Your Secret Weapons for Inventory Management

Inventory management is all about having the right inventory at the right quantity, in the right place, at the right time, and at the right cost. Part of this management includes having an effective auditing process. 

Here are two proven tips to ensure a successful inventory audit.

Cycle Counting

Cycle counting is an inventory auditing procedure within inventory management where a small subset of inventory, in a specific location, is counted on a specific day.

Unlike the widely-used phyiscal inventory process, where a business physically counts its entire inventory periodically, cycle counting uses a an A-B-C-D ranking system, or stratification, for regular corrections and better accuracy.

Cycle-counting.pngCycle Count vs. Phyiscal Inventory

With cycle counting, the business stratifies (or categorizes) the inventory in an A,B,C, or D ranking based on frequency of use and cost:

  • A-rank: items with frequent and stable demand usage
  • B-rank: items with frequent, but variable demand usage
  • C-rank: items where the demand usage is very infrequent and unpredictable
  • D-rank: items with little-to-no usage; these items have the appearance of being obsolete

A-B-C-D stratification used to be solely based on cost. In other words, items with the greatest cost, regardless of usage, were automatically marked as A-rank items. However, we've seen this lead to nothing but increased cost - and many times - stock outages.

A more effective method of A-B-C-D stratification uses the coefficient of variation:

The coefficient of variation (CoV) is a measure of spread that describes the amount of variability relative to the mean. Because the CoV is unit-less, you can use it instead of the standard deviation to compare the spread of data sets that have different units or different means.

Cycle Counting with the "5-Why" Tool

5-Why is a lean problem-solving tool used in determining the root course of a problem and implementing a full-proof countermeasure to prevent repeat failures. This process, if used in conjunction with cycle counting can be very effective. Every time a gap is found during cycle count (inventory discrepancy), inventory managers can use the 5-Why approach to determine the root cause of said gap and implement a countermeasure to prevent reoccurrence. 

Cycle counting without a problem-solving process can result in a less-accurate cycle count. Without this proactive approach, wastes can manifest throughout the organization in the form of excess labor, increased cost, poor customer service levels, stock-outs, production downtime, and robotic employees. The collaboration that results from using the cycle count process and 5-Why can have a positive, lasting impact on the organization.

Posted by Terrance Johnson

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