Wednesday, August 13, 2008

Inventory Accuracy -2

by Jon Schreibfeder
Cycle counting is the process of physically counting part of your inventory every day and comparing the quantity found on the shelf to the on-hand quantity in your computer.

In one instance we implemented a program in which we changed the compensation program for all of a company’s warehouse employees. The distributor involved was loosing one-tenth of his inventory to theft every year. And, we determined that the majority of the pilferage was committed by employees. Because of the transient nature of the local workforce (the company was located in a resort area) we determined that it would be difficult, if not impossible, to convince the employees with words alone that their long-term future was tied to the profitability of the company.

The new compensation plan was radical, to say the least. Instead of paying everyone by the hour, a significant portion of every warehouse employee’s compensation was now dependent on the accuracy of the inventory counts in the warehouse. Management cycle-counted part of the inventory every day. And, employees didn’t know in advance when a particular item would be counted. The inventory accuracy goal was titled the "97-3" rule. If 97% of the counts in a two-week period were within 3% of the quantity that the computer determined should have been in inventory, every employee received an incentive bonus. If the cycle counts fell short of the goal, no employee received the bonus. When the bonus was earned, warehouse employees earned 10% more than they did before the program was implemented. When the goal wasn’t met, they earned 10% less.
The program resulted in every warehouse employee becoming an "inventory watchdog." They realized that if there was an inventory shortage, the result would be a reduction in their next paycheck. If they saw someone stealing, they viewed that person as stealing from them personally, not from the company. The result was that inventory shortages decreased substantially.
Most, if not all distributors realize that they must encourage inventory accuracy. If you can convince your employees that their long-term security is directly tied to protecting your assets, great. If not, don’t give up. You must take a different approach. Employees must personally feel the benefit of good inventory accuracy (i.e. a bonus), or the cost of missing material (i.e. a reduction in compensation). In either case, the distributor cannot maximize productivity and profitability unless inventory accuracy is achieved.

No comments: