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The Importance of Inventory Accuracy

inventory accuracyFor manufacturers and distributors, product availability (i.e. inventory) is the driver of almost all revenue-generating activity.  Next to fixed assets (property, equipment), inventory represents the biggest outlay of capital.

And yet, of any of an enterprise’s assets, the information regarding the quantity and location of materials seems to be unappreciated and under-maintained.

Looking at Inventory in a New Light

Think about company inventory in terms of a bank account, debit card, checking account, etc.  We have deposits in and payments out. 

Don’t you hate it when you think your actual balance is different than what the bank says?  If there appears to be a shortage of money, I cut back on expenses or work more to add more money.  If there appears to be a surplus of money, I can buy something to improve my life. 

If customers were as cavalier about managing cash like inventory, we’d have a lot fewer customers. 

Inventory data integrity control can determine if you stay in business; too much inventory and you run out of cash (e.g. Target Canada); too little inventory and you can’t meet customer requests and business activity spirals downward. 

Unreliable inventory information impacts multiple facets of operations; customer-facing order fulfillment, replenishment planning and execution, and financial position.

What Does an Accurate Inventory System Look Like? 

Inventory Accuracy.jpegThe best practice is to use a pass/fail rule. If the shelf count does not equal the system count, the item is inaccurate.  Take this example—300 items were counted, but 43 of the items had some form of unit discrepancy (count quantity off, location incorrect, etc.). 

By the unit variance measure, this item would have an 85.6% accuracy rate.  In this scenario, if a manufactured item required two different components, the probably of having enough inventory for production would not be 85.6%, it would actually be 73.27% (85.6 * 85.6).

So, What’s the Deal with not Having Inventory System Accuracy? 

Justifications abound for not having inventory system accuracy.  From experience in manufacturing and through my consulting career, here are some commonly-provided reasons:

  • Recording data takes too long
  • Inventory moves, but the movement is not recorded; “I’ll bring it right back”
  • Our staff is incapable; there’s no ownership or accountability
  • We keep lots of material in the pipeline so inventory is not a problem (your board of directors will love this reason)
  • Our operations management won’t do it; it’s a financial management problem

All of the above reasons are traceable to management failures to:

  • Prioritize inventory accuracy as a company-wide objective
  • Equip the staff with tools and procedures for timely data recording
  • Provide training for execution-level staff
  • Have tracking measurements in place and process improvement and corrective action outcomes

Righting the Inventory-Accuracy Ship

Most likely, the current inventory investment situation reflects how the company is managed.  If a company wants to have accurate inventory data, it must be a top-down objective with regular measurement  and follow-up actions.  Management is there to select, train, organize, control, and motivate staff; it’s work. 

State the goal, establish ownership for the inventory, help the owners set policies and procedures, equip and train the team, have regular, published measurements, and have a means for improving the processes so measurements meet the objectives.

Keep the following benefits in mind as you weigh the cost of not working on an inventory-management strategy:

  • A good inventory-management strategy will help prevent product shortages (customer fulfillment) and optimize inventory investment (financial investment)

  • A good inventory management strategy supports an organized warehouse. If your warehouse is not organized, you will have a hard time managing (and finding) your inventory. Consolidate locations or set up bin locations in the storage areas

  • A good inventory management strategy can have some real-time operations benefits. You can save yourself the effort of having to do manual recounts to ensure your records are accurate. You can eliminate investing in slow-moving products

  • A good inventory-management strategy increases efficiency and productivity by having a common, reliable repository of data. Even a manual, rule-based, rigorously-enforced data collection method is better than doing nothing, though the turnaround time may be slower. However, employing barcode scanners and inventory management software will improve your company’s efficiency and productivity and allow employees to focus on customer value-added functions of the business

  • Good inventory management leads to what you are constantly striving for – repeat customers. You want your hard-won customers to come back for your products and services, so you need to be able to meet customer demand quickly and have the right products on-hand as soon as your customers need them.

Need some help?  At Algorithm, we have the knowledge, experience, coaching skills, and tools to help you have a more accurate and effective inventory system.

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