Supply Chain News: Inventory Metrics, Part 2

In the first installment, we explored inventory accuracy and the impact that velocity may have on that accuracy. (See Inventory Metrics, Part 1)  Now let’s discuss the process of managing inventory through cycle counts and physical inventories.  Inventory can clearly assume many variables beyond just count, however, count or quantity is the most important factor used by most supply/logistics professionals.
 

If the count is wrong, the value of inventory - which is a major asset for many companies, will be misrepresented.  But beyond the immediate financial implications, errors in inventory counts can create problems manufacturing products and fulfilling customer orders.  Errors can generate excessive ancillary costs associated with searching for the missing stock and unnecessary expediting of incoming and outgoing materials.  It can also drive changes in forecasts while trying to respond to changes in the on-hand balance, resulting in shortages or excess and obsolete stocks.  For all these reasons, and more, managing accurate inventories is important. 

Our view is that you should cycle count to improve your business operations, not to meet a corporate requirement, and concentrate on the inventory inaccuracies that impact your business the most such as customer service and production. Most ERP and WMS systems have the ability to manage cycle counts using ABC stratification and there are many ways companies choose to stratify.  What is the best way to establish your cycle count parameters?  Do you establish classifications based on pure value or velocity?  Many companies develop a weighting formula that considers both value and velocity.  More recently, we are seeing companies developing a list of critical components that have the most impact to their profitability or customer service. 

However, counting and correcting inventory balances is not enough.  The goal should be to understand the cause of the errors and correcting the processes that drove them.  Well managed cycle count programs will be used as an input to the company’s continuous improvement process.  The process should drive root cause analysis and process improvement. 

But what about the debate on using a documented and rigorous cycle count program verses an annual “wall-to-wall” physical inventory, preferred by many companies (or their financial teams)?  Can cycle counting replace the physical inventory we all dread? We think so, and we are seeing more and more companies moving away from the classic annual inventory. 

If you ask most supply chain professionals what they think about an annual physical count, they will tell you that the process is badly flawed. We often hear comments like:

• We spent months after the physical correcting count errors.
• We never have the time during a physical to investigate discrepancies and end up just adjusting it.
• When “enlisting” people who do not regularly work in the warehouse to count, we end up with all types of count errors; even the experienced people make mistakes in the rush to finish. 
• My operation is 24/7 and stopping my business to count has a huge impact to my customers and results in backlogs and issues for days afterword.
• With all the checks and balances in our processes, we just don’t see the transaction errors we used to see, so do we really need to do a physical when we typically see adjustments from inventory below 0.5%?
  

In our opinion, when you have a comprehensive cycle count proces,s there is little benefit to a physical inventory; in fact, it may do more harm than good.  And financial auditors are recognizing this; more are agreeing to random counts to audit and validate cycle count programs than accepting the company system balance as correct. 

In the next installment on Inventory Metrics, we will review a couple of metrics that are used to help control inventory accuracy but are sometimes poorly tracked – damages and shrinkage.

Agree or disgree with our expert's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the web site. Upon request, comments will be posted with the respondents name or company withheld.