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19 Steps to Maintain an Accurate Inventory What You Must Know About Your Inventory

Written By: René Jones
Published On: May 19 2005

19 Steps to Maintain an Accurate Inventory
What You Must Know About Your Inventory

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Introduction

Peter Drucker, the foremost author and expert on enterprise and self-management, and one whom I am sure everyone reading this has probably heard of, stated, "We know little more about distribution today than Napoleon's contemporaries knew about the interior of Africa." I found out just how true this was when I was gathering information for this article. I began by searching to see what other experts had to say about maintaining an accurate inventory. About one week after beginning my search, I was no closer than when I started, so I decided to talk to people in the industry and ask them three simple questions:

  1. What are your currently doing to maintain the accuracy of your inventory?

  2. Is what you are currently doing working?

  3. If what you are currently doing is not working then why haven't you changed?

You know what the interesting thing was? Everyone answered number 1 and number 2, but when it came to number 3, I ended up right back where I started: scratching my head and saying, "I can't believe since inventory is one of an organization's greatest asset, why do most companies do so little to maintain it?"

There are some interesting things about inventory that I am sure everyone knows, but before I get to the nineteen steps I'm going to reiterate some key points about inventory.

  • Distribution inventory values range between 6 percent and 20 percent of the company's annual revenue.

  • An inaccurate inventory causes several problems: lost sales, decreases in profitability, and lost productivity from searching for products.

  • Companies use inventory as a security blanket to cover deficiencies in their warehouse.

Given all of this, the only thing you really need to know is that it takes $2,500 in new sales to make up $100 in lost inventory, assuming a 4 percent return. I don't think I am the only one in our industry who knows this, but if I am not, then why are so few people talking about how to control the accuracy of their inventory? Think about how much having an inaccurate inventory costing you and your organization.

Again, your inventory is one of the biggest, if not the largest investment you have in your company. The only thing that comes close to it is your people. But you know what I have learned over the years? People do what you inspect and not what you expect! Most leaders expect their people to know why inventory accuracy is important to the company, and it is with this assumption where the problems begin. It is also where I am going to begin the first step.

Step 1: Set Goals.

I know this is a sore subject for most business leaders because they feel goals in the warehouse is an oxymoron. However, I am not saying that by completing this article today you will have 100 percent accuracy on your next physical. It takes time for your warehouse personnel to internalize your warehouse goals. What I am saying is that to do this, you need to determine how many

  • inventory adjustments your warehouse makes on a daily basis

  • stock-outs you have on a daily basis

  • backorders you have because the inventory was inaccurate

  • items that were wrong during your last physical

From those numbers, you need to determine what will be acceptable and then you need to implement the remaining eighteen steps to get to that level of acceptability. I guarantee every department in your organization has goals except for your warehouse. Why is that? You know what Michelangelo said: "The greatest danger is not that our aim is too high and we miss it, but that it is too low and we reach it." You need to address your inventory issues by aiming higher than you have in the past.

Step 2: Document your processes.

Now even though this article is about your inventory, you have to document all of the processes that go on in your warehouse. How can you legitimately establish any type of inventory control program if your people are not sure about what they should be doing? The "follow Nancy around" approach to learn processes only works in the restaurant business. Your people need to know different picking (P) and receiving (R) functions: What to do when I go to pick an item and there is no product in the bin? (P) What do I do when the wrong product is in the bin? (P) What do I do when I am receiving and the vendor sends a replacement item? (R) What do I do if the item in the bin is damaged? and What do I do if the item is not in the bin, but I see the item in overstock? (inventory)

Even though some of the processes are picking and receiving-related, improper processes will cause inventory problems throughout the year and will lead to problems during the annual physical. Your people need to know what processes to follow; however, we know your people are not going to consult a training manual every time they encounter a problem so develop "Cheat Sheets" that are brief references showing how to troubleshoot problems. (See figure 1)


Figure 1: Cheat Sheet

Step 3: Develop and use stock check cards.

Whether you have an automated or a manual system, your people need a vehicle to identify problems and notify the appropriate personnel. A stock check form (figure 2) does just that. It must have certain things on it, such as the order number, picker's name, date, product code, quantity, reason for completing the "stock check" form, etc.

If an item is backordered by a warehouse person, it should be accompanied with a stock check form, which will eliminate the vicious cycle of the backorder fillable report as well. That's when the picker backorders an item, then the purchasing department fills the backorder because the system says its in stock, and another picker backorders it again, causing the buyer not only to fill the order again, but to include a note asking the picker to find the product, all the while muttering obscenities about the warehouse. A new, untrained picker backorders the item again, because no one ever explained what those notes on the pick ticket meant. Now the buyer is livid so he or she goes to get the piece, which he or she can't find, and eventually has to order.


Figure 2: Stock Check

Step 4: Clean and organize the warehouse.

James Q Wilson and George Keilling developed the "Broken Windows Theory" which states that "Crime is the result of disorder. If a window is broken and not repaired people will conclude that no one cares. Soon more windows will be broken and a sense of anarchy will move to the street upon which it faces." Replace "broken window" with "dirty shelves" and it becomes the very relevant "Dirty Shelves Theory".

An inaccurate inventory is the result of disorder. If an aisle is messy, a Coke can is left on a shelf, a box is not put away properly, or a light remains broken, people will conclude that no one cares. Soon more aisles will be messy, more cans will be left on shelves, and more product will not be put away. Pretty soon, an order will be picked incorrectly, and an item will be put in the wrong box at the packing station, and then we wonder why our inventory is so inaccurate.

Remember what I said earlier: "People do what you inspect and not what you expect." If your warehouse supervisor can't hold your people accountable for keeping the warehouse clean, it will not be realistic to expect an accurate inventory. Develop a simple aisle maintenance sheet that includes removing empty boxes, checking for broken lights, removing discarded shrink wrap, emptying the trash can etc. to prevent the warehouse from becoming a mess.

Step 5: Assign all of your product to bin locations.

The average picker spends over one hour per day searching for product. If you have eight pickers that's equivalent to one person per day—and extra person that is probably not needed, or can be used doing something more productive. By assigning product to locations this will eliminate pickers searching for product throughout the warehouse.

Step 6: Allow only warehouse personnel to receive.

Receiving is the most important task your warehouse performs. If an item is received incorrectly, it will be putaway, picked, and shipped wrong. If the paperwork is not processed correctly, the wrong product will be received and given to the customer. When the order is generated, the picker looks for the product and can't find it, so the buyer then orders another while saying "Those warehouse guys are clueless. They just received this product this morning. Now they cannot find it." Eventually, shipping sends the order to the client, but meanwhile, the second order comes in , and the buyer decides to receive the product and personally ship it to the customer. If the product is returned because the customer doesn't need it, a sales person will likely say, "Don't send it back to the vendor. The customer will need another one for another job." The product then just sits on the shelf until it is lost or is counted at the next annual physical. Hopefully the first order was corrected because the customer was never billed for the second one, but for some reason you show two items in stock. Another vicious cycle of inaccurate inventory ensues.

Step 7: Address non-stock and dead inventory.

You have to address your non-stocks and your dead inventory. Non-stocks are a hassle and have to be dealt with. They should be counted regularly, clearly identified, and centrally located. Quite often, non-stocks and dead inventory are not addressed until the end of the year, and then management wonders why there are so many.

Dead inventory is usually DOA, "dead on arrival". New items are the major cause of dead inventory. Climbing up ladders to pick orders or relocating because of space issues does not make sense if you have dead inventory occupying floor space. It is a loss of productivity and should be addressed immediately. Simply put, "If it would stink I bet you would get rid of it." Treat DOA the same way. Get rid of it to streamline your warehouse processes

Also remember, a company has to pay cash for the materials and labor that make up inventory, and until the company gets paid, that outlay of money represents a financial burden to the organization. Your product is worth less each day you hold it in inventory—by the time it reaches the customer, you will have lost significant revenue..

Step 8: Assign someone to address "reports" all year long.

There is no room for excess costs in any economy! In order to show a profit, you need a complete understanding of where the money goes and how to run your operations more efficiently and effectively than your competition. This means you can't just address problems during your annual physical and then think they will not happen again throughout the year. By assigning someone to address reports throughout the year, the reports will be a manageable the week before the annual physical. I see it all of the time. Items are typically added back into inventory when the count is incorrect and the report shows open (shipped) orders that were not invoiced. Those items need to be back into the system to reconcile correctly. This would be avoided if these items were accounted for prior to the physical.

Step 9: Hire an inventory controller.

You need someone in addition to your warehouse supervisor to be held accountable for the accuracy of the inventory. Your warehouse supervisor is nothing more than a firefighter. They do not have time to research inventory discrepancies. Find someone who it detail-oriented, someone who is vocal, and able to start with very little instruction, and complete what they start without any assistance.

Step 10: Stop all non-warehouse personnel from entering the warehouse.

I just have one question that I would like answered: Do you pay your customer service personnel by the mile? It sends a chill up my spine when I see a customer service person walking to the warehouse to check and see if the quantity listed in the computer is actually in the bin, especially while a customer is on hold and more customers are calling in. If an outside sales person needs an item for their customer, they should go to the counter just like a customer. If your counter is so inefficient that you do not want your sales person waiting there, then think of how your customers feel.

Step 11: For the actual annual physical, break the warehouse down into small chunks.

You don't give your sales people a product guide and car keys and say go sell something, so why then do you give your people a pencil and a sheet of paper and tell them to go count something during your physical? This is one of the most important days of the year! Everyone involved should know where they should begin counting and where they will end. Creating zones will maximize time because there will be a specific plan. People will not be walking around to find out where they need to go next. This will also allow you to begin checking variances sooner because your map will show what zones or sections have been completed and by whom.

Step 12: Develop count teams.

Don't simply have two people go out and count. There must be a team of several individuals are assigned to a team leader—preferably a warehouse person. This will give personnel the opportunity to take ownership of the inventory and begin to understand the importance of their job.

The team leader is the only person who should be walking and talking. Everyone else should be counting. This will allow you to begin checking variances sooner because your map will show what zones or sections have been completed and by whom.

See the end of this article for some tips and tricks to conduct an effective physical.

Step 13: Only allow warehouse personnel to count.

Before everyone puts this article down, hear me out on this one. I am sure some people have legitimate reasons for using the entire company to count. However, let me play devil's advocate to some of those reasons.

  • We don't have enough warehouse personnel to complete the count.

    Is that enough people to complete the count the whole warehouse
    or enough so you don't have to be there the entire weekend?

  • Our warehouse people don't know the product well enough.

    How then are they able to receive it, pick it, pack it, and ship it,
    but not well enough to count it?

  • They will fumble up the count.

    If you can't trust your warehouse personnel on this one day, why do
    you trust them the other 364?

Step 14: Audit the counts.

I see very few companies that audit their counts. Your people need to know that entire sections need to be recounted if too many mistakes are being made. This is the one time when non-warehouse people can be of service in the warehouse. Use additional personnel such as accounting, sales, and purchasing to perform the audits.

Step 15: Correct the variances the weekend of the count.

A lot of things take place in you warehouse, but variances can't take a back seat to your day to day operations. If you don't address your variances as quickly as possible, they will not be addressed. You have to decide what total variance you can live with. One word of advice though. I have seen the total dollar amount take precedence over the total item count. For example, if you have 1 million dollars of inventory and your total dollar variance amount is 50k, it may seem acceptable because your variance is only 5 percent. However, if your 1 million dollars of inventory consist of 10k SKUs and of those 10k, 4k have a variance, your inventory is actually only 60 percent accurate. Is that acceptable to your customers? That could mean four out of ten times a picker goes to a location the product is not there. Is that acceptable to you? More importantly, is that acceptable to your bottom line? Personally, I am a fanatic about recounting based on quantity not necessarily just on dollar variance. If missing 200 pieces with a total value of $100 dollars is missing, most people will not want to recount that item. They want to focus on the higher dollar items; however, this is still 200 pieces of that have vanished into thin air.

Step 16: Prepare! Prepare! Perpare!

I am sure everyone has heard the quote, "We don't plan to fail, we just fail to plan!" It amazes me to see multimillion dollar organizations that begin thinking about their inventory only the week before the physical. Do the opposite and give greater advanced notice. One of our customers informs its people a year before the next physical. They want all non-essential personnel to schedule their time off around the physical that will be in December. It also gives them plenty of time to get the books in order. If you don't remember anything else from this article remember this: A physical inventory is 85 percent preparation and 15 percent counting! That means for every hour you spend counting, you should spend 8.5 hours preparing. That may seem like a lot, but remember, there are pre-physical steps that need to be performed, as mentioned above.

Step 17: Cycle the count.

Inventory acts as a buffer between unmatched supply and demand. It hides problems! Eighty percent of a company's sales, profits, and costs are often from 20 percent of its products (Pareto Principle). That 20 percent should receive the most attention when considering the cycle count. They are termed class "A" products for inventory tracking. There are other methodologies out there, but this the best.

Class Percent of total inventory Percent of total sales/costs/profits Number of times to count
A 20 80 4 to 6
B 30 15 2 to 4
C 50 5 1 to 2

Table 1: Inventory and profit and number of times to count.

Step 18: Purchase and install a warehouse management system.

When I hear the horror stories about implementations or no ROI has not been achieved, I have to question the company. Most people want to automate their inefficient processes or to use my favorite analogy, they "put clean clothes on a dirty kid." However, this means they simply do their processes wrong, faster. You have to address your problems prior to or during the implementation. Also, when it comes to ROI, you have to track all of your warehouse expenses. It is impossible to expect a return when you don't know where something is. See my article, ROI In Your Warehouse—Real Or Imagined for a detailed discussion about this. It is impossible to expect a return when you don't know what something costs. Track your warehouse expenses—all of them!

Step 19: Address your returns.

This may seem like it is out of place, but believe me, it is not. I want to make sure that when you put this articles down, you will have returns on your mind. They are not a "necessary evil" as they have been called in the past. They are receiving and as I already said, receiving is the most important job in your warehouse, which is why your returns need to be sent through receiving just like a purchase order.

Conclusion

You have to implement the idea of a "day's work in a day." If it comes in today, it has to be received and putaway today. Returns cannot just take a back seat to every other process in the building. If you monitored your inventory adjustments for a week, I guarantee more than half of them will be the result of a return being processed incorrectly. You know, several hundred years ago excess inventory meant a businessperson was wealthy. Today, excess inventory shows the inability to understand how to run a business or an organization. Customers today will only pay for a high level of service, and are refusing to accept the excuse that the warehouse is the problem or the system is always wrong. You need to to get a handle on your inventory.

Some Tips and Tricks for the Physical

  1. Use post-it notes. Have counters write problems on the post-it and affix it to the product then move to the next item. This prevents unnecessary conversation and people from walking around to get an answer on how to solve their problem.

  2. Use Problem Flags. Once a problem is identified by a person counting they should place a flag at the end of the aisle to notify the team leader that there is a problem. The team leader will then go the aisle with the flag, read the post-it correct the problem, remove the flag, and proceed to the next aisle.

  3. There must be no talking during the count. One company we worked writes up employees for talking during the inventory. It may seem harsh but their inventory was the most accurate I had ever seen on a manual system. They were in the high nineties.

  4. No Music. Music is a distraction during the count.

  5. Check overstock product prior to the count. Make sure it is properly labeled. This will take the guess work out of the count.

  6. Use count markers instead of dots. This prevents people from stopping ot look for more dots when the run out and minimizes waste because there are no dots to be thrown out after the count.

  7. Centralize the location for supplies and instructions. Your counters should not have to walk around looking for supplies or for anwers to questions.

  8. Identify and purchase supplies ahead of time. Purchasing supplies during the count should never happen. It wastes time.

  9. Close during the physical. Trying to process orders during a physical tells everyone that the accuracy of the inventory is not really that important. As long as you inform your customers about the closing well enough in advance, they will understand why you are not processing orders during that period.

About the author

Ren Jones is widely known in the industry as the founder of Total Logistics Solutions, Inc. (http://www.logisticsociety.com) a warehouse efficiency company and is now the president and CEO of AHN Corporation (http://www.ahninc.com), a warehouse management solutions provider. With over eighteen of industry experience, Jones was recently recognized for his achievements in the industry by Supply & Demand Chain Executive and was named one of the top 25 "Pros to Know" in the industry for 2005. Published and quoted in industry magazines throughout the United State, Central America, Canada, and Australia, he is also the author of the acclaimed book, This Place Sucks: What your warehouse employees think about your company and how to change their perceptions! and WMS 101: A Complete Guide to Selecting, Implementing and Maintaining a Warehouse Management System.

He can be reached by phone at (818) 353-2962 or by e-mail at rene.jones@ahninc.com

 
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