Regardless of the type of manufacturing business, there is a need to keep some type of inventory on hand. Job shops may have to keep some finished parts on the shelf or at least some level of raw material in the warehouse. Original equipment manufacturers (OEMs) have even larger inventories to worry about, especially if they are a make-to-stock company, forced to ship parts to their customers almost immediately.
Due to the need for inventory, there is the need to count it. Counting inventory is a necessary evil, not only because your accountant needs to know the value of your assets, but more importantly, because you need to know what you have in order to run your business. Knowing what you have and comparing this to what you need allows you to determine what you have to make or buy.
Companies have traditionally conducted a "physical inventory" once a year. During this time, all shipments and receipts are held up (which frequently holds up production), and people count EVERYTHING in inventory. Once the counts are made, inventory records are adjusted and, for a point in time, companies know what they really have in inventory. The problem is that the day after the physical inventory is completed, inventory counts are frequently wrong again. Why does this happen? One way to find out is by beginning a process known as Cycle Counting.
Cycle Counting involves counting part of your inventory every day and several times a year. It is a method of inventory auditing that supplements your annual physical inventory and, in some cases, replaces it. Cycle Counting gives you "real-time" information that will help you identify and correct inventory problems before they become widespread.
Cycle Counting involves five steps:
- Count a representative sample of specific parts. Critical items can be counted more often than less important items.
- Once the count has been taken, compare it to the inventory records.
- If the cycle count and inventory records agree, you are in good shape. However, if there is a discrepancy, do not simply adjust the inventory records! Instead, investigate the discrepancy and find the cause.
- Once the cause or causes of problems have been identified, educate warehouse employees on the findings.
- Once causes are identified and corrected, use Cycle Counting to assure problems do not reoccur.
The best time to cycle count is some time during the day when material is not moving. Generally, this is just before or after normal working hours. The chance of counting errors is reduced if Cycle Counting is performed during these "off" hours. Most companies will assign one hour before the warehouse opens for business or an hour each afternoon after the last order has been filled to cycle count.
There are a number of ways to select items to be cycle counted. One method ranks all parts by value and directs you to count the items with a large number of dollars flowing through inventory more often than slower-moving products. As an example, items can be ranked and counted as follows.
- Count "A" rank items (responsible for the top 80 percent of sales) six times per year.
- Count "B" rank items (responsible for the next 15 percent of sales) three times per year.
- Count "C" rank items (responsible for the next 4 percent of sales) twice per year.
- Count "D" rank items (responsible for the last 1 percent of sales) and products with no sales count once per year.
This method works well for maintaining accurate inventory counts because it focuses effort on the items that move the most, which are those with the greatest opportunities for processing errors.
Another method of Cycle Counting is to simply divide the stock area into geographic locations. Start in one location and work your way through until every location is counted. This method assures all parts are counted in a given period of time and may also turn up "missing" parts that may not be found in the ranking method.
Cycle Counting offers many advantages, the main one a more accurate inventory. The second is that it fosters an environment of problem solving and continuous improvement through ongoing corrective action.
If you are not Cycle Counting, try it. Few who have tried it would say it does not lead to greater inventory accuracy.