Wednesday, August 13, 2008

Cycle Counting -1

by Jon Schreibfeder
Without accurate stock level information in your computer, effective inventory management is impossible. No matter what sophisticated tools you have in your inventory management system, if the computer thinks you have 100 pieces of an item, and there are really only three on the shelf, the system won’t replenish your inventory when it should or order the right quantity.

Unfortunately, most distributors only verify the stock balances in their computer once a year, when they perform a physical inventory. During the physical count, every item is counted and, if necessary, the balance in the computer is adjusted to reflect the actual quantity on the shelf. Even if you assume that the physical inventory results in an accurate count of each stocked product (a big assumption for many distributors), how long do the counts remain accurate? One month? Two months? Six months? Eleven months after the physical count, what percentage of stocked products still have an accurate available quantity in the computer?

In order to receive all of the benefits from a good inventory management system, stock balances must be at least 97% accurate, every day of the year. This means that the actual available quantity of every item in the warehouse is no more than 3% greater or less than the available quantity displayed on your computer inquiry screens. If the computer says there are 100 pieces of an item on the shelf, there should be no less than 97, nor more than 103. Note that 97% is the minimum acceptable standard. One hundred per cent accuracy is the optimal goal that you should strive to attain.

The best way to ensure that a minimum of 97% accuracy is maintained is to continually count your products. That is, count part of your inventory every day, and count each item several times per year. This process is called "cycle counting."

If the answer is so simple, why doesn’t every distributor abandon their annual physical inventory and cycle count? Do distributors enjoy the annual wall-to-wall count so much that they refuse to give it up? I don’t think so. In fact, many distributors have implemented cycle counting programs only to abandon them when they see that their inventory accuracy hasn’t improved, it may even have gotten worse!

For all of its benefits, there is one logistical problem which makes cycle counting more difficult than a complete inventory. That problem is material movement. Think of the environment that exists (if you follow the guidelines in the previous two articles) when you conduct an annual physical inventory:
* All stock receipts have been placed in their proper bin location.
* All printed sales orders and transfers for stock material have been filled.
* Computer records for these receipts, sales orders, and transfers have been updated.
* All customer returns have been processed and the material returned to stock.
* No customer orders are filled nor material moved until the counting of all products in the warehouse is completed

All material movement has stopped. You are counting a fixed target.

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