One of the first things a company does when
implementing Manufacturing Resource Planning, is to review the
accuracy of their inventory records. This is done primarily to
ensure that the information resulting from the universal equation
of materials requirements planning is trustworthy; nobody disputes
the notion that your plans are as good (or bad) as the information
you put into them. In pursuing the goal of getting above 95% in
Inventory Record Accuracy (IRA), many companies have adopted the
traditional ABC Cycle Counting methodology. To a great extent,
this selection has been influenced by auditors (both internal and
external) as well as by the availability of computer logic already
present in computer packages.
However, when ABC Cycle Counting is analyzed
more carefully, and the costs associated with counting parts,
wasted resources, loss of productivity, etc., are properly
measured, one wonders if the price paid is actually too high for
the benefits derived.
ABC Cycle Counting
First of all, lets define what we mean by ABC
Cycle Counting. It is a frequency selection method that
arbitrarily sets the numbers of counts for a particular item (all
items are to be counted) according to the weight given by an ABC
classification that groups parts primarily according to their
annual monetary usage. This results in "A" items being
counted more times than "B" items, which in turn are
counted more frequently than "C" items, the frequency
per category is usually constant. The question of when to count is
typically answered by a timetable based on when the item was last
cycle counted (see Table 1).
Table 1. ABC Cycle Counting Work Load
Number of Items
Annual Count Frequency
ABC Cycle Counting addresses two requirements.
First, the whole inventory is counted at least one time during the
year. By doing so, the auditors are satisfied with the accuracy of
the book value of the inventory and therefore the Materials
Management Department (or whoever in the organization is
responsible for inventory and warehousing) is no longer required
to take a complete annual physical inventory. Second, together
with the first requirement, a measurement of the accuracy of the
whole inventory is obtained.
In reviewing these requirements one has to
question if they are completely valid.
1. Number of items counted. Cycle counting
all items at least one time during the year is equivalent to a
taking a physical inventory. Although it can be argued that this
sequential physical inventory is more
efficient than the annual procedure, the reasoning behind it
does not improve operational or financial accuracy.
2. Accuracy of the total population. No doubt
that it is important to have an estimate of accuracy of the
whole inventory. However, this approach attempts to measure the
accuracy of the inventory balances in the warehouse, not the
accuracy of the process that produces errors in the inventory
balances. In fact, what it's really necessary is to assure that
the process, that is, the inventory transaction processing
system works in such a way that no errors are ever made. If we
were able to demonstrate this (Process Capability in Total
Quality terminology) the implication is that the inventory
balances will be accurate at all times, not just when a cycle
count is taken.
Pitfalls of ABC Cycle Counting
With these definitions, lets explore the areas
where waste and excess costs occur. The primary costs of taking a
physical count are associated with time; how long are human and
material resources tied up.
When a cycle count is performed on a fixed time
schedule, based on the frequency of counts according to the
respective ABC classification, 100% of the effort is waste
attributable to the cycle counting process, since none of it
translates to any value added, other than the cycle count itself.
Further analysis will uncover that even more waste is
generated. When, and if an error is detected, a thorough
investigation should be carried out to identify the true causes of
the error in order to immediately eliminate them. Typically, with
this set up, an unpredictable number of transactions would have to
be reviewed to identify the real cause of error. Under these
circumstances, a lot of unnecessary work is added to the auditing
function (for instance, an "A" item cycle counted 6
times per year with an average of 240 transactions annually
results in the review of 40 transactions on average).
To be Continued
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