Andrew C. Stein, CPIM | May/June 2014 | 24 | 3
Making the most of your cycle count
In his article “The Limitations of Cycle Counting,” author Richard T. Graff, CFPIM, writes: “Practitioners shouldn’t confuse measurement of accuracy with control of that accuracy.” Although he penned the piece way back in 1987, this quote remains just as accurate today as it was more than 25 years ago. Indeed, measurement is only the first step in the journey, not the end point.
Cycle count programs often lack a comprehensive view of the business. In many cases, they are created only with an eye toward meeting an auditor’s validation requirements. Bins may be counted early in the morning and adjustments made before warehouse operations begin. The cycle count then is put out of mind until the next day. Frequently, no root cause or corrective action is developed as a result of the program findings—and neglecting to evaluate cycle count discoveries is a true business process failure.
In many cases, software also encourages this confusion, as the design of cycle count programs focuses on the bin level instead of the macro level and requires the blocking of inventory until the cycle count has been resolved. To make matters worse, company leaders often see cycle counting and inventory control only as cost drivers. These constraints encourage a get-it-done-quickly mentality such that cycle counting becomes an activity that is done fast and forgotten about even faster.
Identifying the problems
It’s important to view cycle counting and inventory control programs as real assets to your business that can improve the bottom line. For example, reducing stockouts caused by poor inventory accuracy can have a positive effect on customer satisfaction and retention. Stockouts have a far more detrimental impact on the business than often is recognized, as they may cause customers to seek out a competitor’s product to meet an immediate need. And, if customers perceive an advantage in availability, price, or quality, you may have trouble winning them back. The effect of one lost order can have a mushroom effect far exceeding the cost of the missing product.
Following are some clear strategies for correcting inventory inaccuracy and tactics to help identify those areas of your operations that need shoring up. First, by recognizing that the cycle count is a measurement tool, you will naturally progress to the desire for completeness. For example, consider a part that is stored in more than one bin in the warehouse, but the cycle count program only picks up the first bin for that part. Thus, any inventory adjustment is made on an incomplete measurement of the inventory. This can cause a whiplash effect when the item is written off from the first bin only to be found in another bin the following month.
Next, take a holistic view in order to discover a variety of issues that can be addressed via control mechanisms. For example, do you find that every bin where part number 1A1 is stored is short of material? This may point to a theft problem, package quantity issue, or receiving error. Or, perhaps 1A1 is short in one bin while over in an offsetting quantity in the others. This could be caused by staff members not picking from the bin to which they were directed but picking from one with easier access. Root causes can only be addressed when the full picture is present. Appreciating this fact will make your replenishment decisions more accurate, thus reducing costs throughout the supply chain.
Another key shift in your cycle count program is to supplement cycle counts with activity-based counts, which can help identify the root causes of inaccuracy and create the necessary control mechanisms. This is an approach that triggers an inventory count based on the activity of the part. For example, consider counting your fast-moving material when a certain quantity threshold is reached. These items often have greater error rates due to the numerous inventory transactions that occur and the frequency with which the material is handled. The human factor is multiplied in such cases and error introduced into the stock records. Counting the inventory when the level falls to less than, say, 10 units may help identify and avoid potential stockouts. In addition, it can reveal gaps in processes or issues with individual associates.
Another option is to validate that a bin is in fact empty when the system quantity indicates stock on hand as zero. By having a warehouse associate confirm the empty bin, you will recover lost inventory more quickly and avoid the possibility of causing mixed stock, which often occurs when material is stored in the bin at a later time.
Targeting warehouse problem spots is another area of opportunity. To accomplish this, count a sample of part numbers weekly from the specific places and watch for trends in the data. By limiting the amount of activity to one week, you restrict the number of actions that have occurred on these part numbers. This will help identify the activities that are leading to inaccuracy.
Fixing the problems
Cycle counting is most effective when it triggers research, identification, and elimination of the cause of errors. Depending on the type of issues found by the application of the previously detailed strategies, a variety of corrective actions can be developed in order to eliminate or reduce future errors.
If the issue is a simple miscommunication of processes, retraining should be the first choice. This can be followed by a periodic audit of staff to ensure that employees understand and are following processes. If specific steps are not documented or have not been developed, you will need to step back to square one. While this may seem like an obvious point, it cannot be stressed enough how important it is to have clear, standard processes that staff members understand.
If you have theft-prone products, take steps to secure them in a locked area with limited access. View your warehouse from a criminal’s point of view: Are the doors secure? Do you store material outside that can be easily accessed? Do you allow customers to have free reign to wander around the facilities while waiting for their orders to be filled? All of these are potential opportunities for inventory loss.
If the root causes are more difficult to identify, consider embracing big data. Most warehouse management systems today generate large amounts of data, which can be mined for trends. Once you start gaining an understanding of the information you receive, you can begin looking for correlations. You should at least have the basic reports required to begin controlling your inventory—net and gross adjustments, part number details, and adjustments by storage type. If you aren’t putting this information to use, you likely are falling behind the competition. Remember that the ways to mine and make use of big data are limited only by your imagination.
Don’t overlook the obvious in regards to inventory control. Engage your warehouse associates in the journey, making them partners in the process and providing them with an understanding of the costs of poor inventory control and the bottom-line benefits of a good process. Often, warehouse associates will have insights into root causes. Use their knowledge and work together in order to establish strategies for continuous improvement. It is vital that they see the linkage between their actions and the impact to the customer.
Finally, keep in mind that your primary focus should be on achieving a well-designed cycle count program and establishing control mechanisms. Gain a complete view of your inventory by including all the bins associated with a product for that day’s cycle count. And consider supplementing your cycle count with activity- based counts.
Focusing your energy on root-cause and corrective actions will evolve into the control mechanisms required to improve your inventory accuracy. When done correctly, cycle counts, rather than being cost drivers, will become value propositions for the enterprise, helping to reduce stockouts, improve ordering decisions, and lower your overall inventory position.
Andrew C. Stein, CPIM, is a senior supervisor at Caterpillar. He has more than 15 years of supply chain experience and has been involved with record accuracy in a variety of roles, including six sigma black belt and supervisor of record accuracy teams. He may be contacted at firstname.lastname@example.org.