Cycle Counting – the Secret to Inventory Accuracy Bob Collins, CFPIM, CIRM SSI North America Chicago, IL APICS International President

Agenda Inventory Accuracy Periodic Physical Inventory Cycle Counting Cycle Counting in Oracle How to get started!

Inventory Accuracy Reality or Oxymoron?

Sound familiar? Can’t find parts your system says you have? Expediting too many items? Wasting time looking for parts? Holding excess inventory “just in case?”

Unrecorded Inventory Transactions Root cause of Inaccurate Inventory Unrecorded Inventory Transactions

Types of Transactions Receiving Put away Transfer from one location to another Material issue Extra issue of material Backflushing Shipments Removal to QA Return from QA Completions “Loans” to Sales, Engineering, R&D etc.

Inventory Accuracy Demands Discipline!

True Cost of “missing” parts Sam loses $100 of inventory/month Lost material must be replaced with profit dollars Distributor w/ 6% profit $100 / .06 = $1666.67 Must sell extra $1667/month to replace $100 of lost inventory!

Other costs Wasted time looking for parts Delayed customer orders Wasted time in production Excessive expediting costs Excessive inventory carrying costs $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$!

Two methods of “keeping inventory accurate” Periodic physical inventory count Cycle count program

Physical Inventory Count Root Canal? You decide!

Periodic Physical Inventory Count Periodic physical count of inventory Annually Quarterly Monthly Expensive Shut down production/shipping – sometimes for days Unidentified or misidentified material

Periodic Physical Inventory Count Inexperienced, reluctant counters Temptation to cut corners Missing documents Count, recount, audit counts Cannot track down causes of errors Often introduces more errors than it fixes

Accounting vs Manufacturing Physical inventory counts often get close to actual dollar value of inventory (what accountants are looking for) Individual item accuracy abysmal (What manufacturing is looking for) Too many item A, Not enough item B, Dollars even out, but accuracy suffers

(If you must) Tips to Improve Physical Inventory Counts Set date early – time for prep Determine counting method Bar code Count cards Count Sheets Determine who will count – train! Map of facility

(If you must) Tips to Improve Physical Inventory Counts Clean up first Reduce inventory as low as you can Ship what you can Delay incoming materials No receiving or shipping during count Keep supplies on hand (Dots!)

(If you must) Tips to Improve Physical Inventory Counts Pre-count (and audit) surplus supplies and slow moving items Audit while your people are still counting Don’t move misplaced material during count (note and move later) Oracle Physical Inventory can help!

Cycle Counting – APICS Dictionary Inventory counted on cyclical schedule Count on regular, defined basis Most effective - counting a certain number of items daily w/prescribed frequency for each item An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. A cycle inventory count is usually taken on a regular, defined basis (often more frequently for high-value or fast moving items and less frequently for low-value or slow moving items). Most effective cycle counting systems require the counting of a certain number of items every work day with each item counted at a prescribed frequency. The key purpose of cycle counting is to identify items in error, thus triggering research, identification, and elimination of the cause of the errors. APICS Online Dictionary

Determine and Eliminate of inaccurate inventory The Key Purpose of Cycle Couting Determine and Eliminate CAUSES of inaccurate inventory

Eliminate cause of error Continual improvement Identify cause of error Cycle Counting Cycle Find error Eliminate cause of error Continual improvement Find item in error Research error Identify cause of error Eliminate cause of error Continual improvement of inventory accuracy Research error Identify cause of error

Cause Report

Common Causes for Errors counting procedure/equipment untrained personnel carelessness poor forms design poor document control inventory adjustments lack of transaction discipline midnight requisitions

Deciding What to Count ABC analysis Location counting Negative on-hand items When order placed When order received Today’s problems Control Group Today’s problems. People should have the ability to manually add an item to tomorrow’s list. Any item that has a problem today is a good candidate. Control group. Probably the least understood selection method is that of a control group. A control group is a small number of items that is a good representation of your overall inventory. number that will select a reasonable number of items to count each day.

Deciding How Often to Count ABC After specified number of transactions What’s possible with staffing level What’s possible There are two ways to approach this question. First we could calculate how many counts we need to perform each year and calculate that back to number of counts per day. (Example: 5000 SKUs in database, A = 20 percent counted 12 times, B = 30 percent counted 4 times, C = 50 percent counted 1 time, totals 20,500 counts. Divide 20,500 by 240 working days = 85 counts per day). Second, we could work from the resource availability and determine how many counts are possible per day. (Example: We have four people, working half time on cycle counting and half time on inventory movements, so we have 16 hours of availability. Divide that by an aver-age of 12 minutes per item and you count cycle count approximately 80 items per day) Note that 12 minutes per count is a rough average determined by discussions with many companies. Your product characteristics may make that time significantly longer or shorter. Regardless which method you use, it is important to select a number of items that can reasonably be counted in the time available. To do otherwise simply positions your cycle counters for failure. Bill Latham, CFPIM, CIRM - Cycle Counting: Inventory Accuracy in the Real World (APICS International Conference, 2003)

Oracle Cycle Counting Set Up Define ABC classes If using ABC, compile an ABC analysis and assign your compiled items' ABC classes

Oracle Cycle Counting Set Up Define a cycle count for the organization or subinventory level Enter control and scope information Enter autoschedule information Define adjustments and ABC information Enter ABC classes to include in your cycle count Define cycle count items

Oracle Cycle Counting Set Up Define cycle count classes Define cycle count items Automatically schedule item counts using ABC count frequencies Manually schedule counts for the following inventory control details items, or specific revisions, lots subinventories or specific locators

Oracle Cycle Counting Process Generate daily, weekly, or period count requests and lists based on your schedule Enter counts Count items generated Approve, reject, or request recounts for cycle count adjustments based on approval tolerances

Eliminate cause of error Continual improvement Identify cause of error Don’t Forget the Cycle! Find error Eliminate cause of error Continual improvement Find item in error Research error Identify cause of error Eliminate cause of error Continual improvement of inventory accuracy Research error Identify cause of error

How to Start a Cycle Count Program

Step 1 – Controlled Test Pick 100 representative parts Divide into 25/day – Mon thru Thur Friday for clean up Begin with accurate count Note and investigate variances each day Keep track of daily accuracy percentage (spreadsheet)

Step 1 – Controlled Test Cycle Counter uses checklist to investigate possible root causes Oracle Transaction Summaries report will show transactions in system (go back one week) After finding root cause, correct inventory record (spreadsheet)

Step 1 – Controlled Test Record of cause, who will fix and when Keep checking until you’ve attained 100% accuracy for two or three weeks (Predictable results) If time available, also check negative on-hand items

Results of Step 1 You have begun to establish the discipline necessary to maintain an accurate inventory You have identified and corrected most of the errors that are causing inaccurate inventories

Step 2 – An Expanded Test Expand to a larger number of items (600 to 700?) Use ABC categories A – count bimonthly B – count monthly C – count quarterly Keep inventory accuracy and cause records (spreadsheets)

Step 2 – An Expanded Test Example formula for counts Counting 4 days/week A’s – every 2 weeks (once every 8 days) 100 A items = 100/8 = 13 items/day B’s – monthly (once every 16 days) 200 B items = 200/16 = 13 items/day C’s – quarterly (once every 52 days) 400 C Items = 400/52 = 8 items day The formula to determine how many parts to count a day is as follows: Determine how many A items you are counting, how many B items, etc. Divide the items by the number of days in the time period you intend to count that classification of items in. For example, you are counting 4 days a week, so biweekly would represent 8 days, monthly would represent 16 or 20 days (depending on if it is a 4 week month or a five week month), quarterly would represent 52 days (using the 4-4-5 calendar = 16+16+20 days). If you have 100 A items, then 100/8 = 13 items/day If you have 200 B items, then 200/16 = 13 items/day If you have 400 C items, then 400/52 = 8 items/day Or all 600 items can be divided into 34 items/day

Step 2 – An Expanded Test All 600 items can be divided into 34 items/day In a quarter, all A items will have been counted 6 times, B items 3 times, C items once. Continue until you’ve attained 100% accuracy for two or three weeks (Predictable results)

Step 3 – Full Cycle Counts Once the root causes are identified and are being dealt with for the items in the Expanded Test, and the Cycle Counting procedures have been reviewed and are in place, the Cycle Counting program should be expanded to include all of the inventory items.

97% + Accuracy You can achieve 97%+ accuracy If accuracy level maintained long enough – you may be able to eliminate periodic physical inventory counts

Questions? Bob Collins, CFPIM, CIRM SSI North America APICS bob.collins@us.ssiworldwide.com