Category Archives: Supply Chain Concepts

Inventory Drivers – Production Accuracy

Inventory driverWelcome back to the ongoing series about Inventory Drivers.  In this posting I would like to touch on production accuracy.  One would think this is a given.  You take this many units of raw material and you finish with that many units of finished goods.  As talked about in an earlier posting, that is one plus one thinking and has a couple of assumptions built in that just may not be absolutely correct.

The first assumption is that the quantity completed is recorded accurately.  I’m not saying that people would deliberately misreport a number but mistakes can happen.  Depending on the product being made, it could just be a simple miscount but in other cases the process itself lends itself to less accurate counts.  Take for instance a company making something as simple as a washer.  This is not usually counted by unit but rather by weight with a particular weight assumed to represent a specific number of units.  This is arrived at by dividing the total weight by the average weight of one washer.  While this is a relatively accurate method with a lower volume, when you get to really large volumes it becomes inaccurate due to rounding error.  Specifically an average weight with 2 digits after the decimal is far less accurate than one with several digits.  Actually, anything that requires a conversion is open to severe consequences if done wrong.  If you want an example of this please go look up the “Gimli Glider”. Another possibility is that the average weight may have changed due to a process or raw material change but nobody updated the average weight used in the calculation.

production accuracy

The second assumption is that the raw materials not used will be put away properly and accurately recorded.  Far too often people seem to think that once the finished goods are made that the job is done or leftovers are just pushed to the side until the next job where they might need them.  I even know of one case where parts were stripped off old machines for repairs to other machines without recording the increased inventory of the recovered parts.  Of course this led to the system showing a negative inventory because they were recording the use of parts that were never received into the system.

 

The important point to all this is that people must have the discipline to actually consider how their processes affect the inventory accuracy and what is needed to keep it accurate.  They also need to have the discipline to record ALL transaction and to do so in a timely fashion.  As always, real time entry being the desired time frame (RF and RFID systems are your friend).  If inventory is not being recorded correctly and in a timely fashion then inventory levels will be pushed higher as everyone tries to compensate for the inherent errors that develop.

Enjoy thinking and talking to your friends and co-workers about this, especially what it means for your organization.   I would love to hear back on your (and their) thoughts on this topic

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Inventory Drivers – Inventory Accuracy

Inventory driverWelcome back to the ongoing series about Inventory Drivers.  In this posting I would like to address Inventory Accuracy or, as is found in most companies, Inventory INaccuracy.  Inventory accuracy is almost always acknowledged by everyone as critically important when being discussed but unfortunately, that importance seems to get missed when tactical decisions are made or costs are discussed.  A fact of life is that it costs money to ensure a higher accuracy level.  The important question to be asking yourself is: which costs more – accuracy or inaccuracy?  Generally the accuracy level needs to be at least 95% or little things like MRP, locator systems and order promising systems will no longer provide accurate information which will have a direct negative effect on customer service levels, fill rates and efficiency rates.  These expenses are caused by expediting, down time, missed orders, lower customer service, potential lost customers…  All or which become expensive very quickly.  Back in the 80’s we had a saying that “Quality is Free”.  The same thought process also leads to the statement “Accuracy is Free”.  Not because there is no cost but because you will spend less money achieving an accurate inventory than you will spend dealing with the problems created by inaccuracy.  For anyone familiar with Lean Thinking this concept is not going to be new.  If you eliminate Inventory Inaccuracy you also eliminate the waste effort and aggravation associated with Inventory Inaccuracy.inventory accuracy

So how do you achieve an acceptable accuracy?  There are many steps to that dance but some of the more important ones are:

  • A Cycle Count program
  • Timeliness in reporting movements
  • Employee and Process discipline
  • A valid locator system
  • A sensible Part Numbering system

This is not a comprehensive list but they are certainly some of the most important ones to concentrate on first.  I will talk more about each of these in later blogs but I would like to just touch quickly on the first two here.

While a Cycle Count program is definitely a desirable tool it will not work on its own. Without support from many other factors it will just become an exercise in frustration for everyone involved.  While fixing the incorrect amounts is important, it is NOT the key to a successful cycle count program.  The key is in identifying the reason for the inaccurate count and putting a fix into the appropriate process to eliminate the reason for the failure.  Cumulatively, all these changes will predispose your process to having and maintain an accurate count.  This allows you to decrease safety stock levels thereby reducing total inventory without increasing expediting costs.  A side benefit of Cycle Counting is that you can eliminate the annual (periodic) physical inventory which is a significant cost as well as a major pain for the organization.

Regarding Timeliness – by definition your inventory count is wrong from the time you move anything until that movement is recorded in your system (paper or electronic).  The longer the delay in recording the transaction, the longer your inventory system will remain inaccurate and the greater the risk it will not be entered at all or if it is entered, it will be entered incorrectly.  The faster the information is recorded the less likely you are to promise something already used and less time will be spent looking for items that have been moved, shipped or consumed already.  With timeliness being such a critical issue you will find that real time systems are best for dealing with this issue.  With quick entry of any movements you decrease the search time for material and the amount of expediting to cover material that has been double booked.  This leads to both cost reductions and to lower inventory levels and costs.

With reference to driver interaction, slow recording (timeliness) leads to inventory inaccuracy which increases the number of cycle counts required to determine why the counts are wrong.  This leads to extra costs and higher inventory levels to compensate for symptoms rather than root causes.  Fixing the problem rather than the symptoms is the only way to permanently improve the situation.  When you throw in other drivers such as an inadequate locator system the situation gets worse quickly.

Hope this gives you something to think about and discuss with your friends and co-workers.   I would love to hear back on your (and their) thoughts on this topic.flag