Wednesday, August 13, 2008

Ranking method

Research shows that the more often a product is received or shipped, the less accurate its computer stock balance. This makes sense. Every time someone goes to the bin is an opportunity for a mistake (or to coin the new term, an "unquality event") to occur. For example, material can be put away in the wrong bin, or the wrong product can be taken to fill an order. The Ranking Method directs you to count the items with a large number of dollars flowing through inventory (i.e. with the highest annual cost of goods sold) more often than slower-moving products. The ranking is based on "Pareto’s Law" (named for the late Italian economist Vilfredo Pareto) which basically states that, in general, 80% of the results of any process is produced by 20% of the contributing factors. Applied to inventory, this means that approximately 20% of your inventory items are responsible for 80% of your stock sales.
Though not as effective in finding lost material, the Ranking Method usually works best for maintaining accurate inventory counts. Because the primary purpose of cycle counting is to verify the quantity on-hand of each item, most distributors prefer the Ranking Method.
Greater inventory accuracy resulting from 25% fewer counts! No wonder rank based cycle counting is a popular alternative to geographic counts or an annual physical inventory.

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