The Glass Ceiling of Cycle Counting

The Situation

This company's cycle counting program enjoyed initial success but then stalled out. The situation was particularly frustrating because the program's justification was based on the elimination of the annual physical inventory and this could only happen when accuracy reached the goal of 92%, i.e., anything less seemed like complete failure. Here are the essential facts:

• The company had a large jobbing machine shop with over 10,000 products.

• An MRP system processed thousands of transactions each day as batches moved from one department to the next.

• Prior to cycle counting, accuracy was on the order of 60%.

• The finance department had instigated a cycle counting program with a goal of 92% accuracy.

• The intent of the cycle counting program was to eliminate the annual physical inventory.

• The cycle counters and their supervision worked for finance.

• Some attempts at determining root error causes had been made but these efforts were swamped by the massive amounts of transaction activity.

• Most of the cycle counters and their supervisor had received Six Sigma and process improvement training but seemed unable to relate it to cycle counting.

• Inventory accuracy had risen from the original 60% range to 86%.

• Accuracy had been stuck at 86% for months and frustration was growing.

Root Causes

The immediate cause of this problem is that errors are entering the system at about the same rate that the cycle counters remove them. When the removal rate exceeds the input rate, IRA improves. But, the higher the IRA, the fewer errors get removed by cycle counting. The fundamental choice is to reduce the entering errors or remove additional errors through more cycle counts. Additional cycle counts will be expensive and, as IRA improves, even less effective.

The best choice is to prevent new errors from entering the system. The company had trained their people in Six Sigma and process improvement but they were unable to apply it to the problem of transaction errors. This reflects several issues:

• The most difficult problem with any adult training is the transfer of classroom theory to actual practice. Classroom exercises did not exactly match the problems at hand and the inexperienced personnel could not make the transition.Action Learning assists with this transition.
• Six Sigma often has so much complexity-- so many tools and acronyms that people get confused about which to use and what to do. The reality is that 3-4 of the simplest tools, borrowed from TQM and Work Simplification, will solve 90% of everyday problems.

Perhaps a more fundamental root cause was the fact that Finance had instigated, planned and implemented the program without other involvement. All parties operated from a mental model that considered inventory accuracy Finance's responsibility and that the Finance department received the primary benefit by elimination of the annual physical inventory. In reality the biggest benefits are not from the physical inventory elimination.

Moreover, Finance was not creating the new errors. The errors are created in the warehouse, on the factory floor, in sales, in scheduling and even in other departments. Their participation in process improvement is absolutely essential.

The Solution

• Transfer the cycle counting program and corresponding responsibility to Operations.

• Utilize Finance in an auditing role to verify accuracy metrics.

• Employ Kaizen and Action Learning workshops in cross-functional process improvement teams.