One particular section of the model deserves a closer look in the discussion of quality cycles. The flow of information in the upper left quadrant of the model changes depending on the type of quality improvement process involved. Two quality improvement terms borrowed from the Japanese are particularly relevant to this topic. The terms and their definitions are:
Hoshin:
A breakthrough innovation or dramatic change in level of performance. The Hoshin concept was developed in Japan to communicate company policy to everyone in the organization. Hoshin's primary benefit is to focus activity on the key things necessary for success. Japanese Deming Prize winners credit Hoshin as being a key contributor to their business success. Progressive US companies, like Hewlett-Packard and Xerox, have also adopted Hoshin as their strategic planning process. Hoshin plans, therefore, map out a framework for substantial increases in performance.
Kaizen:
Kaizen is the Japanese term for continuous improvement. It refers both to a statistical/quantitative evaluation of process performance and an adaptive framework of organizational values and beliefs that focuses workers and management alike on zero defects. Kaizen plans lay out an ongoing refinement process.
Hoshin and Kaizen, along with a Plan-Do-Check-Act (PDCA) cycle, will be used to describe the previously mentioned information flows and demonstrate the quality improvement cycles.
1. Breakthrough Innovation (Hoshin) Cycle
When Cp <=4/3, an unstable process is indicated and a major innovative change, or Hoshin, is suggested. A Hoshin could also be considered even when a process is stable. For a business firm to maintain its competitive edge and/or increase revenue, it may be necessary to initiate a Hoshin cycle for a process that is already at a high sigma level of quality. Figure 8 depicts the information flow within the model when a jump in productivity or level of performance is desired.
Through the use of the MBM component, a simulation of the physical layer is created so that the effects of altering process variables may be analyzed. It is probable that numerous simulations will be executed with differing variables until a path representing the breakthrough is discovered. At this point, the results of the simulation are implemented in the actual system with feedback flowing back through the management element for monitoring and adjustment. It may take a process several cycles to stabilize and begin the Kaizen cycles.
2. Continuous Improvement (Kaizen) Cycle
Generally speaking, when Cp >4/3 for a process, that process is considered stable [Mizuno, 1988]. Figure 9 depicts the information flow for Kaizen continuous improvement cycles. In this situation, feedback from the physical layer is monitored by the management component . Input from the MIS and DSS assist managers in making incremental improvements to the business processes.
3. PDCA Quality Cycles
In this view of quality improvement cycles, the upper and lower PDCA cycles of Figure 10 correspond to Hoshin and Kaizen respectively. For illustrative purposes we will assume an unstable process as a starting point and follow it through the 8 steps of this process improvement procedure [Eddlestone, 1992].
Beginning at the Plan element of the upper cycle, the steps are as follows:
Develop process innovation/breakthrough plans.
Implement plans.
Check impact on capability
Act on results (decision point). If Cp >4/3 , process has stabilized. Go to plan element of lower PDCA (Kaizen) cycle.
Develop process improvement plans.
Implement plans.
Check process variation.
Act on results (decision point). If Cp <=4/3 , process is now unstable. Go to plan element of upper PDCA (Hoshin) cycle.
4. A Simplified Example of Process Improvement
For the purpose of demonstrating a series of quality improvement cycles, the output of a modeling simulation under development at North Carolina State University will be presented1. It is beyond the scope of this paper to provide an in-depth description of the theory and formulae that form the basis of this simulation. The information provided here is for illustrative purposes only. The simulation requires variable values to be input for certain business competencies. The inputs are a decimal number ranging from 0 to 1and represent the percentage level of a particular competency. Of interest to this example are:
Information Technology Competencies: The business firm's level of competency in utilizing information technology. For this example, the variable has values of IT=0.45, IT=0.5, and IT=1.0.
Mission Critical Competencies: These are the core competencies vital to the success of critical business processes. This variable has values of MC=0.85, MC=0.5, and MC=1.0.
Learning Competency: The ability to incorporate learning from the changes to a business process. This variable has a value of L=0.5 for all three simulation runs.
The simulation scenario portrayed here is that of a major pharmaceutical company that has decided it must reduce the mean time for drug-to-market delivery. The delivery time units are in days and the company is seeking a reduction in mean delivery time from approximately 4000 to 2000 days over a period of four years.
Notice that the process is starting at a current level of six sigma. In essence, the trailing end of the distribution curve for longer delivery times is cut off. When the sigma level is recalculated under these conditions the result is that sigma = 3.
In the simulation, the start of each major Hoshin cycle corresponds with the beginning of a year. Four cycles are depicted within each major Hoshin cycle; each of these corresponds to a 3 month period (one quarter). During the period of four cycles (1 year), sigma builds from sigma =3 back to sigma = 6. Figure 11 is a graphic depiction of the simulation output for the mean delivery times over a period of four years. Each line on the graph represents the mean delivery time as impacted by the differing competency values.
The simulation shows that significant drops in mean delivery time occur at the beginning of each major Hoshin cycle. The values associated with business competencies also have a measurable effect on achieving the company goal. The main point here is that breakthrough innovation is a cyclic process with dependencies on business competency values.
1. Implementation of simulation model by T.L. Honeycutt and W.M. Waters, Department of Math, Science, and Technology Education
V. Conclusion
Quality improvement and information technology have an integral relationship in a business firm. The IT infrastructure is essential in tracking and monitoring the quality improvement process. The model of a business firm presented in this paper combines IT and quality improvement in an organized structure that exploits the synergy of the two concepts. Finally, the competency and quality of the management process carries more weight than the technology by which it is supported.
Showing posts with label Cycle count. Show all posts
Showing posts with label Cycle count. Show all posts
Saturday
Sunday
Guide to inventory accuracy
Having problems with inventory accuracy? Implementing technologies such as bar coding systems, RFID, and pick-to-light are often assumed to be the solutions to inaccurate inventories. If properly implemented these technologies can help reduce errors, however, none of them will eliminate all errors, and a poorly implemented system can leave you worse off than you were before. Whether you are planning on implementing additional systems or not you should consider taking care of the basics first.
The Basics
There is nothing revolutionary about my list of "The Basics", it's simply a series of steps which define a process for achieving higher levels of inventory accuracy. Your success or failure will be determined by your implementation of these steps. This is not something that should be rushed; throwing a quick fix approach together to alleviate an immediate need may be more damaging in the long run since the success of this plan requires a cooperative effort by many people within your organization. If your first attempt fails, you will find it more difficult to get a high level of cooperation for your next try. Take the time and do it right.
Attitude. Maintaining inventory accuracy must be an integral part of the attitude of the organization. Like quality, customer service, and plant safety, accuracy must be promoted throughout the organization as everyone's responsibility. This attitude must start at the top levels. Yeah I know all you managers and execs out there want an accurate inventory but are you doing your part through your decisions and business practices to promote it. Processes are often shortcut in the name of "Customer Service" (this also applies to processes for Quality, Inventory Management, and Production Plans) that reduce or eliminate the effectiveness of the plan, which in the long run will reduce your ability to service your customers. Remember that these plans are designed to meet the needs of the customer, don't compromise them.
Process Definition. You'll struggle to make any progress if you have not clearly defined the processes throughout the organization that affect inventory. While defining the processes, you should be looking for opportunities for errors and implementing changes to eliminate or reduce them. Even the most accurate employee will make errors, I suggest placing formal checks in place for critical operations. Get as many people involved in this step to ensure you have a complete and accurate understanding of the processes. Anything missed in this step will require new procedures and additional employee training later, so once again, "take the time and do it right".
Procedure Documentation. This is the part where you use the previously defined processes to document the procedures the employees will follow to maintain inventory integrity. The procedures documented here should not be limited to inventory issues; they should be the complete procedure including quality, physical aspects, and safety. This documentation should be as clear and comprehensive as possible. It should be written for a specific task within a specific job responsibility, it should include everything the employee needs to know to complete the task and nothing else. For example: if a stock clerk's responsibility is to notify the supervisor of any discrepancies, that is all it should state in the procedure for the stock clerk even though there will be additional procedures for dealing with the discrepancy. Procedures should also include the correct method for filling out and processing paperwork, the sequence and timing of entering data, and any checks that are required to be performed. If there are any exceptions to a procedure they should be specified in the document, allowing undocumented exceptions to a procedure will decrease its effectiveness. Be realistic, procedures are not a "wish list", they are the documentation of the requirements of a specific task. You must be prepared to enforce compliance to all procedures. Once you are completed with the documentation, I suggest you first distribute the procedures to a few key employees, then take a couple of weeks for you and the key employees to monitor existing operations to see if anything was missed or if anything is incorrect. Once this is done, the procedures should be officially put into effect and distributed to all employees.
Employee Training. Handing out a written procedure does not constitute employee training. It is important to set a training schedule to go through all the procedures with groups of employees. Take whatever time is necessary to ensure they have a thorough understanding of the procedures. Make it clear that the procedure document is the only way to perform the task. If you did your job correctly in defining the processes and documenting the procedures you shouldn't run into many surprises during the training. Try to refrain from making changes or exceptions to the documentation at this time (unless there is a critical error). Last minute changes or exceptions will cause confusion and diminish the value of the documents. Make notes for possible future revisions of the procedures instead. Set a timetable for publishing and putting into effect revisions (every quarter or six months). Frequent revisions of procedures tend to cause confusion and make it difficult to enforce adherence.
Employee Testing. I am a big advocate of formal testing of employees on procedures. This is the only way to know if they understand them (or have even read them). Be prepared, this will scare the hell out of your staff. Do not make the tests too difficult, I suggest multiple choice questions and maybe some true/false. You may also need testing which requires the employee to perform the task in the presence of the tester. Make a point to include items in the test that are known to have been issues in the past. There should not be any penalties for incorrect answers on the test. Any incorrectly answered questions should be discussed with the employee to ensure that he/she now understands the correct answer. You may need to make arrangements to conduct the test verbally for employees with inadequate reading skills or other arrangements if language is an issue.
Monitoring Processes for Compliance. You must begin to monitor the processes for compliance to the procedures immediately. Any actions observed which do not comply with the written procedures must be addressed immediately with the employees involved. As stated earlier, the written procedures are the only way to perform the task. Allowing employees to "do it their own way" (even if their way is a better way) will make it impossible to enforce compliance on other issues and will create problems when changes are made to processes. If they have a better way, consider it for the next revision at which point it would then become "the only way".
Setting Standards. I am also a big advocate of setting minimum accuracy and production standards wherever feasible. Do your research to ensure the standards set are high enough yet still achievable. You will have to enforce these standards so it is critical to set them correctly. If in doubt, set them lower, you can always increase them later when more data is available. If you set them too high you have put yourself in a difficult position when it comes time to enforce them. Standards should be set for the specific task being performed. For example, the accuracy standard for a stock clerk stocking in random storage area would be lower than for one stocking in fixed locations. Setting standards requires tracking of the accuracy and productivity of the tasks being performed which makes it more viable when you have several people performing the same tasks.
Tracking Accuracy. Whether you have set standards or not I still suggest you track accuracy organizationally and individually. Accuracy tracking should always be measured as a percentage of total transactions. Tracking accuracy as flat numbers (number of errors) puts your more productive employees at a disadvantage, and at an organizational level will be skewed by variances in business activity. Accuracy tracking should be communicated to staff in a positive manner; it is a tool to facilitate improvement in processes and people. I have found that by simply tracking and communicating accuracy to employees you will see immediate reductions in errors even if standards are not set. The fact is we all want to be accurate; the problem is we all think that we are accurate and it's always the other guy who is making all the mistakes.
Accountability. People must be held accountable for following documented procedures. You have spent the time to document the procedures, provide the training, and the testing. If someone is not following the procedures they must be dealt with applying appropriate disciplinary action. It's that simple. You may be amazed as to how much just one individual not following procedures can screw up your inventory. If you don't hold the employees accountable you may as well throw out everything you have done to this point. Mistakes are mistakes and everyone makes them, however, not following a specified procedure is a conscious decision made by the employee to not do what he/she was instructed to do.
Count, Count, Count. We would like to believe that since we have taken the above steps we should now assume our inventory is accurate. Not necessarily. You will have to count it to determine the accuracy, as well as determining areas needing additional evaluation. Year-end physical inventories are tools used by accountants and do very little for inventory accuracy. You should count your inventory on a continuous basis (cycle counting) to maintain high levels of accuracy. This is one of the best ways of identifying problem areas on a timely basis and providing an environment conducive to continuous improvement. The way you count and the frequency of your counts should be designed for your specific type of operation.
Reevaluate. You should be regularly reevaluating your processes and procedures. Results of your cycle count program should point you in the direction of areas where enhancements are needed. Business conditions often change and new processes are added which will require evaluation. As previously mentioned try to refrain from frequent revisions to procedures (the memo of the day), it is more effective to plan a revision date and group multiple revisions into a revised release of the procedures. These revisions should be implemented with the proper training and testing as was done during initial implementation.
As you may have noticed, each of the above steps is highly dependent on the successful implementation of the previous steps. Although this process for improving inventory accuracy is not very complicated, the implementation can prove to be demanding. Depending on the environment you are working in, it can sometimes seem to be an insurmountable task to change the attitudes of people towards inventory accuracy. It will require a high level of effort and diligence to ensure success.
Additional recommendations.
The following are some additional suggestions that may help in your quest for a more accurate inventory.
Dedicate positions for managing inventory. Make sure you have control of which employees are affecting your inventory. This is especially true in manufacturing operations where the priorities of machine operators and production supervisors are meeting the production schedule, keeping the machines running, and ensuring the quality of the product being produced. Inventory accuracy will never be a primary responsibility of these types of positions. Once you come to this realization, it is easy to see the benefits of putting your inventory and material handling responsibilities in the hands of people whose primary responsibility is inventory. Also, within your material handling/warehouse positions you should limit the people doing miscellaneous type inventory adjustments.
Control employee turnover. I know, easier said than done. You've invested the time into training them, now figure out what you need to do to keep them. Once you have your processes and procedures under control you will find that new employees will become your #1 source of errors. My experience shows a new employee generally makes 2 to 5 times as many mistakes as a one-year employee and 5 to 10 times as many mistakes as a five-year employee. These numbers are based on operations that track accuracy and promote continuous improvement. If you're not tracking accuracy, your five-year employees may be making as many mistakes as they did during their first year. Also high employee turnover results in operations that are frequently short staffed which will almost always lead to increased errors.
Be prepared to dismiss or reassign employees. May sound like a contradiction to the previous suggestion, however, if you have made every effort to assist an employee in improving their accuracy and insufficient progress is being made you will need to get them away from your inventory. Again, don't underestimate the damage that can result from just one employee's errors.
Don't be afraid to put Checks in place. Some people feel that checking or rechecking work is admitting failure or is a waste since it "should be done right the first time", so I'll say it once again, everyone makes mistakes, that means everyone. If you find there are certain areas that are highly prone to errors (such as random stocking areas) or critical parts of your operation where a mistake can have significant detrimental effect, consider putting checks in place. A check may be an employee checking their own work or a specific checking operation. Outbound shipments should always have some type of check in place, the specific type of check will vary from operation to operation. In a high-volume, low-value shipping operation a simple looking over the shipment may be all that's feasible, while in a lower-volume, high-value shipping operation I've had as many as three people performing redundant checks of each shipment prior to loading.
Storage Areas. How you store your product will also affect accuracy. Crowded unorganized areas become "black holes" for missing product. Crowded areas also cause increase damage to product that is often disposed of without inventory corrections being made. High-density storage makes it very difficult to accurately count the product. Maintaining proper lighting, shelf and product labeling, and organization makes it easier to stock, pick, and count product thus increasing levels of accuracy.
Know your inventory system. The more you know about how your specific inventory system works, the more successful you'll be in optimizing its features. Computer systems are regularly blamed for things that are usually turn out to be human error, however, occasionally your computer system can be the source of the problem. Bugs, glitches, hiccups or whatever you want to call them do occur and changes to system parameters to optimize functionality in one area can create havoc in a seemingly unrelated area. The only way to determine the source and correct these problems is to have a thorough understanding of how your system is set up and how the specific programs process the information. The bigger advantage to acquiring a high level of system knowledge lies in the amount of information you'll be able to extract from your system. Today's larger software systems maintain enormous amounts of data and contain far more functionality than most users realize. Managers need to be taking more active roles in system set up and implementations if they want to optimize the system to meet their business needs. The days of leaving it all up to the IS department are gone, the staffing levels of most IS departments are inadequate to deal with the complexity and the enormity of software packages today. IS personnel tend to spend the majority of their time making sure the system runs rather than optimizing its features.
The end result in accuracy improvement will be directly related to the effort put forth to achieve it. Building a sound consistent inventory accuracy plan will get people in the habit of being accurate, as the entire organization gets in the habit of being accurate you will find the accuracy plan starts to run itself. Until then, it will require a lot of work by those implementing it.
Source : Dave Piasecki, logistic management.
The Basics
There is nothing revolutionary about my list of "The Basics", it's simply a series of steps which define a process for achieving higher levels of inventory accuracy. Your success or failure will be determined by your implementation of these steps. This is not something that should be rushed; throwing a quick fix approach together to alleviate an immediate need may be more damaging in the long run since the success of this plan requires a cooperative effort by many people within your organization. If your first attempt fails, you will find it more difficult to get a high level of cooperation for your next try. Take the time and do it right.
Attitude. Maintaining inventory accuracy must be an integral part of the attitude of the organization. Like quality, customer service, and plant safety, accuracy must be promoted throughout the organization as everyone's responsibility. This attitude must start at the top levels. Yeah I know all you managers and execs out there want an accurate inventory but are you doing your part through your decisions and business practices to promote it. Processes are often shortcut in the name of "Customer Service" (this also applies to processes for Quality, Inventory Management, and Production Plans) that reduce or eliminate the effectiveness of the plan, which in the long run will reduce your ability to service your customers. Remember that these plans are designed to meet the needs of the customer, don't compromise them.
Process Definition. You'll struggle to make any progress if you have not clearly defined the processes throughout the organization that affect inventory. While defining the processes, you should be looking for opportunities for errors and implementing changes to eliminate or reduce them. Even the most accurate employee will make errors, I suggest placing formal checks in place for critical operations. Get as many people involved in this step to ensure you have a complete and accurate understanding of the processes. Anything missed in this step will require new procedures and additional employee training later, so once again, "take the time and do it right".
Procedure Documentation. This is the part where you use the previously defined processes to document the procedures the employees will follow to maintain inventory integrity. The procedures documented here should not be limited to inventory issues; they should be the complete procedure including quality, physical aspects, and safety. This documentation should be as clear and comprehensive as possible. It should be written for a specific task within a specific job responsibility, it should include everything the employee needs to know to complete the task and nothing else. For example: if a stock clerk's responsibility is to notify the supervisor of any discrepancies, that is all it should state in the procedure for the stock clerk even though there will be additional procedures for dealing with the discrepancy. Procedures should also include the correct method for filling out and processing paperwork, the sequence and timing of entering data, and any checks that are required to be performed. If there are any exceptions to a procedure they should be specified in the document, allowing undocumented exceptions to a procedure will decrease its effectiveness. Be realistic, procedures are not a "wish list", they are the documentation of the requirements of a specific task. You must be prepared to enforce compliance to all procedures. Once you are completed with the documentation, I suggest you first distribute the procedures to a few key employees, then take a couple of weeks for you and the key employees to monitor existing operations to see if anything was missed or if anything is incorrect. Once this is done, the procedures should be officially put into effect and distributed to all employees.
Employee Training. Handing out a written procedure does not constitute employee training. It is important to set a training schedule to go through all the procedures with groups of employees. Take whatever time is necessary to ensure they have a thorough understanding of the procedures. Make it clear that the procedure document is the only way to perform the task. If you did your job correctly in defining the processes and documenting the procedures you shouldn't run into many surprises during the training. Try to refrain from making changes or exceptions to the documentation at this time (unless there is a critical error). Last minute changes or exceptions will cause confusion and diminish the value of the documents. Make notes for possible future revisions of the procedures instead. Set a timetable for publishing and putting into effect revisions (every quarter or six months). Frequent revisions of procedures tend to cause confusion and make it difficult to enforce adherence.
Employee Testing. I am a big advocate of formal testing of employees on procedures. This is the only way to know if they understand them (or have even read them). Be prepared, this will scare the hell out of your staff. Do not make the tests too difficult, I suggest multiple choice questions and maybe some true/false. You may also need testing which requires the employee to perform the task in the presence of the tester. Make a point to include items in the test that are known to have been issues in the past. There should not be any penalties for incorrect answers on the test. Any incorrectly answered questions should be discussed with the employee to ensure that he/she now understands the correct answer. You may need to make arrangements to conduct the test verbally for employees with inadequate reading skills or other arrangements if language is an issue.
Monitoring Processes for Compliance. You must begin to monitor the processes for compliance to the procedures immediately. Any actions observed which do not comply with the written procedures must be addressed immediately with the employees involved. As stated earlier, the written procedures are the only way to perform the task. Allowing employees to "do it their own way" (even if their way is a better way) will make it impossible to enforce compliance on other issues and will create problems when changes are made to processes. If they have a better way, consider it for the next revision at which point it would then become "the only way".
Setting Standards. I am also a big advocate of setting minimum accuracy and production standards wherever feasible. Do your research to ensure the standards set are high enough yet still achievable. You will have to enforce these standards so it is critical to set them correctly. If in doubt, set them lower, you can always increase them later when more data is available. If you set them too high you have put yourself in a difficult position when it comes time to enforce them. Standards should be set for the specific task being performed. For example, the accuracy standard for a stock clerk stocking in random storage area would be lower than for one stocking in fixed locations. Setting standards requires tracking of the accuracy and productivity of the tasks being performed which makes it more viable when you have several people performing the same tasks.
Tracking Accuracy. Whether you have set standards or not I still suggest you track accuracy organizationally and individually. Accuracy tracking should always be measured as a percentage of total transactions. Tracking accuracy as flat numbers (number of errors) puts your more productive employees at a disadvantage, and at an organizational level will be skewed by variances in business activity. Accuracy tracking should be communicated to staff in a positive manner; it is a tool to facilitate improvement in processes and people. I have found that by simply tracking and communicating accuracy to employees you will see immediate reductions in errors even if standards are not set. The fact is we all want to be accurate; the problem is we all think that we are accurate and it's always the other guy who is making all the mistakes.
Accountability. People must be held accountable for following documented procedures. You have spent the time to document the procedures, provide the training, and the testing. If someone is not following the procedures they must be dealt with applying appropriate disciplinary action. It's that simple. You may be amazed as to how much just one individual not following procedures can screw up your inventory. If you don't hold the employees accountable you may as well throw out everything you have done to this point. Mistakes are mistakes and everyone makes them, however, not following a specified procedure is a conscious decision made by the employee to not do what he/she was instructed to do.
Count, Count, Count. We would like to believe that since we have taken the above steps we should now assume our inventory is accurate. Not necessarily. You will have to count it to determine the accuracy, as well as determining areas needing additional evaluation. Year-end physical inventories are tools used by accountants and do very little for inventory accuracy. You should count your inventory on a continuous basis (cycle counting) to maintain high levels of accuracy. This is one of the best ways of identifying problem areas on a timely basis and providing an environment conducive to continuous improvement. The way you count and the frequency of your counts should be designed for your specific type of operation.
Reevaluate. You should be regularly reevaluating your processes and procedures. Results of your cycle count program should point you in the direction of areas where enhancements are needed. Business conditions often change and new processes are added which will require evaluation. As previously mentioned try to refrain from frequent revisions to procedures (the memo of the day), it is more effective to plan a revision date and group multiple revisions into a revised release of the procedures. These revisions should be implemented with the proper training and testing as was done during initial implementation.
As you may have noticed, each of the above steps is highly dependent on the successful implementation of the previous steps. Although this process for improving inventory accuracy is not very complicated, the implementation can prove to be demanding. Depending on the environment you are working in, it can sometimes seem to be an insurmountable task to change the attitudes of people towards inventory accuracy. It will require a high level of effort and diligence to ensure success.
Additional recommendations.
The following are some additional suggestions that may help in your quest for a more accurate inventory.
Dedicate positions for managing inventory. Make sure you have control of which employees are affecting your inventory. This is especially true in manufacturing operations where the priorities of machine operators and production supervisors are meeting the production schedule, keeping the machines running, and ensuring the quality of the product being produced. Inventory accuracy will never be a primary responsibility of these types of positions. Once you come to this realization, it is easy to see the benefits of putting your inventory and material handling responsibilities in the hands of people whose primary responsibility is inventory. Also, within your material handling/warehouse positions you should limit the people doing miscellaneous type inventory adjustments.
Control employee turnover. I know, easier said than done. You've invested the time into training them, now figure out what you need to do to keep them. Once you have your processes and procedures under control you will find that new employees will become your #1 source of errors. My experience shows a new employee generally makes 2 to 5 times as many mistakes as a one-year employee and 5 to 10 times as many mistakes as a five-year employee. These numbers are based on operations that track accuracy and promote continuous improvement. If you're not tracking accuracy, your five-year employees may be making as many mistakes as they did during their first year. Also high employee turnover results in operations that are frequently short staffed which will almost always lead to increased errors.
Be prepared to dismiss or reassign employees. May sound like a contradiction to the previous suggestion, however, if you have made every effort to assist an employee in improving their accuracy and insufficient progress is being made you will need to get them away from your inventory. Again, don't underestimate the damage that can result from just one employee's errors.
Don't be afraid to put Checks in place. Some people feel that checking or rechecking work is admitting failure or is a waste since it "should be done right the first time", so I'll say it once again, everyone makes mistakes, that means everyone. If you find there are certain areas that are highly prone to errors (such as random stocking areas) or critical parts of your operation where a mistake can have significant detrimental effect, consider putting checks in place. A check may be an employee checking their own work or a specific checking operation. Outbound shipments should always have some type of check in place, the specific type of check will vary from operation to operation. In a high-volume, low-value shipping operation a simple looking over the shipment may be all that's feasible, while in a lower-volume, high-value shipping operation I've had as many as three people performing redundant checks of each shipment prior to loading.
Storage Areas. How you store your product will also affect accuracy. Crowded unorganized areas become "black holes" for missing product. Crowded areas also cause increase damage to product that is often disposed of without inventory corrections being made. High-density storage makes it very difficult to accurately count the product. Maintaining proper lighting, shelf and product labeling, and organization makes it easier to stock, pick, and count product thus increasing levels of accuracy.
Know your inventory system. The more you know about how your specific inventory system works, the more successful you'll be in optimizing its features. Computer systems are regularly blamed for things that are usually turn out to be human error, however, occasionally your computer system can be the source of the problem. Bugs, glitches, hiccups or whatever you want to call them do occur and changes to system parameters to optimize functionality in one area can create havoc in a seemingly unrelated area. The only way to determine the source and correct these problems is to have a thorough understanding of how your system is set up and how the specific programs process the information. The bigger advantage to acquiring a high level of system knowledge lies in the amount of information you'll be able to extract from your system. Today's larger software systems maintain enormous amounts of data and contain far more functionality than most users realize. Managers need to be taking more active roles in system set up and implementations if they want to optimize the system to meet their business needs. The days of leaving it all up to the IS department are gone, the staffing levels of most IS departments are inadequate to deal with the complexity and the enormity of software packages today. IS personnel tend to spend the majority of their time making sure the system runs rather than optimizing its features.
The end result in accuracy improvement will be directly related to the effort put forth to achieve it. Building a sound consistent inventory accuracy plan will get people in the habit of being accurate, as the entire organization gets in the habit of being accurate you will find the accuracy plan starts to run itself. Until then, it will require a lot of work by those implementing it.
Source : Dave Piasecki, logistic management.
Cycle Counting and Physical Inventories
So it's the end of the year and the warehouse workers and all the salaried employees are gathered together on a Saturday morning to perform the annual physical inventory. The coffee and donuts help to put color into the faces and cover up the odors enveloping those who had overindulged themselves the night before. People are wandering around not sure what they should be doing, when the boss walks in with stacks of reports, cards, and colored stickers and says "OK here's how this is going to work." By noon it's obvious that less than half the warehouse has been counted and the pizza lunch has left everyone with an enthusiasm deficit. At two o'clock, one by one, people start approaching the boss with the reasons as to why they have to leave. Suddenly the pressure increases on those remaining to get finished. Five o'clock and the last of the counters are abandoning ship, there's an enormous pile of paperwork marked "discrepancies" and several piles of product marked "unknown," "what's this?" and "needs to be identified." The boss surveys the scene and instructs the people in charge of investigating the overwhelming pile of discrepancies to "just make the adjustments, we need to get out of here."
With some variations, this is how annual physical inventories are performed year after year. So what’s wrong with this process? Everything!!! You’ve just had a group of people with inadequate training and experience — most of them forced into being there on their day off — count your inventory, and have then made adjustments to your on-hand balances based on those counts without having the time to adequately investigate the variances. The final result likely being that half of the adjustments corrected previous inventory problems while the other half created new inventory problems on items that were correct prior to the inventory. In case it’s not obvious to you, I don’t like annual physical inventories. Counting inventories on a regular basis throughout the year (cycle counting) combined with a process for continuous improvement in inventory accuracy will prove a far better method for achieving accurate inventories. My definition of cycle counting tends to differ slightly from the generally accepted one. Most people think of cycle counting as regularly scheduled (usually daily) counting of product where you randomly count items based upon some type of predefined parameters. For example, inventory is broken down by ABC classifications and frequencies assigned such as A items counted 10 times/year, B items 5 times/year, and son on. I prefer to define cycle counting as any count program using regularly scheduled counts where you count less than the entire facility's inventory during each count. This includes a system that I’ve found to be highly effective, that is a hybrid of a physical inventory and a cycle count, where you’re counting all inventory within a physical area like a physical inventory, however, you are not counting the entire facility at one time. The next day you simply start where you left off the day before. Regularly scheduled physical inventories can be an effective way of counting inventory in smaller operations provided you are using trained counters and have adequate time to investigate the discrepancies prior to making adjustments. If your inventory is so extensive that you cannot adequately investigate the count discrepancies, you must break it down into some sort of a cycle count program.
If you are running a successful and comprehensive cycle counting program, there is little benefit to performing an annual physical inventory. Unfortunately, many in the financial establishment still live in the Dark Ages when it comes to inventory counting and will try to tell you that “you must perform an annual physical”. Once again I’ll state that if you can count and adequately investigate count discrepancies in a single day, then go ahead and perform the physical. However, if your inventory is too extensive or if you are in a 24/7 operation, do not want to shut down operations, and feel confident in the accuracy of your cycle count program, you can pressure them into accepting some type of on-site audit instead. They generally don’t like it but they will do it.
Designing your Count Program.
Your count program should be customized to your specific operation and business. Do not accept the “one system fits all” approach. In complex operations you may have a count program that uses multiple approaches to counting, such as one method for finished goods, another for WIP, another for raw materials, and still other methods based upon whether the inventory is stored in fixed or random storage areas.
Why are you counting?
The first thing you need to determine is why you are counting. Specifically, what is it that you expect to achieve through your count program? If you are setting up a program just to fulfill a corporate requirement of counting inventory X times per year or to achieve some subjective accuracy number thrown at you, you will likely not end up with a highly effective count program. You should be counting to optimize your business operations and achieve high levels of customer service. If your business has been operating for some time you probably have some idea of the areas that have had ongoing problems related to inaccurate inventories. This is a good place to start, however, you should also weigh the effects created by these inaccuracies to determine which areas are more critical than others. Small variances in some types of raw materials may have little or no effect on operations while inaccuracies on others may shut down an operation. Inaccuracies in finished goods tend to have the most obvious direct effect on customer service and generally get a high priority in count programs.
Frequency of Counts.
Count frequency should be calculated to meet your previously stated objectives. Factors such as the effects on customer service and manufacturing operations, and the potential for inaccuracy within the specific product group will affect the frequency of your counts. Even factors such as manufacturing and supplier lead times should be considered in prioritizing counts. Certain key raw materials critical to your operation that are highly prone to variances due to high scrap factors or variation in manufacturing processes may need to be counted every week (or day) while some very slow-moving finished goods may only need to be counted once a year. As your count program evolves, the frequency of counts will change based upon the accuracy levels achieved.
Accuracy Tracking.
Your count program should be considered part of a continuous improvement process. Tracking accuracy is necessary to determine where improvement is needed. The more detail you can provide, the better you will be able to pinpoint specific areas requiring attention. Breaking down accuracy by product groups, physical area, and operational groups, will provide the information needed to improve processes and determine priorities for future counts. Don’t get hung up on “Benchmarking”. There are so many variables in the ways accuracy is tracked from one organization to another that these comparisons tend to be a waste of time. What you should get hung up on is consistency. Spend the time to develop your methods for tracking accuracy to meet current and future needs. Long-term data is invaluable provided the method used to compile it has not changed.
I primarily use two methods for tracking inventory variances, which I will refer to as Transactional and On-hand methods. On-hand tracking is the most commonly used method where variance amounts are divided into on-hand amounts to give you a variance percentage. The On-hand method gives you a snapshot of what your inventory accuracy is at that specific point in time. It is helpful in projecting the impact your variances might have on subsequent operations and is the only method accountants use. The problem with the on-hand method is that it may not give you enough information to pinpoint process problems and, at a detail level, it fluctuates too much based upon current on-hand balances. For example, if on Monday you count part #XYZ and find you are short 20 units out of an on-hand balance of 100, this results in an accuracy rate of 80%. However, if you did not count this item until Tuesday and a receipt of 2000 units was received Monday afternoon, your accuracy rate would now be 99% even though you are still missing those 20 units.
Transactional tracking compares the variance amount to the amount consumed during the count period, showing the accuracy of your operation. This type of tracking is far more useful in determining process problems. Unfortunately, it is also much more difficult to implement this method. In the same example where you are short the 20 units and you determined that you have consumed 1000 units during the count period, you now have an operational accuracy of 98%. If this item is a raw material used in manufacturing and you determine that your finished goods is accurate, then you may have a 2% variance either in your bill of material or scrap reporting. Transactional tracking assumes that your receipt quantities are accurate.
There is another method widely used in cycle counting I will refer to as Good Count Bad Count. In this method you compare the number of good counts to the number of bad counts. Tolerances are often put in place to allow a count to be considered "good" if it is within a certain percentage. I personally find very little value to this method. Regardless of the methods used it is important to summarize variances in both net and gross amounts. For example, if you had variances on three items, one being short $50, another short $5, and another over $40, you would have a net variance amount of -$15 and a gross variance of $95. Gross accuracy calculations are a better method of showing true accuracy. In the end, the measurement must be meaningful. If the measurement is not providing information that will allow you to optimize operations, why are you doing it?
Blind Counts.
Now I know I’ll get a fair amount of disagreement on my views on this subject, but here goes. First of all, a blind count occurs when you send your counters out with an item number and location, but with no quantity information. They count the product and write down the quantity or enter it directly into a data collection device. The count administrator then compares the count quantities to on-hand quantities and investigates any variances (usually conducting recounts of each variance). The problems with blind counts are that they have lower first-pass accuracy rates and are more time consuming. Just the action of writing and/or entering the counts creates an opportunity for error. Having someone perform a recount on all variances is necessary on blind counts, this puts greater demands on your resources. If you do blind counts and perform recounts of all variances, this is the most accurate method of counting inventory. However, by giving your initial counters the quantity information and setting a system to just confirm correct counts and only enter variances, you will greatly reduce initial count errors, thus reducing recounts, thus enabling you to count more product with the same amount of resources.
Now don’t get me wrong, there is a downside to giving your counters the quantities. If you don’t keep tight control you may find some counters cheating on items that are difficult to count by just confirming it as correct if it looks close. You also risk honest employees unconsciously making errors just because the quantity is visible. Trust me, when you're doing a lot of counting your mind can play tricks on you, if you see a quantity of 12 on the paper you might look at a stack of 16 and think 12. If you closely monitor the count process and thoroughly train your counters, the benefits of counting more product often outweighs the risks associated with non-blind counts.
Timing.
Timing is critical in cycle counting. In a perfect world you should be able to count and resolve discrepancies with no other processing going on during the count process. If your operation allows you to do this, great, your job will be a lot easier. If it is cost prohibitive or impossible to shut down all other operations, it does not mean you cannot have a successful cycle counting program — it just means you're going to have to work a lot harder at it. You will need a thorough understanding of all operations and must be able to track any transactions occurring during the counts. Even with this you may have situations where it is just far too difficult to get an accurate count on an item that day and may need to skip it and count it again a couple of days later. Whether you are shutting down operations or not, you must have solid procedures and thorough control over inventory operations making sure that all transactions are performed in a timely manner.
Staffing.
Only use highly trained accurate employees to count your product. Specialize if possible. Having employees whose primary responsibility is counting inventory and resolving discrepancies will greatly increase the level of success of the program. In some operations this may not be feasible.
Understand the effects of adjustments.
It is imperative the person responsible for approving and making the inventory adjustments based on your counts understands the effects of these adjustments. One of the biggest problems I see with cycle count programs is that they do not handle “lost product” well. If you have a random storage warehouse and are counting by item, your count program will tell you when you’re missing something but does nothing for locating this lost product. You will need some type of location auditing process in conjunction with this to find the “lost product” or change your program to be based on location rather than item. Meanwhile your count administrator must be making decisions on variances and determining when to make adjustments. In many operations, an adjustment is made one day to deduct the missing product and an offsetting adjustment made a few days later when it is found. The problem with this is the effect this has had on materials management. When the product was deducted, a new purchase order was probably generated to order more product and production schedules and manufacturing orders may have been changed due to the unavailability of this item. Even though the product turned up just a few days later you’ve still caused additional work, disrupted the production schedule, and may now end up with excess inventory on this item. A good count administrator should be able to determine if a variance is due to a process issue or is “lost”. Adjustments for “lost” and “found” inventory should be avoided whenever possible. Creating a variance location to move “lost" and “found” product to and from is a great way to have visibility to the variances without the havoc created by the adjustments. These variance locations must be closely monitored and you must have an aggressive program for finding the product. An aggressive location auditing process will prove to be far more effective than sending someone out to “look for the lost product”. Obviously, tightening up the processes to avoid missing product in the first place makes this less of an issue.
Now I’d like to say that your count program doesn’t need to be this complicated, however, in many operations a complex count program will prove to be the most effective method of dealing with a complex inventory. A good count program combined with solid inventory practices will prove to be a significant asset to any organization. You may still have specific counting demands placed on you by outside sources such as customers and financial institutions. Demonstrating the success of your counting program and inventory practices should reduce or eliminate the need for these special inventories.
Source : Dave Piasecki, Logistic Management.
With some variations, this is how annual physical inventories are performed year after year. So what’s wrong with this process? Everything!!! You’ve just had a group of people with inadequate training and experience — most of them forced into being there on their day off — count your inventory, and have then made adjustments to your on-hand balances based on those counts without having the time to adequately investigate the variances. The final result likely being that half of the adjustments corrected previous inventory problems while the other half created new inventory problems on items that were correct prior to the inventory. In case it’s not obvious to you, I don’t like annual physical inventories. Counting inventories on a regular basis throughout the year (cycle counting) combined with a process for continuous improvement in inventory accuracy will prove a far better method for achieving accurate inventories. My definition of cycle counting tends to differ slightly from the generally accepted one. Most people think of cycle counting as regularly scheduled (usually daily) counting of product where you randomly count items based upon some type of predefined parameters. For example, inventory is broken down by ABC classifications and frequencies assigned such as A items counted 10 times/year, B items 5 times/year, and son on. I prefer to define cycle counting as any count program using regularly scheduled counts where you count less than the entire facility's inventory during each count. This includes a system that I’ve found to be highly effective, that is a hybrid of a physical inventory and a cycle count, where you’re counting all inventory within a physical area like a physical inventory, however, you are not counting the entire facility at one time. The next day you simply start where you left off the day before. Regularly scheduled physical inventories can be an effective way of counting inventory in smaller operations provided you are using trained counters and have adequate time to investigate the discrepancies prior to making adjustments. If your inventory is so extensive that you cannot adequately investigate the count discrepancies, you must break it down into some sort of a cycle count program.
If you are running a successful and comprehensive cycle counting program, there is little benefit to performing an annual physical inventory. Unfortunately, many in the financial establishment still live in the Dark Ages when it comes to inventory counting and will try to tell you that “you must perform an annual physical”. Once again I’ll state that if you can count and adequately investigate count discrepancies in a single day, then go ahead and perform the physical. However, if your inventory is too extensive or if you are in a 24/7 operation, do not want to shut down operations, and feel confident in the accuracy of your cycle count program, you can pressure them into accepting some type of on-site audit instead. They generally don’t like it but they will do it.
Designing your Count Program.
Your count program should be customized to your specific operation and business. Do not accept the “one system fits all” approach. In complex operations you may have a count program that uses multiple approaches to counting, such as one method for finished goods, another for WIP, another for raw materials, and still other methods based upon whether the inventory is stored in fixed or random storage areas.
Why are you counting?
The first thing you need to determine is why you are counting. Specifically, what is it that you expect to achieve through your count program? If you are setting up a program just to fulfill a corporate requirement of counting inventory X times per year or to achieve some subjective accuracy number thrown at you, you will likely not end up with a highly effective count program. You should be counting to optimize your business operations and achieve high levels of customer service. If your business has been operating for some time you probably have some idea of the areas that have had ongoing problems related to inaccurate inventories. This is a good place to start, however, you should also weigh the effects created by these inaccuracies to determine which areas are more critical than others. Small variances in some types of raw materials may have little or no effect on operations while inaccuracies on others may shut down an operation. Inaccuracies in finished goods tend to have the most obvious direct effect on customer service and generally get a high priority in count programs.
Frequency of Counts.
Count frequency should be calculated to meet your previously stated objectives. Factors such as the effects on customer service and manufacturing operations, and the potential for inaccuracy within the specific product group will affect the frequency of your counts. Even factors such as manufacturing and supplier lead times should be considered in prioritizing counts. Certain key raw materials critical to your operation that are highly prone to variances due to high scrap factors or variation in manufacturing processes may need to be counted every week (or day) while some very slow-moving finished goods may only need to be counted once a year. As your count program evolves, the frequency of counts will change based upon the accuracy levels achieved.
Accuracy Tracking.
Your count program should be considered part of a continuous improvement process. Tracking accuracy is necessary to determine where improvement is needed. The more detail you can provide, the better you will be able to pinpoint specific areas requiring attention. Breaking down accuracy by product groups, physical area, and operational groups, will provide the information needed to improve processes and determine priorities for future counts. Don’t get hung up on “Benchmarking”. There are so many variables in the ways accuracy is tracked from one organization to another that these comparisons tend to be a waste of time. What you should get hung up on is consistency. Spend the time to develop your methods for tracking accuracy to meet current and future needs. Long-term data is invaluable provided the method used to compile it has not changed.
I primarily use two methods for tracking inventory variances, which I will refer to as Transactional and On-hand methods. On-hand tracking is the most commonly used method where variance amounts are divided into on-hand amounts to give you a variance percentage. The On-hand method gives you a snapshot of what your inventory accuracy is at that specific point in time. It is helpful in projecting the impact your variances might have on subsequent operations and is the only method accountants use. The problem with the on-hand method is that it may not give you enough information to pinpoint process problems and, at a detail level, it fluctuates too much based upon current on-hand balances. For example, if on Monday you count part #XYZ and find you are short 20 units out of an on-hand balance of 100, this results in an accuracy rate of 80%. However, if you did not count this item until Tuesday and a receipt of 2000 units was received Monday afternoon, your accuracy rate would now be 99% even though you are still missing those 20 units.
Transactional tracking compares the variance amount to the amount consumed during the count period, showing the accuracy of your operation. This type of tracking is far more useful in determining process problems. Unfortunately, it is also much more difficult to implement this method. In the same example where you are short the 20 units and you determined that you have consumed 1000 units during the count period, you now have an operational accuracy of 98%. If this item is a raw material used in manufacturing and you determine that your finished goods is accurate, then you may have a 2% variance either in your bill of material or scrap reporting. Transactional tracking assumes that your receipt quantities are accurate.
There is another method widely used in cycle counting I will refer to as Good Count Bad Count. In this method you compare the number of good counts to the number of bad counts. Tolerances are often put in place to allow a count to be considered "good" if it is within a certain percentage. I personally find very little value to this method. Regardless of the methods used it is important to summarize variances in both net and gross amounts. For example, if you had variances on three items, one being short $50, another short $5, and another over $40, you would have a net variance amount of -$15 and a gross variance of $95. Gross accuracy calculations are a better method of showing true accuracy. In the end, the measurement must be meaningful. If the measurement is not providing information that will allow you to optimize operations, why are you doing it?
Blind Counts.
Now I know I’ll get a fair amount of disagreement on my views on this subject, but here goes. First of all, a blind count occurs when you send your counters out with an item number and location, but with no quantity information. They count the product and write down the quantity or enter it directly into a data collection device. The count administrator then compares the count quantities to on-hand quantities and investigates any variances (usually conducting recounts of each variance). The problems with blind counts are that they have lower first-pass accuracy rates and are more time consuming. Just the action of writing and/or entering the counts creates an opportunity for error. Having someone perform a recount on all variances is necessary on blind counts, this puts greater demands on your resources. If you do blind counts and perform recounts of all variances, this is the most accurate method of counting inventory. However, by giving your initial counters the quantity information and setting a system to just confirm correct counts and only enter variances, you will greatly reduce initial count errors, thus reducing recounts, thus enabling you to count more product with the same amount of resources.
Now don’t get me wrong, there is a downside to giving your counters the quantities. If you don’t keep tight control you may find some counters cheating on items that are difficult to count by just confirming it as correct if it looks close. You also risk honest employees unconsciously making errors just because the quantity is visible. Trust me, when you're doing a lot of counting your mind can play tricks on you, if you see a quantity of 12 on the paper you might look at a stack of 16 and think 12. If you closely monitor the count process and thoroughly train your counters, the benefits of counting more product often outweighs the risks associated with non-blind counts.
Timing.
Timing is critical in cycle counting. In a perfect world you should be able to count and resolve discrepancies with no other processing going on during the count process. If your operation allows you to do this, great, your job will be a lot easier. If it is cost prohibitive or impossible to shut down all other operations, it does not mean you cannot have a successful cycle counting program — it just means you're going to have to work a lot harder at it. You will need a thorough understanding of all operations and must be able to track any transactions occurring during the counts. Even with this you may have situations where it is just far too difficult to get an accurate count on an item that day and may need to skip it and count it again a couple of days later. Whether you are shutting down operations or not, you must have solid procedures and thorough control over inventory operations making sure that all transactions are performed in a timely manner.
Staffing.
Only use highly trained accurate employees to count your product. Specialize if possible. Having employees whose primary responsibility is counting inventory and resolving discrepancies will greatly increase the level of success of the program. In some operations this may not be feasible.
Understand the effects of adjustments.
It is imperative the person responsible for approving and making the inventory adjustments based on your counts understands the effects of these adjustments. One of the biggest problems I see with cycle count programs is that they do not handle “lost product” well. If you have a random storage warehouse and are counting by item, your count program will tell you when you’re missing something but does nothing for locating this lost product. You will need some type of location auditing process in conjunction with this to find the “lost product” or change your program to be based on location rather than item. Meanwhile your count administrator must be making decisions on variances and determining when to make adjustments. In many operations, an adjustment is made one day to deduct the missing product and an offsetting adjustment made a few days later when it is found. The problem with this is the effect this has had on materials management. When the product was deducted, a new purchase order was probably generated to order more product and production schedules and manufacturing orders may have been changed due to the unavailability of this item. Even though the product turned up just a few days later you’ve still caused additional work, disrupted the production schedule, and may now end up with excess inventory on this item. A good count administrator should be able to determine if a variance is due to a process issue or is “lost”. Adjustments for “lost” and “found” inventory should be avoided whenever possible. Creating a variance location to move “lost" and “found” product to and from is a great way to have visibility to the variances without the havoc created by the adjustments. These variance locations must be closely monitored and you must have an aggressive program for finding the product. An aggressive location auditing process will prove to be far more effective than sending someone out to “look for the lost product”. Obviously, tightening up the processes to avoid missing product in the first place makes this less of an issue.
Now I’d like to say that your count program doesn’t need to be this complicated, however, in many operations a complex count program will prove to be the most effective method of dealing with a complex inventory. A good count program combined with solid inventory practices will prove to be a significant asset to any organization. You may still have specific counting demands placed on you by outside sources such as customers and financial institutions. Demonstrating the success of your counting program and inventory practices should reduce or eliminate the need for these special inventories.
Source : Dave Piasecki, Logistic Management.
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