"Can you afford to do Physical Inventories?"

By Kathy Pennise, member of the ACA Group

In the last 2 newsletter articles, I focused on ABC analysis and also how to maximize your Cycle Count results. Today I would like to discuss with you the positive aspects of eliminating the need for physical inventories. Our group's newsletter theme for this quarter is Crisis Brings Real Change. Having worked in manufacturing for the last 28 years- I can tell you that doing a physical inventory at most companies puts the company into a crisis mode. Some of these companies have now adopted a cycle count program and are enjoying the benefits of not being in a crisis when it comes to inventory accuracy and the expense of doing a physical inventory.

Let's look at the expenses of performing a physical inventory:

Pre-planning meetings (who, what and when)
Purchasing communicating with Vendors on dates NOT to deliver material
Pre-count of materials
Training of employees
Shutdown of production and material movement- several days to a week
Possible overtime payment
Morale of employees
Accuracy of physical counts
Tag/number control for re-counts
No time to research the root cause if an inaccuracy is found

I have worked with several companies and have been very successful in completely eliminating their physical inventory. Here are the key steps that insured the success:

Education of the types of cycle count process
Buy-in from management
Cycle count program working for 6 to 12 months
Measurement tools and reporting of cycle count findings
Documentation of cycle count process
Designation of experienced counters to perform actual counts
Working with an external accounting firm or corporate accounting for their buy-in

By eliminating their physical inventories these companies have been able to see the above listed expenses disappear and also the addition of these benefits:

Early detection of inventory inaccuracy
Root cause corrective action analysis
Better Customer service
No shutdown period
Reduction in inventory levels
Better planning and scheduling decisions due to accurate inventory balances
Minimum investment for maximum results

There can be times when a physical inventory might be necessary; here are a few examples:

Converting to lot number tracking
Fraud or theft is discovered or is suspected
Implementation of a new software system

So, if you are still doing physical inventories, I invite you to list the pros and cons for your company and let's have a discussion about initiating a cycle count program to reap the benefits and eliminate the crisis!

To schedule an appointment with me, please e-mail kp@theacagroup.com.