as
collateral want to protect their loan.
-
Taxation often depends on inventory value.
Overpayment of taxes reduces profits and underpayment incurrs penalties.
-
Poor accuracy begets more inventory and requires
more capital. Inventory is often the largest consumer of capital
for an enterprise.
Operational Reasons:
-
Stockouts interrupt production and create
delivery delays.
-
People waste hours looking for misplaced or
missing items.
-
When stockouts are frequent,
inventory rises to compensate. This
unnecessary inventory requires space and capital.
-
Inventory turnover reflects
overall manufacturing efficacy.
-
MRP and ERP systems require very high accuracies
(95%-99%) to function well.
-
Stockouts increase cost in a hundred ways and sap
the time and energy of everyone.
IRA &
Lean Manufacturing
Lean Manufacturing reduces the need for inventory and
transaction volume. It makes high accuracy easier. However, this
takes many years and Inventory will be with us for a long
time.
The stockouts common to firms with poor accuracy
generate significant fears throughout the organization and
create
complications for a lean implementation. Because of this, increasing
inventory accuracy may be a necessary part of a lean manufacturing
strategy.
|
Reasons For Inaccuracy
There are many causes for inaccurate records. People
may enter data inaccurately or not at all. Confusing location codes
cause discrepancies between recorded and actual locations.
Occasionally, software bugs introduce errors. The thousands of
possible causes are either
process-related or volume-related.
Process Related Errors--
Each step in a transaction process introduces some probability for error, even if that
probability is small. To reduce process-related errors, we
must change the process.
Volume-Related Errors-- Every transaction
process has an inherent error rate
or probability of error
resulting from the structure and execution of the process. Over time, and with many
transactions, the number of new errors per week or per thousand
transactions is relatively constant, if the process
remains unchanged. The more transactions, the more errors.
If
transaction volume is reduced through kanban, backflushing, Cellular
Manufacturing or other simplification, errors drop proportionately.
Methods For Improving Accuracy
To improve inventory record accuracy, the error
creation rate (i.e. errors per week, month, etc.) must be less than the
error removal rate. to increase accuracy we can decrease errors
flowing in or increase the removal rate.
Figure 1 Inventory Error Rates
Methods to improve accuracy include Cycle
Counting, Physical Inventory, Transaction Reduction and Process
Improvement. An optimal approach uses them all.
Physical Inventory-- In a physical inventory,
normal operations cease while a physical count of every item is
conducted. The counts are compared to
inventory records and, when necessary, the records are corrected.
Cycle Counting-- A small number of items are
physically counted, daily, on a random or semi-random basis. The
physical count is compared to the inventory record. When necessary,
the records are corrected.
Process Improvement-- Process Improvement
examines the transaction processes. Changes are identified that
reduce the probability of error.
Transaction Reduction-- The most effective way
to reduce errors is to reduce the number of transactions. Fewer
transactions introduce fewer errors. Kanban, BOM simplification,
cellular manufacturing and other elements of Lean make this
feasible.
|
