One of the number one complaints I hear from new customers is related to inventory problems. It goes “I can’t trust my inventory”, or “My inventory is always wrong”. Here are key reasons for inventory issues as well as how to find solutions.
The order that got away
Your biggest customer calls; he/she needs 300 of your latest widget, 300 lbs of liquorice, 3000 Inspector Gadget dolls or whatever it is that you sell. You check your inventory software of choice, and you have exactly enough to fill the order.
The sales order gets entered, and a pick ticket is generated and printed to ship the product.
Then the call from the warehouse comes.
We only have 20% of the order.
If you’ve been in any operational, distribution, retailing or other business that carries inventory, you’ve experienced this issue. It is a decidedly less inspiring feeling than the moment you got the order.
Let’s talk about why it happens and what to do about it.
Three Distinct Processes
Physical inventory processes
The physical processes are all of the inventory touch points. These may include:
- Receiving inventory off of a truck
- Pulling inventory out of boxes
- Putting inventory away
- Moving inventory
- Moving inventory again because you shouldn’t have put it there, didn’t you know that?
- Picking inventory for production
- Staging inventory for production
- Moving work in process around
- Putting finished inventory away
- Did I mention counting, let’s do that again.
- Picking for shipping
- Packing items into larger boxes or crates
- Ship an item to a vendor for external processing
- Loading onto a truck
- Throwing in the garbage
That covers a lot of the physical movements. The one thing that all have in common is that none of them affects the inventory levels shown in your inventory software / ERP system. These are all purely the physical acts carried out by individuals.
Paper processes are often the instructional steps in the middle. These may include:
- Recording a perished item on a scrap list
- Printing a pick list/ticket
- Writing a count on a count sheet
- Writing a count on packing slip
- Printing packing slips
The common thread with paper processes is that they don’t affect the product physically and they do not change the level of inventory in the system.
Software / ERP transactions
Now let us talk about how the inventory gets tracked in your chosen software package or ERP. We will refer to these activities as transactions. Transactions include:
- Goods receipt from a purchase order
- Scrapping parts in the system
- Transactional movement from bin to bin
- Goods issuing materials to work in process
- Shrinking material due to a cycle count/stocktake
- Writing off material due to obsolescence
- Shipping material in your system
- Receiving finish materials into inventory
- Shipping materials to sub-vendors
The common thread here is that all of these activities have no physical touching of the materials. Also, these transactions all change the level of inventory recorded or the storage location in your software system/ERP.
The answer to the question “Why can’t I trust my inventory?”
When any of the above physical activities happen without a corresponding software transaction, you generate a variance. Conversely, any time you create a software transaction without a matching physical activity you also create a variance.
I can’t tell you how often I see “the cage” implemented. The cage is a physical cage or fenced area that the inventory goes in and an inventory control person sits in the cage during work hours. Nothing goes in or out of the cage without the inventory control person recording the activity. The cage may be appropriate in some inventory situations with exotic or expensive materials. In most cases, it’s inefficient and costly.
The planner is my reference to an effort by companies to take many transactions away from shop/production level people and move all of the transactions to a centralised planning or materials group. Typically in the “Planner” scenario, the physical activity happens long before the transaction as there is a piece of paper or work pack that must make it’s way to the planner. I’m not aware of any situations where this works well or makes sense, but if you know of one, I’d like to here it.
In many businesses, there will be a requirement for a minimum of one full stocktake per annum. Many companies also feel this will correct their inventory problems. The truth is that it is likely to “reset” most of the values back to correct levels for a short period only. When the same inventory movements begin after the count, the issues will return.
The other thing to note about full physical inventory counts/stocktakes is that they often cause a lot of new variances in spite of the efforts to correct them.
Cycle counting is counting a portion of your inventory on a periodic basis. There are several ways to set up a cycle count which I won’t detail here, and often these are driven by criteria set up in your financial controls. In many large companies, good performance during a year of cycle counts means an exception from the full physical inventory/stocktake.
This article isn’t a how to do a cycle count article, so I’ll say this one thing. If all you do is count and correct the inventory variances, you are doing it wrong. Finding root-cause of the variances should be a key goal.
Process mapping or value stream mapping is the exercise of mapping the entire process. The effort of process mapping can help flush out the root-cause of inventory issues. It’s crucial that all elements, physical, paper and transactional get recorded during the process mapping to give you the best chance to solve the problem.
There is a common belief that adding inventory software will solve inventory variances and challenges. The software can certainly be a solution. Businesses often install new inventory software with the hope that it will correct inventory issues. In many cases, the organisations then find that the inventory issues become worse than before.
I’m not suggesting that you avoid inventory or ERP systems with inventory management. I will, however, state that the inventory software should be fit for purpose and the process must be robust.
In some cases, software can also be a part of the problem. Warehouse management (some call this bin management) software without staff discipline can quickly lead to lost items. At the same time, Inventory Management software in a large facility with many bins with the same items can cause lost items for different reasons.
Training is your last defence against inventory issues. Staff training needs to cover, the software transactions, the process, the timing, paperwork and tools. It is important to address situations such as service technicians that take inventory without recording the activity. A qualified team that understand the duties to ensure accurate inventory pays long-term dividends.
While at the heart inventory transacts only IN or OUT and location to location, the possibility of errors is significant. Process mapping and cycle counting can help to find the cause of your issues. Built a robust process and combine it with fit for purpose software. Reinforce the process and systems with training and the variances will begin to disappear.
Don’t go it alone
If you’re having significant inventory issues in the Perth region, give us a call. You can view our Inventory Solutions page here.