What Is Inventory
Record Accuracy?
Inventory Record Accuracy (IRA) is
a measure of how closely official inventory records match
the physical inventory (figure 1).
Many managers equate IRA with cycle counting, but there is a
lot more to it than just counting.
The units of measurement are either dollar based or count based. These
two bases have different
purposes and may give widely differing results.
Accountants and financial auditors prefer dollar-based measurements of
accuracy. Their concern
is to ensure that the inventory value stated on books and tax returns is
accurate at an aggregate
level. Discrepancies on individual items hold little concern provided
that positive and negative
discrepancies are roughly equal and the total value is the same.
Operations and material
management people have a stronger interest in the accuracy of individual
SKUs. If one SKU is
short, they can rarely substitute some other part or item that happens
to be long. They need count
based measurements of accuracy.
Why Inventory Accuracy Is Important !!!
The reasons for having accurate records are legion. Stock outs increase
cost in a hundred ways
and sap the time and energy of everyone. Poor accuracy begets more
inventory and requires
more capital. Inventory is often the largest consumer of capital for an
enterprise. The various
reasons for accuracy fall into the two general categories of financial
and operational. Here are a
few of them:
Financial Reasons:
· Investors want to know that the book value is accurate and inventory
is
usually a large balance sheet item.
· Combined with other financial data into various ratios, imventory is
a
primary indicator of a company’s financial health and value.
· Conventional lenders, such as banks, often lend money using inventory
as
collateral. If the loan should default, they want to ensure that the
inventory stated is accurate.
They are also likely to be concerned about obsolete and slow moving
inventory.
· Taxation often depends on inventory value. Overpayment of taxes
reduces profits and
underpayment incurs penalties.
Operational Reasons:
· Stockouts interrupt production and create delivery delays.
· Missing items cause delays and idle time that reduce
manufacturing efficiency.
· Schedules must often be juggled to accommodate
stockouts.
· People waste hours looking for misplaced or missing
items. This happens in the warehouse and often again on the
manufacturing floor.
· When stockouts are frequent, inventory rises to compensate. This
unnecessary inventory
requires space and capital.
· Inventory turnover reflects overall manufacturing efficacy.
· MRP and ERP systems require very high accuracies (95%-99%) to function
well.
· The annual physical inventory audit is a nuisance for everyone and
takes several days from
production capacity. Such audits are required when inventory accuracy is
questionable but can be
eliminated when accuracy is demonstrated to the auditors through cycle
counting and other
means.
IRA and Lean Operations
Inventory accuracy links to Lean Manufacturing in much the same way that
quality is linked to
Lean Manufacturing. They both eliminate waste and allow the smooth
production with low
inventories that characterizes lean. In fact, inventory accuracy is
really a special case of quality;
it is quality in the warehouse and transaction process.
Lean Manufacturing
Lean Manufacturing reduces the need for inventory and transaction volume
in many
ways. It makes high accuracy easier. If transaction volume is reduced
through kanban,
backflushing, Cellular Manufacturing or other simplification, errors
drop proportionately.
The stockouts common to firms with poor accuracy generate significant
fears throughout
the organization and create difficulties for a lean implementation.
Because of this,
increasing inventory accuracy through more conventional means such as
cycle counting
may be a necessary part of a lean implementation.
The Lean Warehouse
IRA is also an element of lean operations within the warehouse.
Inaccurate records are
one of the major sources of waste for warehouse and inventory
operations. At he same
time, streamlined warehouse processes and low inventory prevent many
errors from
occurring.
The Lean Office
The lean office takes Lean Manufacturing principles and applies them to
the typical
administrative and information-based activities of office work. Since
inventory accuracy
depends greatly on information-based transaction processes, lean office
techniques apply
directly. At the same time, increased inventory record accuracy helps
smooth many front
office processes that depend on inventory information.