Inventory Accuracy and Cycle Counting

Inventory records usually differ from the actual physical count; inventory accuracy refers to how well the two agree. Companies such as Wal-Mart understand the importance of inventory accuracy and expend considerable effort ensuring it. The question is how much error is acceptable? If the record shows a balance of 683 of part X and an actual count shows 652, is this within reason? Supposedly, the actual count shows 750, an excess of 67 over the record; is this any better?

Every production system must have agreement, within some specified range, between what the records says is in inventory and what actually is in inventory. There are many reasons why records and inventory may not agree. For example, an open stockroom area allows items to be removed or both legitimate and unauthorized purposes. The legitimate removal may have been done in a hurry and simply not recorded. Sometimes parts are misplaced, turning up months later. Parts are often stored in several locations, but records may be lost or the location recorded incorrectly. Sometimes stock replenishment orders are recorded as received, when in fact they never were. Occasionally, a group of parts is replaced in inventory without cancelling the record. To keep the production systems flowing smoothly without parts shortages and efficiently without excess balances, records must be accurate.

How can a firm keep accurate, up-to-date records? The first general rule is to keep the storeroom locked. If only storeroom personnel have access, and one of their measures of performance for personnel evaluation and merit increases is record accuracy, there is a strong motivation to comply. Every location of inventory storage, whether in a locked storeroom or on the production floor, should have a recordkeeping mechanism. A second way is to convey the importance of accurate records to all personnel and depend on them to assist in this effort. This all boils down to this: Put a fence that goes all the way to the ceiling around the storage area so that workers cannot climb over to get parts; put a lock on the gate and give one person the key. Nobody can pull parts without having the transaction authorized and recorded.

Cycle Counting: Another way to ensure accuracy is to count inventory frequently and match this against records. A widely used method is called Cycle Counting. It is a physical inventory-taking technique in which inventory is counted frequently rather than once or twice a year. The key to effective cycle counting and, therefore, to accurate records lies in deciding which items are to be counted, when, and by whom.

Virtually all inventory systems these days are computerized. The computer can be programmed to produce a cycle count notice in the following cases:

• When the record shows a low or zero balance on hand; it is easier to count fewer items.
• When the record shows a positive balance but a backorder was written (indicating a discrepancy).
• After some specified level of activity.
• To signal a review based on the importance of the item, as in the ABC system.

The easiest time for stock to be counted is when there is no activity in the stockroom or on the production floor. This means on the weekends or during the second or third shift, when the facility is less busy. If this is not possible, more careful logging and separation of items are required to count inventory while production is going on and transactions are occurring.

The counting cycle depends on the available personnel. Some organizations schedule regular stockroom personnel to do the counting during lulls in the regular working day. Other companies hire private firms that come in and count inventory. Still other firms use full-time cycle counters who do nothing but count inventory and resolve differences with the records. Although this last method sounds expensive, many firms believe that it is actually less costly than the usual hectic annual inventory count generally performed during the two- or three-week annual vacation shutdown.

The question of who much error is tolerable between physical inventory and records has been much debated. Some firms strive for 100% accuracy, whereas, others accept 1, 2 or 3% error. The accuracy level often recommended by experts is + 0.2% for A items, + 1% for B items, and + 5% for C items.

Regardless of the specific accuracy decided on, the important point is that the level be dependable so that safety stocks may be provided as a cushion. Accuracy is important for a smooth production process so that customer orders can be processed as scheduled and not held up because of unavailable parts.