Top Ten Reasons for Inaccurate Inventory Records - Warehouse Best Practices
There are two areas in business, that generally not handled very well, these are firstly, Forecasting and Demand Management and secondly, achieving 100% real-time inventory records in the Store or Warehouse..
Today we will concentrate on the latter, Inventory Accuracy. When we ask Management the accuracy levels of their inventory, we usually get the replies; ‘OK, not too bad, could be better’, rarely do we actually get a percentage figure. If management understood, or even measured, the cost of poor inventory accuracy, they might then do something about it. Sometime ago a survey was done of 1100 companies and it was established that for a company of $100 – $200m turnover, poor inventory accuracy could cost the company in the region of $7m a year, now this is a waste. Over the years we have developed, what we call, our ‘World Class Warehouse Assessment’, which compares the company’s warehouse operations to what we would consider to be a World Class Warehouse Operation. The assessment contains over 30 aspects of warehouse best practices and gives a score as a percentage achieved. What we want to do in this podcast is to focus on what we have found to be the top ten reasons that contribute to Inaccurate Inventory. These are not in any order, as every warehouse, or store, is different.
01. Education and Training: Although we said these reasons for the lack of inventory Inaccuracy are not in order, without a doubt, in most assessment reports we have presented to companies, this is at the top of the list. Generally, we find that the employees in the warehouse are the least educated, trained and empowered employees in the company and yet they are responsible for the companies ‘Bank Vault’. This where we keep Millions of Dollars of the company’s assets, and then we wonder why it goes missing. Management, wake up, the warehouse is the place in your operations that people should aspire to work after much education and training, as would happen in a bank, who look after their and our assets accurately.
02. Cycle Counting: This is nothing new and yet most companies do not implement this best practice. They continually insist on monthly, quarterly and annual stock takes to try and determine what is in their warehouse. I put my first cycle counting process in during the 1980’s and quickly achieved well above 99% accuracy in 4 warehouses. In our experience, and we have proved it more than once, a physical stock take is only about 85-90% accurate. This is nowhere near accurate enough to run any manufacture planning and control system. We require an absolute minimum of 95% before even considering switching on an MRP system and expect that figure to be ultimately on its way to virtually 100%. Many companies say they do cycle counting but when we review their processes and resultant lack of increased improvement in accuracy, we realize they are just doing a physical stock take spread out over the month. A proper cycle counting process starts with a control group to identify the major causes of errors and then eliminating these causes prior to implementing the full cycle counting process. So, the objective of cycle counting is not to get your stock accurate, it is there to find out why things go wrong and then fix the problems. As this happens, the inventory becomes more and more accurate. And, when you get there, never ever do a full physical stock take again otherwise you will introduce errors back into your system.
03. Policies, Procedures and Computer Work Instructions.: We are not sure that we have ever assessed a warehouse that really had a good set of documentation. Some warehouses have some procedures, but rarely do we see a Management Warehouse Policy indicating how the warehouse should be run. In fact, we generally see very little Management Policy in any area of a business. We are not sure that management knows what to write in these policies or the need for them. For example, the Warehouse Policy should, apart from other aspects, indicate that stock accuracy in the warehouse will be maintained by using proper cycle counting procedures and all physical stock takes will be eliminated. This policy does not tell us how to do it, that is the job of the Procedure to lay out, in detail, the process to conduct a daily cycle count. The results of the cycle counts need to be recorded in the computer system and this is the job of the Work Instruction to explain the correct transactions to record the counts in the computer system. Ultimately, this full set of documentation will be used to educate and train the warehouse employees and only after being tested, to confirm their competence in the various warehouse functions. Here, we just want to comment on the job descriptions of those that are working in the warehouse, do they include the word ‘Accuracy’. Mostly, I find they do not and therefore it doesn't happen. In-fact, the job description for anybody working in the warehouse could be one sentence. “To create and maintain 100% accurate and real time inventory records”, that is what we expect them to do for the benefit of the rest of the business.
04. Housekeeping.: Many companies have monthly housekeeping checks around their facilities to ensure safe and healthy operating conditions, but the warehouse needs a couple of extra items to be added onto the list of requirements. When I first walk into a store or warehouse, I can almost immediately come up with a score for their World Class Warehouse Assessment based on their housekeeping. If everything is neat and tidy, racks and SKU are numbered clearly and there is no rubbish lying around we can be confident that the employees have a pride in their work, and they know what they are doing. A warehouse that is a complete mess with rubbish all over the place is going to require a great deal of work to get it up to the required level to be an asset in that company’s supply chain.
05. Receiving: This is the area where we find many errors enter the warehouse system for two reasons. Firstly, has the item that is being delivered been ordered on an official Purchase Order and has the supplier sent the correct material, in the correct quantity? So, being able to identify items correctly and confirm the quantity is vital. When it comes to quantity it is sometime difficult to accurately determine if we have received to correct amount, or not. Is there really 100 metres of wire on that reel, 250 metal pressing in the box, or 1000 tea bags in the carton. Or sometimes we buy product by weight, are we able to confirm we received the right quantity. Over the years we have collected many stories about suppliers cheating their customers by under supplying, as they know their customers have no way of confirming the quantity accurately. In receiving you need a little ‘Black Book’ to record information. So, the most important piece of equipment at receiving is an appropriate, accurately calibrated, scale for what you need to measure. For example, accurately count 250 metal pressings into the carton and weight them, recording the weight in the ‘Black Book’. It is easy then to put future cartons of that product being received on the scale to get a confirmation of the quantity. If the carton is light, send it back to the supplier. Measure the weight of a metre of wire and when the core is empty weigh that as well. It should then be easy to compute and confirm the weight of the full reel of wire. Remember to record these numbers in your ‘Black Book’. By the way, do you test your store employees to see if they can count? It sounds silly but many can’t count correctly when tested!
06. Warehouse Security: Over the years we have realized that people that work in a store or warehouse are exceptionally clever. We have collected many stories of the innovative ways that people have devised to get stock out of the warehouse, unofficially. Maybe I should write a book! Time is too short to relate any of these tales now, but if you are responsible for a warehouse, think like a criminal and see how you would relieve the store of stock illegally. If I were a criminal, I would certainly look for a warehouse that does not perform proper cycle counting because if I am careful, and not too greedy, it is unlikely that I will be caught. With proper cycle counting causes of errors are very quickly picked up and shrinkage is definitely one of them. There are many reasons for poor security, but probably the main one is the warehouse is left open and people can wander in and out at leisure. This is your ‘Bank Vault’, treat it as such. It should be written in the company policy that to be found in the store without permission and being escorted by an employee working in the area, is a serious offence with a written final warning. Second time, dismissal.
07. Visible Performance Measures: Very rarely do we see visual performance measures in a warehouse or store. We would at least like to see inventory accuracy indicated at the warehouse so we know how well we can believe the on-hand balances in the computer system when making decisions to replenish stock or allocate inventory to works or sales orders. If inventory accuracy is below 90%, I would probably ask to store to confirm quantities before making a decision. Above 95% I could probably take the computer information as acceptable. Of course, inventory accuracy is the key measure, but once a proper cycle counting program is in place more measures will be available, such as and not exclusively, receiving, putting away, picking and shipping accuracy. We have found that those companies that do not have inventory accuracy on the boss’s daily dashboard find it difficult to reach their accuracy targets. If the employees in the warehouse know the boss is looking at their performance and he, or she, knows the true cost of inaccurate inventory to the business, they are more likely to try harder to get to that virtually 100% accuracy level.
08. Shipping: Where material enters and exits the warehouse, these are certainly places for errors to take place. We have already mentioned receiving but we have also found criminal activity taking place at the point where stock leaves the warehouse. Here we usually set up a 3rd party check on goods that have been brought to the marshaling area by the picker, to ensure two things. One, the customer is going to get exactly the right items and quantities that he ordered and secondly to ensure there is no collusion between the picker and the person loading the trucks or issuing to the customer. These third-party checkers need to be rotated on a regular basis to ensure no improper-relationships can develop between employees.
10. Continuous Improvement.: This is the cream on the top, but I do not see many companies getting to the point where they have a regular continuous improvement program on the go. Some companies have introduced ‘Green Areas’ where employee have a quick meeting each morning to look at what went wrong the previous day, look for solutions and implement continuous improvement. Of course, with a proper cycle counting program you are also continuously improving as you find reasons for errors in you inventory records and then eliminate them. There is always a better way, we need to find it and move forward and upward. If you are not improving, then you are going backwards.
In conclusion, considering what we have just discussed, the logical place to start a warehouse improvement program is with the education. In this regard VCARE have recently introduced their ‘Certified in Stores and Stock Control’ (CSSC) program which covers many of the point mentioned. In fact, it really makes sense that everybody working in the warehouse should have some form of certification due to the importance of their job and the vast amount of the company’s assets in their care. Something else that could be added to the Warehouse Policy, all employees need to be certified in Stores and Stock Control. We would be happy to assist you in achieving that important goal of, 100% accuracy and real-time in you inventory records.
CFPIM, CSCP, SCOR-P, CPF, CS&OP, PLS, CDDP, CSCA, CDDL, CLTD, DDPP, DDLP, AEF, CSSC, CPIA
Chief Executive Officer at Kent Outsourcing Services
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