Inventory Accuracy Simplified: What is it, Where is it, and How Many?
Updated: Nov 27, 2022
Inventory accuracy, or more precisely, Inventory Record Accuracy (IRA), is one of the most common pain points in distribution and manufacturing companies today. By not having enough inventory, you risk losing customers. Having too much inventory will break the bank and risk obsolescence. If you do not really know what you have, that is just disastrous. If you cannot accurately confirm a customer inquiry solely from the data in your ERP business software, you have a serious confidence problem. Ask yourself, "What is the confidence level of your inventory quantities from your business software inquiries?"
Inventory Record Accuracy (IRA) formula:
Inventory accuracy can be a pretty complex topic, but it essentially boils down to looking up an item in your ERP business software system and noting the quantity on hand and bin storage location. For example, if we go to the warehouse area, we should find the correct item in the exact bin location and the exact quantity. We can also reverse this by starting in the warehouse, going to any bin location, identifying an item and quantity, and matching it to the computer records. And yes, the bin location needs to be correct, as well as the quantity to claim 100% accuracy.
Champion Business Solutions, LLC, teaches a simplified method to control and gain confidence in your inventory accuracy; What is it, Where is it, and How Many? WWH for short.
What is it?
Obviously, this is simply the correct identification of the item or stock-keeping unit (SKU). Having witnessed thousands of items being counted, we can attest that this is not always as easy as it sounds. Do you label all incoming materials with your internal inventory labels? Not correctly identifying an item with your internal item numbers or SKUs drastically increases mistakes when picking for sales orders and production orders. Unlabeled items are also difficult to identify when performing annual physical counts or cycle counts correctly, again contributing to counting mistakes. You should be able to identify all inventory items in stock without rulers, tape measures, scales, or other tools. Special attention should be paid to items that look similar but are made of different materials.
Asking your vendors to label your items with your item numbers and barcodes is a hit-or-miss proposition, so you should plan on doing this internally because it is improbable that you will ever obtain 100% compliance in this area.
The best opportunity to create and place inventory labels on cartons is at the receiving dock before putting items away. Inventory labels can be generated directly from receiving transactions which immediately lets everyone know that the item has been properly received into inventory and is ready to ship or put away. The actual items do not need to be labeled, but the stocking cartons should be labeled appropriately, indicating the quantity per carton. If cartons are opened for counting and inspection purposes, they should be resealed with clear "INSPECTED" tape to make future cycle counting easier.
Information on your internal inventory labels should include, at a minimum, the item or SKU number, the description, the unit of measure (UOM), and the case quantity. Optional information can be purchase order numbers, receiving dates, and expiration dates. If your company uses serial numbers and lot numbers, they should be included on the inventory label and be barcoded. An added touch is to use of colored labels for easier identification.
Where is it?
Do you have an effective stockroom locator system in your warehouse? Most warehouse layouts evolve as the company grows and product offerings change. A stockroom locator system, also called a warehouse addressing system, is the organizational layout of your stockroom's aisles, racks, shelves, and bins. To start with, you need a good drawing that is scaled to your warehouse layout. The layout can be a precise CAD drawing with exact measurements or a simple drawing in MS Word or MS Visio. You should also post the layout drawing throughout the warehouse for easy reference. Identifying where you are on the drawing in the area a map is posted is good practice. This is similar to the emergency evacuation maps on the back of hotel room doors.
There are two common strategies for laying out a warehouse locator system; the row & rack method and the aisle & rack method. Either way, what is more important is that an effective locating system is kept up to date.
The Row & Rack Method
The row & rack method is often found in situations where there are few clearly defined aisles. It is the more common method in smaller-sized companies. This method takes the form of rack section, rack number, shelf, and then bin/slot.
The Aisle & Rack Method
The aisle & rack method is similar to the USPS addressing system. The stockroom is the city, the aisle is the street, the rack is the building, the shelf is the floor, and the bin/slot is the apartment. This design is straightforward to teach new employees and facilitates the efficient picking of items. The see this method in action, visit your local Home Depot or Lowe's store and look at their rack labels. Even in grocery stores, everything is located by the aisle.
The first question is, "What exactly am I counting?" if you ask two people to go out and count an item, they may come back with two different results. Am I counting cases, each's feet, pounds, or sheets? The short answer is that you are counting the units in which the software system items are stocked. We find that information where? We find it on the item inventory label previously discussed. We will also find the correct unit of measurement to count if we print a counting worksheet directly from your ERP system, which will always show the stocking units of measurement.
Where possible, inventory counts should be conducted by two people who cross-check each other. All full cartons should be sealed for easy counting, and a separate carton is usually left open with partials. If any cartons are unsealed, you will have to open and inspect each one to get an accurate count. Some ERP systems allow for multiple stocking units of measures such as pallets and cases. Be sure you know what unit of measure (UOM) you are counting.
For expert assistance in designing the proper warehouse layout in your organization, please contact us. We also offer the "How to Design an Effective Stockroom Locator System" as a free download from our website.
Roger Pujol is a business improvement consultant and founder of Champion Business Solutions, LLC. He speaks and writes about encounters helping small to medium-sized businesses (SMBs) improve their business operations.
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