INVENTORY CYCLE COUNTS

Transcription

1 INVENTORY CYCLE COUNTS This document will explain what cycle counts are and how they are done. While we draw reference to the VISUAL ERP environment, the cycle count principles in this white paper work irrespective of your ERP.

2 Inventory Cycle Counts EXECUTIVE SUMMARY A cycle count program is essential if you want to have accurate inventory levels throughout the year. Annual counts primarily serve financial reporting needs of the business while cycle counts serve both financial reporting and daily operating needs. Cycle counts can be as simple as counting specific locations or products on a rotating basis to using ABC product and velocity analysis as your cycle count strategy. If done regularly and properly achieving 97% inventory accuracy, in quantity and by location, is attainable and will eliminate the need for annual inventory counts. THE CHALLENGE Cycle Count Definition: A subset of inventory that is counted on a periodic basis per a predetermined set of criteria. Nobody likes inventory counts. Companies close operations, bring in additional staff, load everyone up with caffeine and sugar, then start counting and recounting items that they can t even recognize. After at least two passes through the warehouse, the inventory is deemed accurate, the ERP inventory is adjusted, often involving a big write-down, and quickly thereafter, everything returns to normal. Before asking what inaccurate inventory costs your company, we should first ask where do we feel the impact of inaccurate inventory?. We believe there are three primary pain points: 1. Financial reduced inventory turns and reduced fill rates reduce profit margins 2. Service - reduced fill rates and back-orders reduce customer satisfaction 3. Productivity everyone scrambles to verify inventory due to lack of trust in the system EXAMPLE:EVERY LOST $100 IN STOCK REQUIRES $2500 IN SALES TO MAKE UP FOR IT - ASSUMING A 4 PERCENT NET PROFIT BEFORE TAXES.

3 When companies conduct annual physical counts, inventory is only accurate on the first morning after the completion of a count. Over the next few weeks and months, erroneous transactions start to have their effect and inaccuracies creep back into the system. The ability to find what is needed when it is needed declines and trust in the system is eroded. As errors are uncovered staff must perform ad hoc remedial counts and adjust the ERP inventory. Every year, this cycle repeats. All errors that are not noticed during daily operations are all uncovered at once and adjusted for in the financial all at once. Inventory Optimization is a Business Outcome that is dependent upon the four main pillars of an efficient warehouse: technology, processes, people, resources. If a business attempts to conduct its Inventory Optimization exercise either manually or with software without considering these other factors, then it will not succeed. The process requires participation from senior management to purchasing to floor personnel. This document will consider each of these individually and explain this cross functional process. Why do Cycle Counts? Companies that do regular cycle counts have 50% higher inventory accuracy levels than companies who only do annual physical counts, have fewer hi or low swings in inventory levels, and they enjoy more turns. In addition, Visual ERP users that employ regular cycle counts will be able to offset inaccuracies caused by Visual s automatic backflush and auto issue processes. CYCLE COUNTS KEEPS EVERYONE HONEST WHILE MEETING BANK AND FINANCIAL COVENANTS This document is intended to help companies that operate warehouses. It is assumed herein that these companies are running an MRP or ERP system such as Visual ERP, and that they do not already use cycle counting. Their existing systems and procedures are designed to help them build and deliver products, but might be less effective in the tracking of inventory. Candidates for cycle counting should already have reasonable system controls and accuracy and be doing periodic full physical counts. Cycle counting maintains system integrity, but does not replace disciplined inventory control policies and practices.

4 THE PROCESS Those that are interested in cycle counting typically fall into a few categories. Materials Managers often care about the manpower required to count. Counts must be done, so how can they be less painful. There are the financial types such as controllers and plant accountants, who see how inventory inaccuracies create uncertainty in the organizations valuation. Operations and production staff need to be able to trust the inventory numbers in the system so that they are not caught over or under producing for an order. Customer Service staff want to make sure that they don t make promises that they can t fulfill. The requirement is the same having trustworthy inventory data reduces juggling of shortages. The differences between a cycle count and full count Cycle Count Daily Occurrence Specialized staff Operations keep running Preventive More useful for Operations Can replace Full Count Pays for itself Full Count Annual process All available personnel Operations are closed After the Fact More useful for Finance Department Much smoother process when Cycle Counts are conducted Represents expense for time and lost manufacturing Tip: True inventory accuracy is having BOTH quantity and location accuracy HOW TO GET STARTED 1. Decide on an approach 2. Facility Prep (including Visual) 3. Tools 1. Decide on an approach and frequency The approach has 2 options: Location or ABC product/velocity analysis.

5 Real Time Integration into Infor VISUAL Manufacturing Cycle counting by location begins from one end of the warehouse to the other, based on surface area. In this system, a schedule is created and followed so that each location s contents are counted on an assigned day, and that all locations contents are counted at least once. This approach is easiest to implement and it treats all inventory types equally. Cycle counting by ABC analysis and velocity is determined first by Pareto frequency analysis, and then manually adjusting as needed per item based on usage, sensitivity, or other factors. The Pareto method determines what to cycle count based on percentage of inventory value (cost multiplied by usage for period). Items with a higher determined value are counted more often, while items that have little movement are seldom counted. This concentrates effort on higher volume of use items but almost ignores low value items which may still be critical for production. Cycle counting by usage relates count frequency to the risk of transactional error the more something is used or moved, the more likely it needs to be checked.

6 Other factors or considerations when defining how a company will conduct cycle counts also include: Requirements of auditors and financial stakeholders, Government compliance and regulations, High risk items, High value items, Historical inventory accuracy of an item. Frequency of cycle counts Daily Build it into normal operations Ensure everything is counted at least once/year Have process triggers which force a cycle count if a SKU or warehouse slot location is outside acceptable tolerances e.g. negative inventories When to do cycle counts During non-ship days if counts include primary locations Count reserve or bulk during normal operations away from pick processes Morning time is best or before replenishment and picking processes of those locations End of Season i.e. seasonal products or Black Friday 2. Preparing VISUAL and the facility. It all begins and ends in the ERP. Cycle counts are set up in Visual ERP. The big question is How do we choose what to count? They can be configured by location, by product or commodity code, or by ABC code as described above. Facility preparation includes: Clean areas to be counted Train personnel Share quantities with personnel or give them access to the online qty Ensure all UOM (Units of Measure) are clearly marked and defined Ensure location labels can be scanned Open parts in receiving, WIP and Ship should be closed out in Visual (on a best effort basis) Eliminate obsolete or defective parts Ensure IT is available for support and adequate software licenses are available Create an orphanage for found parts tag it and move it for later handling

7 3. Necessary Tools - 3 Options Option 1 Pen & Paper This process typically takes 100%+ more time and resources than an automated system. Option 2 Power Cart including: Mobile Workstation, PC with access to Visual, Printer and Scanner. This can also be used for re-labelling and inventory adjustments. The typical return on investment for a power cart in regular use is 3 weeks. Option 3 Mobile Terminal For maximum efficiency, cycle counting should be conducted within a warehouse management system. The counting operation is performed on mobile computers with integrated barcode scanners that allow the operator to automatically identify items, and enter inventory counts via keypad. The software then transmits data to a database in real-time. Progress can be managed on the WMS full screen control centre. Once management accepts the counts as accurate, the WMS synchronizes the count data with the ERP.

8 HOW DOES IT MEET THE CHALLENGE? Over the last 20 years of helping customers control their inventory, we ve found that inventory error has a ripple factor for every dollar of inaccuracy, there are costs to the company of five dollars, some are hidden, others obvious, and this is just a rule of thumb, but it has proven to be a reliable indicator. Portable Intelligence Inc. has developed a WMS called RF Plus, which is available for Visual Mfg., MS Dynamics NAV, Syspro and other ERP systems. Counts with RF Plus - The Physical Count screen works in conjunction with Count IDs from VISUAL.

9 CONCLUSION In a team environment including representatives from management, warehouse, production, IT, Set targets, Decide on what inventory types to count, Plan your counts with pre-determined criteria/rules, Source help to set up the program, Train personnel to be inventory count specialists, Ensure personnel have the right tool for the job. The Inventory count program paid for itself after the first use it s well worth the investment -RF Plus user Whether a company uses RF Plus or any other form of automated inventory management, we encourage the use of daily cycle counts. When done properly and as recommended herein, companies will experience the following: 1. Inventory accuracy will achieve that critical 97% mark which is the point at which the annual inventory process is not required 2. Productivity and trust in the WMS will increase 3. Customer satisfaction will increase 4. Order fill rates, inventory turn rates and profit margins will increase

10 SOURCES Contributors to this document include the following personnel from Portable Intelligence Inc. Jeff Lem, Founder and President, MBA, P.MM, MBA, 20 plus years in supply chain industry and over 100 WMS installations. Portable Intelligence is also a VISUAL user. Parminder Grewal, PM, has over 10 years as a user of VISUAL ERP and TM Plus /RF Plus, having successfully deployed and used both products in previous roles.