What Is Inventory Record Accuracy?
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:
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 incurs penalties.
Poor accuracy begets more inventory and requires more capital. Inventory is often the
largest consumer of capital for an enterprise.
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
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