Can You Afford To Do Physical Inventories?

January 1, 2011
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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.

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