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Guide to Inventory Accuracy

By Dave Piasecki

Having problems with inventory accuracy? Implementing technologies such as bar coding systems, RFID, and pick-to-light are often assumed to be the solutions to inaccurate inventories.  If properly implemented these technologies can help reduce errors, however, none of them will eliminate all errors, and a poorly implemented system can leave you worse off than you were before.  Whether you are planning on implementing additional systems or not you should consider taking care of the basics first.

The Basics

  • Attitude
  • Process Definition
  • Procedure Documentation
  • Employee Training
  • Employee Testing
  • Monitoring Processes for Compliance
  • Setting Standards
  • Tracking Accuracy
  • Accountability
  • Count, Count, Count
  • Reevaluate

There is nothing revolutionary about my list of "The Basics", it's simply a series of steps which define a process for achieving higher levels of inventory accuracy.  Your success or failure will be determined by your implementation of these steps.  This is not something that should be rushed; throwing a quick fix approach together to alleviate an immediate need may be more damaging in the long run since the success of this plan requires a cooperative effort by many people within your organization.  If your first attempt fails, you will find it more difficult to get a high level of cooperation for your next try.  Take the time and do it right.

Attitude. 

Maintaining inventory accuracy must be an integral part of the attitude of the organization.  Like quality, customer service, and plant safety, accuracy must be promoted throughout the organization as everyone's responsibility. This attitude must start at the top levels.  Yeah I know all you managers and execs out there want an accurate inventory but are you doing your part through your decisions and business practices to promote it.  Processes are often shortcut in the name of  "Customer Service" (this also applies to processes for Quality, Inventory Management, and Production Plans) that reduce or eliminate the effectiveness of the plan, which in the long run will reduce your ability to service your customers.  Remember that these plans are designed to meet the needs of the customer, don't compromise them.  

Process Definition. 

You'll struggle to make any progress if you have not clearly defined the processes throughout the organization that affect inventory.  While defining the processes, you should be looking for opportunities for errors and implementing changes to eliminate or reduce them. Even the most accurate employee will make errors, I suggest placing formal checks in place for critical operations.  Get as many people involved in this step to ensure you have a complete and accurate understanding of the processes.  Anything missed in this step will require new procedures and additional employee training later, so once again, "take the time and do it right".

Procedure Documentation. 

This is the part where you use the previously defined processes to document the procedures the employees will follow to maintain inventory integrity.  The procedures documented here should not be limited to inventory issues; they should be the complete procedure including quality, physical aspects, and safety.  This documentation should be as clear and comprehensive as possible. It should be written for a specific task within a specific job responsibility, it should include everything the employee needs to know to complete the task and nothing else.  For example:  if a stock clerk's responsibility is to notify the supervisor of any discrepancies, that is all it should state in the procedure for the stock clerk even though there will be additional procedures for dealing with the discrepancy.  Procedures should also include the correct method for filling out and processing paperwork, the sequence and timing of entering data, and any checks that are required to be performed.  If there are any exceptions to a procedure they should be specified in the document, allowing undocumented exceptions to a procedure will decrease its effectiveness.  Be realistic, procedures are not a "wish list", they are the documentation of the requirements of a specific task.  You must be prepared to enforce compliance to all procedures. Once you are completed with the documentation, I suggest you first distribute the procedures to a few key employees, then take a couple of weeks for you and the key employees to monitor existing operations to see if anything was missed or if anything is incorrect.  Once this is done, the procedures should be officially put into effect and distributed to all employees.

Employee Training. 

Handing out a written procedure does not constitute employee training.  It is important to set a training schedule to go through all the procedures with groups of employees.  Take whatever time is necessary to ensure they have a thorough understanding of the procedures.  Make it clear that the procedure document is the only way to perform the task.  If you did your job correctly in defining the processes and documenting the procedures you shouldn't run into many surprises during the training.  Try to refrain from making changes or exceptions to the documentation at this time (unless there is a critical error).  Last minute changes or exceptions will cause confusion and diminish the value of the documents.  Make notes for possible future revisions of the procedures instead. Set a timetable for publishing and putting into effect revisions (every quarter or six months).  Frequent revisions of procedures tend to cause confusion and make it difficult to enforce adherence.

Employee Testing. 

I am a big advocate of formal testing of employees on procedures.  This is the only way to know if they understand them (or have even read them).  Be prepared, this will scare the hell out of your staff.  Do not make the tests too difficult, I suggest multiple choice questions and maybe some true/false. You may also need testing which requires the employee to perform the task in the presence of the tester. Make a point to include items in the test that are known to have been issues in the past.  There should not be any penalties for incorrect answers on the test.  Any incorrectly answered questions should be discussed with the employee to ensure that he/she now understands the correct answer. You may need to make arrangements to conduct the test verbally for employees with inadequate reading skills or other arrangements if language is an issue.

Monitoring Processes for Compliance. 

You must begin to monitor the processes for compliance to the procedures immediately.  Any actions observed which do not comply with the written procedures must be addressed immediately with the employees involved.  As stated earlier, the written procedures are the only way to perform the task.  Allowing employees to "do it their own way" (even if their way is a better way) will make it impossible to enforce compliance on other issues and will create problems when changes are made to processes.  If they have a better way, consider it for the next revision at which point it would then become "the only way".

Setting Standards. 

I am also a big advocate of setting minimum accuracy and production standards wherever feasible.  Do your research to ensure the standards set are high enough yet still achievable.  You will have to enforce these standards so it is critical to set them correctly.  If in doubt, set them lower, you can always increase them later when more data is available.  If you set them too high you have put yourself in a difficult position when it comes time to enforce them.  Standards should be set for the specific task being performed. For example, the accuracy standard for a stock clerk stocking in random storage area would be lower than for one stocking in fixed locations. Setting standards requires tracking of the accuracy and productivity of the tasks being performed which makes it more viable when you have several people performing the same tasks.  

Tracking Accuracy. 

Whether you have set standards or not I still suggest you track accuracy organizationally and individually.  Accuracy tracking should always be measured as a percentage of total transactions.  Tracking accuracy as flat numbers (number of errors) puts your more productive employees at a disadvantage, and at an organizational level will be skewed by variances in business activity.  Accuracy tracking should be communicated to staff in a positive manner; it is a tool to facilitate improvement in processes and people. I have found that by simply tracking and communicating accuracy to employees you will see immediate reductions in errors even if standards are not set.  The fact is we all want to be accurate; the problem is we all think that we are accurate and it's always the other guy who is making all the mistakes. 

Accountability. 

People must be held accountable for following documented procedures.  You have spent the time to document the procedures, provide the training, and the testing.  If someone is not following the procedures they must be dealt with applying appropriate disciplinary action.  It's that simple.  You may be amazed as to how much just one individual not following procedures can screw up your inventory.  If you don't hold the employees accountable you may as well throw out everything you have done to this point. Mistakes are mistakes and everyone makes them, however, not following a specified procedure is a conscious decision made by the employee to not do what he/she was instructed to do.

Count, Count, Count. 

We would like to believe that since we have taken the above steps we should now assume our inventory is accurate.  Not necessarily. You will have to count it to determine the accuracy, as well as determining areas needing additional evaluation.  Year-end physical inventories are tools used by accountants and do very little for inventory accuracy.  You should count your inventory on a continuous basis (cycle counting) to maintain high levels of accuracy.  This is one of the best ways of identifying problem areas on a timely basis and providing an environment conducive to continuous improvement.  The way you count and the frequency of your counts should be designed for your specific type of operation. Read my article on Cycle Counting and Physical Inventories and check out Cycle Counting topics covered in my book.

Reevaluate. 

You should be regularly reevaluating your processes and procedures.  Results of your cycle count program should point you in the direction of areas where enhancements are needed.  Business conditions often change and new processes are added which will require evaluation. As previously mentioned try to refrain from frequent revisions to procedures (the memo of the day), it is more effective to plan a revision date and group multiple revisions into a revised release of the procedures.  These revisions should be implemented with the proper training and testing as was done during initial implementation.

As you may have noticed, each of the above steps is highly dependent on the successful implementation of the previous steps.  Although this process for improving inventory accuracy is not very complicated, the implementation can prove to be demanding.  Depending on the environment you are working in, it can sometimes seem to be an insurmountable task to change the attitudes of people towards inventory accuracy.  It will require a high level of effort and diligence to ensure success. 

Inventory Accuracy Consulting

Additional recommendations.

The following are some additional suggestions that may help in your quest for a more accurate inventory.  

Dedicate positions for managing inventory. 

Make sure you have control of which employees are affecting your inventory.  This is especially true in manufacturing operations where the priorities of machine operators and production supervisors are meeting the production schedule, keeping the machines running, and ensuring the quality of the product being produced.  Inventory accuracy will never be a primary responsibility of these types of positions.  Once you come to this realization, it is easy to see the benefits of putting your inventory and material handling responsibilities in the hands of people whose primary responsibility is inventory.  Also, within your material handling/warehouse positions you should limit the people doing miscellaneous type inventory adjustments.

Control employee turnover. 

I know, easier said than done.  You've invested the time into training them, now figure out what you need to do to keep them.  Once you have your processes and procedures under control you will find that new employees will become your #1 source of errors.  My experience shows a new employee generally makes 2 to 5 times as many mistakes as a one-year employee and 5 to 10 times as many mistakes as a five-year employee.  These numbers are based on operations that track accuracy and promote continuous improvement.  If you're not tracking accuracy, your five-year employees may be making as many mistakes as they did during their first year.  Also high employee turnover results in operations that are frequently short staffed which will almost always lead to increased errors.

Be prepared to dismiss or reassign employees. 

May sound like a contradiction to the previous suggestion, however, if you have made every effort to assist an employee in improving their accuracy and insufficient progress is being made you will need to get them away from your inventory.  Again, don't underestimate the damage that can result from just one employee's errors.

Don't be afraid to put Checks in place. 

Some people feel that checking or rechecking work is admitting failure or is a waste since it "should be done right the first time", so I'll say it once again, everyone makes mistakes, that means everyone.  If you find there are certain areas that are highly prone to errors (such as random stocking areas) or critical parts of your operation where a mistake can have significant detrimental effect, consider putting checks in place.  A check may be an employee checking their own work or a specific checking operation.  Outbound shipments should always have some type of check in place, the specific type of check will vary from operation to operation.  In a high-volume, low-value shipping operation a simple looking over the shipment may be all that's feasible, while in  a lower-volume, high-value shipping operation I've had as many as three people performing redundant checks of each shipment prior to loading.

Storage Areas. 

How you store your product will also affect accuracy.  Crowded unorganized areas become "black holes" for missing product.  Crowded areas also cause increase damage to product that is often disposed of without inventory corrections being made.  High-density storage makes it very difficult to accurately count the product. Maintaining proper lighting, shelf and product labeling, and organization makes it easier to stock, pick, and count product thus increasing levels of accuracy.

Know your inventory system. 

The more you know about how your specific inventory system works, the more successful you'll be in optimizing its features.  Computer systems are regularly blamed for things that are usually turn out to be human error, however, occasionally your computer system can be the source of the problem.  Bugs, glitches, hiccups or whatever you want to call them do occur and changes to system parameters to optimize functionality in one area can create havoc in a seemingly unrelated area.   The only way to determine the source and correct these problems is to have a thorough understanding of how your system is set up and how the specific programs process the information.  The bigger advantage to acquiring a high level of system knowledge lies in the amount of information you'll be able to extract from your system.  Today's larger software systems maintain enormous amounts of data and contain far more functionality than most users realize. Managers need to be taking more active roles in system set up and implementations if they want to optimize the system to meet their business needs.  The days of leaving it all up to the IS department are gone, the staffing levels of most IS departments are inadequate to deal with the complexity and the enormity of software packages today. IS personnel tend to spend the majority of their time making sure the system runs rather than optimizing its features.

The end result in accuracy improvement will be directly related to the effort put forth to achieve it.  Building a sound consistent inventory accuracy plan will get people in the habit of being accurate, as the entire organization gets in the habit of being accurate you will find the accuracy plan starts to run itself.  Until then, it will require a lot of work by those implementing it.

Check out my book, Inventory Accuracy: People, Processes, & Technology, for more detailed information on conducting cycle counts and physical inventories.

Go to Articles Page for more articles by Dave Piasecki.

Dave Piasecki, is owner/operator of Inventory Operations Consulting LLC, a consulting firm providing services related to inventory management, material handling, and warehouse operations. He has over 25 years experience in operations management and can be reached through his website (http://www.inventoryops.com), where he maintains additional relevant information.


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