Wednesday, August 6, 2008

Physical Inventories

Count inventory, and have then made adjustments to your on-hand balances based on those counts without having the time to adequately investigate the variances. The final result likely being that half of the adjustments corrected previous inventory problems while the other half created new inventory problems on items that were correct prior to the inventory. Counting inventories on a regular basis throughout the year (cycle counting) combined with a process for continuous improvement in inventory accuracy will prove a far better method for achieving accurate inventories. My definition of cycle counting tends to differ slightly from the generally accepted one. Most people think of cycle counting as regularly scheduled (usually daily) counting of product where you randomly count items based upon some type of predefined parameters. For example, inventory is broken down by ABC classifications and frequencies assigned such as A items counted 10 times/year, B items 5 times/year, and son on. I prefer to define cycle counting as any count program using regularly scheduled counts where you count less than the entire facility's inventory during each count. This includes a system that I’ve found to be highly effective, that is a hybrid of a physical inventory and a cycle count, where you’re counting all inventory within a physical area like a physical inventory, however, you are not counting the entire facility at one time. The next day you simply start where you left off the day before. Regularly scheduled physical inventories can be an effective way of counting inventory in smaller operations provided you are using trained counters and have adequate time to investigate the discrepancies prior to making adjustments. If your inventory is so extensive that you cannot adequately investigate the count discrepancies, you must break it down into some sort of a cycle count program.

(c) Dave Piasecki

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