Many distributors conduct an annual physical inventory. That is, they count the products in their facilities once a year. Unfortunately we’ve found that most physical inventories are a total waste of time and money. Why?
Usually anyone with a pulse is drafted to count inventory during the physical. Even people who are not familiar with your products (like the receptionist and her brother-in-law) will be sent out to the warehouse so that all of the products can be counted in the time allotted.
Workers do not enjoy the physical count process. They probably have better things to do with their weekend than spend it in a hot or cold warehouse counting products. In all probability their actual objective is not to perform an accurate count, but to put down on the count sheet whatever management will accept so they can go home.
There is a tremendous time pressure to finish the count. Shutting down operations for a physical count is a very expensive process. Usually at the end of the time allotted, management will decide to accept the existing count as being as “accurate as possible” so that the company can return to the task of servicing customers. Many discrepancies between the computer’s perpetual inventory and the quantity counted may remain unresolved.
Even if an annual physical count is 100 percent accurate, how long does it stay accurate? A week? A month? Many distributors respond that on-hand quantities only remain accurate until they start shipping material again. For most distributors, cycle counting provides a much better tool for maintaining accurate stock levels than an annual physical inventory. Cycle counting is the process of counting a few products every business day throughout the year.
There are three common methods to determine what products to count on a specific day:
Random selection—Products to be counted are chosen at random. While this method keeps potentially dishonest employees on their toes, it does not ensure that all items in a warehouse will be counted on a regular basis.
Geographic selection—Products are counted in sequence. Starting at one end of the warehouse a certain number of products are counted each day until the counters reach the other end of the building. All products are counted the same number of times, even though some products are more susceptible to discrepancies than others.
Rank-based selection—Products that are sold most often (regardless of quantity) or have the highest cost of goods sold are counted most frequently. Slow-moving products and dead stock items are only counted once a year.
Of the three methods, we’ve found rank-based cycle counting to be the most effective at maintaining accurate stock levels. The more frequently an item is sold, the more chance for inventory inaccuracy. After all, every time someone fills an order or puts away a stock receipt is another opportunity for an error to occur. And the products that are requested most often are probably extremely important to your customers. In order to provide good service, it is critical that you have accurate counts for these items.
It is interesting that, for most distributors, relatively few products are responsible for the majority of product requests (also known as “hits”). You may have heard of the 80–20 rule or “Pareto’s Principle.” This theory states that 80 percent of your sales are derived from 20 percent of your inventory items. We’ve found this not to be true. Usually only 10–13 percent of a distributor’s inventory items are responsible for 80 percent of activity and 50 percent of items are responsible for 95 percent of sales.
We want to count the few items responsible for 80 percent of sales very frequently, perhaps four to eight times a year. Items with fewer hits can be counted less often. Let’s look at a typical rank-based cycle counting program.Items are sorted in descending sequence by hits. The items that are responsible for 80 percent of total activity are assigned to the “A” rank, products responsible for the next 15 percent of activity are assigned to the “B” rank, “C” rank products include the products that are responsible for the next 4 percent of activity, and “D” rank products are responsible for the last 1 percent of activity. Products with a rank of “X” have no activity (they’re dead stock).
• Count the “A” rank products six times a year
• Count the “B” rank products three times a year
• Count “C,” “D,” and “X” rank products once or twice a year
Rank-based cycle counting ensures that your counting activity is productive. Spending just an hour or so a day counting can make the difference in maintaining an accurate perpetual inventory system. It takes a lot of discipline to implement and follow a program in which you count a certain number of products every business day. Many distributors have tried cycle counting and abandoned the program. They’ve been frustrated as other tasks have interfered with the process or they have not been able to complete counting all of the products scheduled on a certain day. The following ideas have helped many of our customers develop successful cycle counting programs. These companies are working “smarter” rather than “harder.”
Find out more by contacting iCepts Technology Group at email@example.com