19 Steps to Maintain an Accurate Inventory

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19 Steps to Maintain an Accurate Inventory

What You Must Know About Your Inventory

Featured Author - Ren Jones- May 19, 2005

1. Introduction

2. Step 2: Document your processes.3. Step 5: Assign all of your product to bin locations.

Introduction

Peter Drucker, the foremost author and expert on enterprise and self-management, and one

whom I am sure everyone reading this has probably heard of, stated, We know little more

about distribution today than Napoleons contemporaries knew about the interior of Africa.

I found out just how true this was when I was gathering information for this article. I began

by searching to see what other experts had to say about maintaining an accurate inventory.

About one week after beginning my search, I was no closer than when I started, so I

decided to talk to people in the industry and ask them three simple questions:

1. What are your currently doing to maintain the accuracy of your inventory?

2. Is what you are currently doing working?

3. If what you are currently doing is not working then why haven't you changed?

You know what the interesting thing was? Everyone answered number 1 and number 2, but

when it came to number 3, I ended up right back where I started: scratching my head andsaying, I cant believe since inventory is one of an organizations greatest asset, why do

most companies do so little to maintain it?

There are some interesting things about inventory that I am sure everyone knows, but

before I get to the nineteen steps Im going to reiterate some key points about inventory.

Distribution inventory values range between 6 percent and 20 percent of the

companys annual revenue.

An inaccurate inventory causes several problems: lost sales, decreases inprofitability, and lost productivity from searching for products.

Companies use inventory as a security blanket to cover deficiencies in their

warehouse.

Given all of this, the only thing you really need to know is that it takes $2,500 in new sales

to make up $100 in lost inventory, assuming a 4 percent return. I dont think I am the only

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one in our industry who knows this, but if I am not, then why are so few people talking

about how to control the accuracy of their inventory? Think about how much having an

inaccurate inventory costing you and your organization.

Again, your inventory is one of the biggest, if not the largest investment you have in your

company. The only thing that comes close to it is your people. But you know what I have

learned over the years? People do what you inspectand not what you expect! Most leaders

expect their people to know why inventory accuracy is important to the company, and it is

with this assumption where the problems begin. It is also where I am going to begin the

first step.

Step 1: Set Goals.

I know this is a sore subject for most business leaders because they feel goals in the

warehouse is an oxymoron. However, I am not saying that by completing this article today

you will have 100 percent accuracy on your next physical. It takes time for your warehouse

personnel to internalize your warehouse goals. What I am saying is that to do this, you need

to determine how many

inventory adjustments your warehouse makes on a daily basis

stock-outs you have on a daily basis

backorders you have because the inventory was inaccurate

items that were wrong during your last physical

From those numbers, you need to determine what will be acceptable and then you need to

implement the remaining eighteen steps to get to that level of acceptability. I guarantee

every department in your organization has goals except for your warehouse. Why is that?

You know what Michelangelo said: The greatest danger is not that our aim is too high and

we miss it, but that it is too low and we reach it. You need to address your inventory issues

by aiming higher than you have in the past.

Step 2: Document your processes.

Now even though this article is about your inventory, you have to document all of theprocesses that go on in your warehouse. How can you legitimately establish any type of

inventory control program if your people are not sure about what they should be doing? The

follow Nancy around approach to learn processes only works in the restaurant business.

Your people need to know differentpicking (P) and receiving (R) functions: What to do when

I go to pick an item and there is no product in the bin? (P) What do I do when the wrong

product is in the bin? (P) What do I do when I am receiving and the vendor sends a


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replacement item? (R) What do I do if the item in the bin is damaged? and What do I do if

the item is not in the bin, but I see the item in overstock? (inventory)

Even though some of the processes are picking and receiving-related, improper processes

will cause inventory problems throughout the year and will lead to problems during the

annual physical. Your people need to know what processes to follow; however, we know

your people are not going to consult a training manual every time they encounter a problem

so develop Cheat Sheets that are brief references showing how to troubleshoot problems.

(See figure 1)

Figure 1: Cheat Sheet

Step 3: Develop and use stock check cards.

Whether you have an automated or a manual system, your people need a vehicle to identify

problems and notify the appropriate personnel. A stock check form (figure 2) does just that.

It must have certain things on it, such as the order number, pickers name, date, product

code, quantity, reason for completing the stock check form, etc.

If an item is backordered by a warehouse person, it should be accompanied with a stock

check form, which will eliminate the vicious cycle of the backorder fillable report as well.

Thats when the picker backorders an item, then the purchasing department fills the

backorder because the system says its in stock, and another picker backorders it again,

causing the buyer not only to fill the order again, but to include a note asking the picker to

find the product, all the while muttering obscenities about the warehouse. A new, untrained

picker backorders the item again, because no one ever explained what those notes on the


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pick ticket meant. Now the buyer is livid so he or she goes to get the piece, which he or she

cant find, and eventually has to order.

Figure 2: Stock Check

Step 4: Clean and organize the warehouse.

James Q Wilson and George Keilling developed the Broken Windows Theory which states

that Crime is the result of disorder. If a window is broken and not repaired people will

conclude that no one cares. Soon more windows will be broken and a sense of anarchy will

move to the street upon which it faces. Replace broken window with dirty shelves and it

becomes the very relevant Dirty Shelves Theory.

An inaccurate inventory is the result of disorder. If an aisle is messy, a Coke can is left on a

shelf, a box is not put away properly, or a light remains broken, people will conclude that no

one cares. Soon more aisles will be messy, more cans will be left on shelves, and more

product will not be put away. Pretty soon, an order will be picked incorrectly, and an item

will be put in the wrong box at the packing station, and then we wonder why our inventory

is so inaccurate.

Remember what I said earlier: People do what you inspect and not what you expect. If

your warehouse supervisor cant hold your people accountable for keeping the warehouse

clean, it will not be realistic to expect an accurate inventory. Develop a simple aisle

maintenance sheet that includes removing empty boxes, checking for broken lights,

removing discarded shrink wrap, emptying the trash can etc. to prevent the warehouse from

becoming a mess.

Step 5: Assign all of your product to bin locations.

The average picker spends over one hour per day searching for product. If you have eight

pickers thats equivalent to one person per dayand extra person that is probably not


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needed, or can be used doing something more productive. By assigning product to locations

this will eliminate pickers searching for product throughout the warehouse.

Step 6: Allow only warehouse personnel to receive.

Receiving is the most important task your warehouse performs. If an item is received

incorrectly, it will be putaway, picked, and shipped wrong. If the paperwork is not processed

correctly, the wrong product will be received and given to the customer. When the order is

generated, the picker looks for the product and cant find it, so the buyer then orders

another while saying Those warehouse guys are clueless. They just received this product

this morning. Now they cannot find it. Eventually, shipping sends the order to the client,

but meanwhile, the second order comes in , and the buyer decides to receive the product

and personally ship it to the customer. If the product is returned because the customer

doesnt need it, a sales person will likely say, Dont send it back to the vendor. The

customer will need another one for another job. The product then just sits on the shelf until

it is lost or is counted at the next annual physical. Hopefully the first order was corrected

because the customer was never billed for the second one, but for some reason you show

two items in stock. Another vicious cycle of inaccurate inventory ensues.

Step 7: Address non-stock and dead inventory.

You have to address your non-stocks and your dead inventory. Non-stocks are a hassle and

have to be dealt with. They should be counted regularly, clearly identified, and centrally

located. Quite often, non-stocks and dead inventory are not addressed until the end of the

year, and then management wonders why there are so many.

Dead inventory is usually DOA, dead on arrival. New items are the major cause of dead

inventory. Climbing up ladders to pick orders or relocating because of space issues does not

make sense if you have dead inventory occupying floor space. It is a loss of productivity and

should be addressed immediately. Simply put, If it would stink I bet you would get rid of

it. Treat DOA the same way. Get rid of it to streamline your warehouse processes

Also remember, a company has to pay cash for the materials and labor that make up

inventory, and until the company gets paid, that outlay of money represents a financial

burden to the organization. Your product is worth less each day you hold it in inventoryby

the time it reaches the customer, you will have lost significant revenue..

Step 8: Assign someone to address reports all year long.

There is no room for excess costs in any economy! In order to show a profit, you need a

complete understanding of where the money goes and how to run your operations more

efficiently and effectively than your competition. This means you cant just address

problems during your annual physical and then think they will not happen again throughout

the year. By assigning someone to address reports throughout the year, the reports will be


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a manageable the week before the annual physical. I see it all of the time. Items are

typically added back into inventory when the count is incorrect and the report shows open

(shipped) orders that were not invoiced. Those items need to be back into the system to

reconcile correctly. This would be avoided if these items were accounted for prior to the

physical.

Step 9: Hire an inventory controller.

You need someone in addition to your warehouse supervisor to be held accountable for the

accuracy of the inventory. Your warehouse supervisor is nothing more than a firefighter.

They do not have time to research inventory discrepancies. Find someone who it detail-

oriented, someone who is vocal, and able to start with very little instruction, and complete

what they start without any assistance.

Step 10: Stop all non-warehouse personnel from entering the warehouse.

I just have one question that I would like answered: Do you pay your customer service

personnel by the mile? It sends a chill up my spine when I see a customer service person

walking to the warehouse to check and see if the quantity listed in the computer is actually

in the bin, especially while a customer is on hold and more customers are calling in. If an

outside sales person needs an item for their customer, they should go to the counter just

like a customer. If your counter is so inefficient that you do not want your sales person

waiting there, then think of how your customers feel.

Step 11: For the actual annual physical, break the warehouse down into small

chunks.

You dont give your sales people a product guide and car keys and say go sell something, so

why then do you give your people a pencil and a sheet of paper and tell them to go count

something during your physical? This is one of the most important days of the year!

Everyone involved should know where they should begin counting and where they will end.

Creating zones will maximize time because there will be a specific plan. People will not be

walking around to find out where they need to go next. This will also allow you to begin

checking variances sooner because your map will show what zones or sections have been

completed and by whom.

Step 12: Develop count teams.

Dont simply have two people go out and count. There must be a team of several individuals

are assigned to a team leaderpreferably a warehouse person. This will give personnel the

opportunity to take ownership of the inventory and begin to understand the importance of

their job.


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The team leader is the only person who should be walking and talking. Everyone else should

be counting. This will allow you to begin checking variances sooner because your map will

show what zones or sections have been completed and by whom.

See the end of this article for some tips and tricks to conduct an effective physical.

Step 13: Only allow warehouse personnel to count.

Before everyone puts this article down, hear me out on this one. I am sure some people

have legitimate reasons for using the entire company to count. However, let me play devils

advocate to some of those reasons.

We dont have enough warehouse personnel to complete the count.

Is that enough people to complete the count the whole warehouse

or enough so you dont have to be there the entire weekend?

Our warehouse people dont know the product well enough.

How then are they able to receive it, pick it, pack it, and ship it,

but not well enough to count it?

They will fumble up the count.

If you cant trust your warehouse personnel on this one day, why do

you trust them the other 364?

Step 14: Audit the counts.

I see very few companies that audit their counts. Your people need to know that entire

sections need to be recounted if too many mistakes are being made. This is the one time

when non-warehouse people can be of service in the warehouse. Use additional personnel

such as accounting, sales, and purchasing to perform the audits.

Step 15: Correct the variances the weekend of the count.

A lot of things take place in you warehouse, but variances cant take a back seat to your dayto day operations. If you don't address your variances as quickly as possible, they will not

be addressed. You have to decide what total variance you can live with. One word of advice

though. I have seen the total dollar amount take precedence over the total item count. For

example, if you have 1 million dollars of inventory and your total dollar variance amount is

50k, it may seem acceptable because your variance is only 5 percent. However, if your 1

million dollars of inventory consist of 10k SKUs and of those 10k, 4k have a variance, your

inventory is actually only 60 percent accurate. Is that acceptable to your customers? That
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could mean four out of ten times a picker goes to a location the product is not there. Is that

acceptable to you? More importantly, is that acceptable to your bottom line? Personally, I

am a fanatic about recounting based on quantity not necessarily just on dollar variance. If

missing 200 pieces with a total value of $100 dollars is missing, most people will not want to

recount that item. They want to focus on the higher dollar items; however, this is still 200

pieces of that have vanished into thin air.

Step 16: Prepare! Prepare! Perpare!

I am sure everyone has heard the quote, We dont plan to fail, we just fail to plan! It

amazes me to see multimillion dollar organizations that begin thinking about their inventory

only the week before the physical. Do the opposite and give greater advanced notice. One of

our customers informs its people a year before the next physical. They want all non-

essential personnel to schedule their time off around the physical that will be in December.

It also gives them plenty of time to get the books in order. If you don't remember anything

else from this article remember this: A physical inventory is 85 percent preparation and 15

percent counting! That means for every hour you spend counting, you should spend 8.5

hours preparing. That may seem like a lot, but remember, there are pre-physical steps that

need to be performed, as mentioned above.

Step 17: Cycle the count.

Inventory acts as a buffer between unmatched supply and demand. It hides problems!

Eighty percent of a companys sales, profits, and costs are often from 20 percent of its

products (Pareto Principle). That 20 percent should receive the most attention when

considering the cycle count. They are termed class A products for inventory tracking.

There are other methodologies out there, but this the best.

Class Percent of total inventory Percent of total sales/costs/profits Number of times to count

A 20 80 4 to 6

B 30 15 2 to 4

C 50 5 1 to 2

Table 1: Inventory and profit and number of times to count.

Step 18: Purchase and install a warehouse management system.

When I hear the horror stories about implementations or no ROI has not been achieved, I

have to question the company. Most people want to automate their inefficient processes or

to use my favorite analogy, they put clean clothes on a dirty kid. However, this means

they simply do their processes wrong, faster. You have to address your problems prior to or

during the implementation. Also, when it comes to ROI, you have to track all of your

warehouse expenses. It is impossible to expect a return when you dont know where


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something is. See my article, ROI In Your WarehouseReal Or Imaginedfor a detailed

discussion about this. It is impossible to expect a return when you dont know what

something costs. Track your warehouse expensesall of them!

Step 19: Address your returns.

This may seem like it is out of place, but believe me, it is not. I want to make sure that

when you put this articles down, you will have returns on your mind. They are not a

necessary evil as they have been called in the past. They are receiving and as I already

said, receiving is the most important job in your warehouse, which is why your returns need

to be sent through receiving just like a purchase order.

Conclusion

You have to implement the idea of a days work in a day. If it comes in today, it has to be

received and putaway today. Returns cannot just take a back seat to every other process in

the building. If you monitored your inventory adjustments for a week, I guarantee more

than half of them will be the result of a return being processed incorrectly. You know,

several hundred years ago excess inventory meant a businessperson was wealthy. Today,

excess inventory shows the inability to understand how to run a business or an organization.

Customers today will only pay for a high level of service, and are refusing to accept the

excuse that the warehouse is the problem or the system is always wrong. You need to to

get a handle on your inventory.

Some Tips and Tricks for the Physical

1. Use post-it notes. Have counters write problems on the post-it and affix it to the

product then move to the next item. This prevents unnecessary conversation and

people from walking around to get an answer on how to solve their problem.

2. Use Problem Flags. Once a problem is identified by a person counting they should

place a flag at the end of the aisle to notify the team leader that there is a problem.

The team leader will then go the aisle with the flag, read the post-it correct the

problem, remove the flag, and proceed to the next aisle.

3. There must be no talking during the count. One company we worked writes up

employees for talking during the inventory. It may seem harsh but their inventory

was the most accurate I had ever seen on a manual system. They were in the high

nineties.

4. No Music. Music is a distraction during the count.

5. Check overstock product prior to the count. Make sure it is properly labeled. This will

take the guess work out of the count.
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6. Use count markers instead of dots. This prevents people from stopping ot look for

more dots when the run out and minimizes waste because there are no dots to be

thrown out after the count.

7. Centralize the location for supplies and instructions. Your counters should not have to

walk around looking for supplies or for anwers to questions.

8. Identify and purchase supplies ahead of time. Purchasing supplies during the count

should never happen. It wastes time.

9. Close during the physical. Trying to process orders during a physical tells everyone

that the accuracy of the inventory is not really that important. As long as you inform

your customers about the closing well enough in advance, they will understand why

you are not processing orders during that period.

About the author

Ren Jones is widely known in the industry as the founder of Total Logistics Solutions, Inc.

(www.logisticsociety.com) a warehouse efficiency company and is now the president and

CEO of AHN Corporation (www.ahninc.com), a warehouse management solutions provider.

With over eighteen of industry experience, Jones was recently recognized for his

achievements in the industry by Supply & Demand Chain Executive and was named one of

the top 25 Pros to Know in the industry for 2005. Published and quoted in industry

magazines throughout the United State, Central America, Canada, and Australia, he is also

the author of the acclaimed book, This Place Sucks: What your warehouse employees think

about your company and how to change their perceptions! and WMS 101: A Complete Guide

to Selecting, Implementing and Maintaining a Warehouse Management System.

He can be reached by phone at (818) 353-2962 or by e-mail at [email protected]
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19 Steps to Maintain an Accurate Inventory