Inventory Accuracy

Common Pitfalls

Inventory (lack of) accuracy is defined as “any disparity that exists between a business’s electronic records reflecting its inventory and its actual inventory.” Many companies struggle with inventory accuracy.

 

Companies report that lack of inventory accuracy has a direct negative effect on their customers’ experience as it negatively affects:

  • On Time Delivery (OTD)
  • Quality (PPM)
  • Lead times

Lack of inventory accuracy also has an indirect negative effect on customers experience as it negatively affects:

  • Cost
  • Efficiency
  • Capacity
  • Employee morale & turnover

Let’s explore some of the common pitfalls that stand between the aspired goal of 99%< inventory accuracy and most manufacturing plants.

BOM Accuracy

This is a frequently observed pitfall. During an introductory meeting with a new company, I make sure to ask the stakeholders about BOM accuracy as it has such a profound effect on inventory accuracy, material ordering, scheduling and more. Two common answers are:

“We realize that some of our BOM’s could use updating”, usually followed by a scratch of the head and the team members looking at each other a bit guiltily

or 

management stating, “Our BOM’s are accurate” only to be corrected by engineering/production, “actually we have some opportunity for improvement in certain areas“

Let’s look at how BOM accuracy affects inventory accuracy as well as the different challenges that come with trying to keep BOM’s accurate.

Challenge Effect on Inventory Accuracy Impact on the business
BOM understates raw material usage When production is reported, electronic inventory will show material available when actually it was consumed. Apart from affecting inventory accuracy, this will cause delay in ordering material as the ERP system registers that there is more material than there actually is. In some cases, companies waste time setting up machines under the false assumption that raw material is available.
BOM overstates raw material usage When production is reported, electronic inventory will show zero or negative material available when material actually is available. Apart from affecting inventory accuracy, this will cause ordering of unnecessary raw material. Based on incorrect inventory tracking, the ERP system calculates that more material is needed when it isn't. In some cases, companies waste money purchasing inventory that will go to waste
BOM accurately reflects part usage of small screws but somehow we always end up with fewer screws then expected at end of job This is noise that you want to avoid. I worked with a company where the buyer was so busy chasing the penny components that she regularly missed ordering critical material. When we quantified it, she saw that she was spending $20 of her time purchasing $15 worth of components. Accurately managing the inexpensive small components is an uphill battle that is usually not worth the time. Small components tend to ‘walk away’. Identify the cheap inventory items, and create a minimum demand in the ERP system coupled with regular cycle counts so that the buyer is triggered to purchase but not too frequently.* As long as these components don’t take much storage space, you should be good.
BOM includes raw material where the exact quantity used is hard to quantify (example: adhesive, paint etc) Despite different methods to quantify (like measuring how much glue/paint is used over 30 parts and using the average as the quantity in the BOM) some operators will have a heavier hand than others. Until a repeatable (automated) system is put in place there is potential for inventory fluctuations. To combat the fluctuations, establish a process where as part of ‘closing a job’ the real world inventory consumed is accurately also consumed electronically. Couple that with regular cycle counts to provide checks and balances. As long as the raw material in question is not expensive, has long lead times or is heavily regulated, the combination of inventory correction via reporting during closing of a job combined with regular cycle counts should assure minimum impact on the business.
In cases where this type of raw material is expensive or has other challenges, a company may want to consider investing in making the dispensing of the material repeatable.**
* Having said that, I did work with a company that took on an initiative of minimizing small component waste and ended up saving $50,000/year. It’s all a matter of priority and magnitude. As inventory accuracy increases and you exhausted the savings from other low hanging fruit, projects such as better management of the ‘penny components’ start making sense. They also have additional value as they challenge the organization to move to the next level of Lean awareness.
** There are other advantages to making the dispensing of raw material repeatable. I lost count of how many customer complaints I worked on over the years where the root cause was lack of repeatability that resulted in with too much or too little adhesive/ paint. Any time in manufacturing where we can assure repeatability of a process, we are stepping closer to the aspired Six Sigma.

Inventory adjustments

The purist in me will forever argue that inventory adjustments are from the devil as they create inventory out of thin air or remove inventory with limited tracking and accountability.

Think about it; why do we need inventory adjustments?

Inventory is ‘born’ when material is received via the receiving process. If any mistakes were made during receiving, they need to be corrected by voiding the original, incorrect, receiving transaction and creating a new, correct, transaction.

WIP and FG are ‘born’ as production is reported (some of you refer to this as floor disposition). They are then trackable back to the raw material (lot#), workcenter and all the additional information that your company records in the RT Work Order History record. Any errors in WIP or FG inventory that are a result of BOM’s or reporting need to be corrected by reversing the original production report transaction and re-reporting after the correction has been made. This process also provides checks and balances that the correction was done accurately.

Inventory ‘leaves our world’ as shipments to customers or scrap. Otherwise, we should be able to account for where it is in our warehouse. I realize that this description takes the complicated reality of inventory management and somewhat simplifies it, but I still firmly believe that most inventory adjustment ‘corrections’ could and should be resolved as corrections to the original transaction. This way we maintain the integrity of the manufacturing life cycle. More about that in the table below.

So why do companies so frequently use inventory adjustments? Good question. Can inventory accuracy in DelmiaWorks be maintained despite an abundance of inventory adjustments? Probably, though I am yet to see that happen.

Too many times, an inventory adjustment is a shortcut that negatively impacts inventory accuracy. It also breaks the data relationships that record the manufacturing life cycle in DelmiaWorks . WIP that magically appears through an inventory adjustment does not have any of the tracking (which raw material it is made of, when was it manufactured, etc) that is required by the ISO standard.

On my third day as material manager, I created a custom Inventory Adjustment Report as it quickly became apparent that we were bleeding money through inventory adjustments. Between the first time I ran the report and the second, inventory adjustments for the day went up by $20K. My first thought was that there must be a mistake in the report. But no such luck, the report was accurate. It turned out that one of the logistics team members accidently created $20K of material out of thin air via an inventory adjustment. It was supposed to be a $200 entry, but too many zeros were entered by mistake. As of that moment all, inventory adjustments required approval by the material manager (me). Soon the team knew that they better have a well-justified reason why we should use material adjustments. Usually their requests were denied as the correct fix was one of those we discussed above.

So let us breakdown the negative implications inventory adjustments can have on inventory accuracy.

Removing raw material/WIP/FG via inventory adjustment

Raw material, WIP or FG that isn’t where you expect it to be is an indication of a greater problem than just inventory accuracy. Adjusting inventory when raw material/WIP/FG is nowhere to be found is putting a bandage on a bleeding artery. Such scenarios require root cause analysis, corrective action and verification of effectiveness in order to solve the inventory accuracy problem. Disappearance of inventory should be seen as an opportunity to improve a weak process that is costing your company money.
Where is the missing inventory? Here are some possible scenarios and their adverse implications on your business:

  • Raw material quantity received was overstated – In this case, the supplier will potentially get paid for product not delivered. I have seen cases where for years the supplier over reported what was shipped, and it wasn’t until inventory accuracy was challenged that this problem went away.
  • WIP/FG production quantity was overstated – In this case, your manufacturing team might be over reporting production which is over consuming raw material. By removing the over stated WIP/FG, you have not solved the problem. Raw material discrepancy needs to be addressed.
  • Raw material/WIP/FG ‘grew legs and walked away’ – You have a theft problem and are masking it through inventory adjustments.
  • The raw material is somewhere in the building; we just cannot find it – You have a location management problem which you are masking through inventory adjustment. This can result in purchasing more material than required, causing your company to bleed money. You bleed money on multiple fronts: the waste of moving and storing untracked inventory, the cost of purchasing replacement inventory, and the cost of processing more WIP/FG.
  • Production is under reporting scrap – Raw material and/or WIP made it to the production area but was scrapped without being reported. The danger of under reporting scrap is that your company is bleeding money, and you are not aware of it. You may think a given production line is profitable only to discover it’s in the red.

Adding raw material / WIP / FG via inventory adjustment

Despite what some in your organization think, finding ‘extra’ material, WIP or FG is not a good thing. We used to have a saying in one of the companies I worked for, “Inventory cannot have babies; if we find babies we have a problem.” Finding extra inventory means some process is out of control, and in a manufacturing environment that spells trouble.
Where is the extra material coming from? Here are some possible scenarios and their adverse implications on your business:

  • Raw material quantity received was understated – In this case, the supplier will potentially not get paid for product delivered. This can have a negative effect on your relationship with your supplier. It is also an indication that the receiving process does not have the required checks and balances. What other mistakes are being made during receiving, and how are they inevitably affecting inventory accuracy?
  • Raw material/WIP that was supposed to be used in production was not used, resulting in a nonconforming product being shipped to the customer – This is a nice way to say the manufacturing process is out of control. The ‘extra’ inventory was removed from DelmiaWorks when the job was reported, but the raw material/WIP was never used. For example, it could be a filter that was not installed in an assembly. By adjusting the inventory back into the system, you are depriving your organization of the opportunity to do a root cause investigation and to reach out to the customer in a proactive manner.
  • Production is over reporting scrap – This does not happen as frequently as the other examples, but I have seen it happen and when it does, it skews profitability. This may cause a company to part ways from a production line that is more profitable than the finance team thinks.
  • FG production quantity is understated – In this case, your manufacturing team is underreporting the product they made. They are consuming WIP and raw material that does not get removed from the system, due to lack of reporting. By adding the understated FG, you have not solved the problem. Raw material and WIP discrepancy needs to be addressed. Another potential issue is that the FG parts in packed boxes were not counted accurately, and that will result in over shipping of FG to your customer.

Production floor inventory accuracy challenges

that At the end of the day, inventory is there so that you can meet your customers' production requirements. At some point, you will bring the raw material and/or WIP to the workcenter to get processed. There are a surprising number of pitfalls that companies meet when managing inventory on the production floor.

  • Bad housekeeping – Imagine if at the end of each meal at home, everyone just got up and left all the dishes, left over food etc on the table. Then during the next meal they did the same. Companies need to clean the production area both electronically and physically. If they do not, they will inevitably have inventory cross contamination as well as inaccuracies. In situations like this the electronic tracking system will say that there are inserts at a work center when in reality they are not there at all.
  • Errors in consumption of raw material/WIP  – This is a nice way to say that the manufacturing process is out of control. The operator is not consuming the correct amount of inventory. Hence, at the end of the shift there is too much or too little raw material inventory left compared with what the electronic system is expecting. This will most likely cause a quality issue as product was not built to spec.
  • Movement of inventory without tracking in the electronic system – This is a discipline issue. Someone with good intentions is moving inventory to a work center where it is needed. They are not moving the inventory in the electronic system; hence, they are causing a mismatch between the real world and the electronic tracking system. Another team member in a later shift is looking for the same material, goes to the location stated by the electronic system, sees that it is not there, and now you have 5 people running around the plant looking for disappearing material. All along, the material in the work center is understated which causes lot number tracking issues.

So how do we address these inventory accuracy challenges?

Inventory challenges are usually an indicator of other issues such as poorly defined processes, staffing shortages, incomplete training, lapses in discipline and lack of attention to detail.

  • Well defined processes – While DelmiaWorks provides the tools to properly track inventory, these tools need to be incorporated in the company's processes. For example, what are the steps that need to be completed when an inventory item:
    • is ordered?
    • is received?
    • doesn't show up in the receiving dock on time?
    • has a shelf life?
    • shows up without a PO?
  • Staffing  – Is your organization adequately staffed for the number of transactions and length of activities required in order to adequately track inventory?
  • Training – Are the team members, those moving and transacting inventory as well as those who support them, trained on how to maintain inventory accuracy? A great example is those who are responsible for BOM creation: are they creating the BOM's correctly? Do they have checks and balances in place to assure the BOM they created will result in accurate consumption of raw material and the reporting of the manufactured part?
  • Discipline - Like production, inventory management requires discipline to follow the process every time. Shortcuts result in inventory inaccuracies. An example is when movements to work centers are not properly followed with movements in the electronic system. Those need to be identified and a root cause investigation completed in a timely manner. Otherwise, they will undermine the integrity of inventory tracking done by the rest of the team.
  • Attention to Details - There are times when the processes are well defined, the team is appropriately staffed, training was completed and the processes are followed, yet due to lack of attention to details, inventory accuracy is jeopardized. Checks and balances within the ERP system can go a long way in helping to catch these errors and to correct them. The root cause still needs to be addressed with the individuals involved.

Most companies experience some of the pitfalls described on this page. Contact us today if your manufacturing organization is ready to start a new chapter with inventory accuracy.

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