FIX THE SYSTEM
Institute Improved Policies and Procedures
Procedures are often in need of a major overhaul. Many are poorly documented, unworkable or cumbersome. The project diagnostics, team meetings, cycle count results, conference room pilot and employee suggestions can all funnel information to the people who revise procedures.
Identify every single transaction and procedure potentially affecting inventory accuracy. Review and, if necessary, enhance, simplify and document them, then thoroughly train all applicable personnel in their use. Keep simple concise procedures available for employees’ ready access. Have employees practice/drill in procedure use. An inventory system test or “demo” database is a good tool to practice with.
• New procedures/changes should be reviewed with users in advance, thoroughly tested and documented prior to implementation.
• Procedures should cover all aspects of inventory transactions: receiving, inspection, stores, issues to floor stock, production, substitutions, transfers, scrap, rework, return to vendor, completions to stock, shipments.
Set Up Basic Inventory Movement Structure and Controls
Most companies lack a common understanding on how inventory transactions- material and paperwork – should flow. One of the first evident symptoms of this is an almost total inability to reconcile cycle counts of active items, due to transaction “cut-off” problems attributable to unpublished/unenforced transaction document flow times. Forget about a full cycle counting program until this is corrected. First, establish, implement and enforce:
• Inventory “transaction flow map” showing all work centers/cells/stores areas, material and paper flows, transaction types and account numbers, so that people will know what should happen. When people see a graphical depiction of system flow and have it explained to them, it often helps them to decode the mysteries of a system.
• Flow times – How long it should take to receive a part, move it to stores, issue it, move it between operations. Publish these flow times, post them, and get people accustomed to working with them. Highlight transactions missing flow time targets.
• Cutoff times – How long it should take to post a transaction after it physically occurred. Publish and highlight similar to the above item.
• Drop points – Where material and transaction documents should be placed. Mark these areas plainly to reduce confusion. Painted lines on the floor, signs, sometimes even fences, may be needed to get the point across.
• Logging and batch controls, especially for key “gateway” transactions such as receiving and shipping. Comparing daily posted transactions to the logs often helps detect missing or erroneous data. Logs can also be useful in reconstructing “crashed” systems.
Write Cycle Counting Procedure
Cycle counting should be the principal ongoing performance measurement, diagnostic and problem-solving approach, basically “SPC for inventory control.” It is a procedure to help determine if the other inventory procedures are working. The procedure needs to fully reflect the overall systems flow and timing. For instance, if inventories are updated daily by MIS, it may be necessary to adjust for unposted transactions prior to completing reconciliation.
• In a high-volume repetitive production in a backflush environment, It is necessary to log production occurring between backflushes and to know precisely when these were performed. In addition, knowing the whereabouts of discrepant material routed for inspection and alternate processing, but still unposted, is vital, since counts of material in the area may omit it.
Consignment inventory rules sometimes need revision to facilitate cycle count reconciliation as well.
Run a Control Group
Once the program is underway, team members often want to quickly start an ambitious, large scale program of cycle counting. Some people come running out of cycle counting seminars, flushed with enthusiasm, wanting to use their new tools immediately to vanquish the demons of inventory error. In general, don’t. Why? Because in most cases the infrastructure isn’t yet in place to support an effective cycle counting system. Make sure it is in place BEFORE starting regular cycle counting, or you’re in for some big disappointments and loss of credibility.
In the meantime, use the initial survey population as a “control group” to help regularly and frequently assess the propagation of errors. Count and reconcile these items over and over again until you start to get the hang of what’s wrong. Chances are, this will be a very tough chore initially, because of the many things wrong with the system. Don’t be surprised if you can’t identify many item error causes with certainty in the initial period. As you count them more frequently, there will be shorter intervals between counts, increasing the likelihood that error causes can be isolated. As the basic controls identified above are established, they will eliminate many errors and make it simpler to identify those that remain. Make sure that problems are posted to the issues list, prioritized, assigned for resolution, discussed at meetings, completed, documented and resolved.
At some point, when the team feels that they have basic controls in place and have mastered control group diagnostics, they can turn the cycle counts loose on a larger scale.
Remind your people that control group accuracy levels are about as representative of all items as MENSA members and basketball players are of the general human population. By definition, the control group is skewed, because it receives inordinate attention and care as a diagnostic tool. We’ve actually seen companies boast about the control group accuracy as representative of all items, declare victory, then go home smiling. The control group only indicates the level of propagation of errors, and if you work at it, their cause. Even that could be wrong, since employees quickly discover which items are measured in the control group and pay special attention to them. Rotate items occasionally.
When the control group is running in the mid 90% accuracy range, it’s time to turn on large scale cycle counting. Companies trying to turn it on too early may get swamped by massive numbers of irreconcilable errors. Some even compound the errors when they start posting corrections before they’ve got reconciliation/posting procedures working satisfactorily.
Most error causes can be found and resolved during the initial control group period.
Make Physical Changes
Paint lines on floors to indicate drop points and department boundaries. Record tare weights on all containers used in weigh counting. Use bar code or other accurate, efficient data acquisition methods. Deploy counting scales where appropriate. Isolate obsolete inventory for final dispositioning. Assign designated drop points for discrepant or “hold” status material. Ensure that there is adequate and appropriate material handling and storage equipment. Sometimes something as simple as lines on the floor, a fence or a gate can make a significant difference. Consider a move to a process-related flow, which may greatly simplify material/inventory control.
A comprehensive facility location system is essential for success in locating material quickly and efficiently when it is needed All inbound and in-transit material should be directed to locations, or they should be assigned upon arrival. If the location system is simple enough, materials might be automatically routed. Reduce the number of possibilities to make mistakes. The location codes should be plainly marked all around the facility, so that there is no confusion about the location. Isolate/purge excessive, obsolete and damaged inventory.
Make Information Systems Improvements
Sometimes computer, software and MIS operational problems contribute to inventory problems. System users tend to overstate these, although we have seen them over and over.
Make sure to set up system tables/data fields properly, or they will generate erroneous transaction data. For example, if bill of material codes weren’t set right, then certain inventory transactions wouldn’t process. Once the system is set up wrong, these errors may take months to detect and diagnose. These can’t simply be changed with impunity, but require careful prior testing and well coordinated changes, usually with the assistance of MIS and/or software suppliers.
Computer batch update processes are sometimes set up improperly or fail to execute as planned, creating erroneous or untimely postings. This is especially critical to three shift operations, where mission critical systems can’t be down long and botched batch updates can significantly impede company operations. Ensure that they’re set up, tested and properly operated. Ensure that there are recovery procedures in place in case things don’t always work properly.
At one company, there were several major bugs not detected in the early conference room pilot, which was done before enhancements were made to the software. The system pilot testing was not very rigorous compared to the one the team did during the inventory accuracy project, when every single process and option was simulated on line, with an exhaustive review and rewrite of procedures done concurrently, followed by employee retraining. Examples of problems found and corrected: scrap transactions costing improperly, move tickets failing to print properly, improper costing with alternate routings, system parameters set up incorrectly causing backflushes to not calculate correctly.
Ensure that software documentation is made site-specific, so that sufficient simple, clear instructions applying to local conditions are made available to personnel, who should be thoroughly trained in these procedures.
Don’t Forget Accounting Systems
Even if a system is “integrated,” there may still be a few things that it does differently to accounting than to operations, such as scrap transaction costing, adjustments, etc. In addition, Accounting might have developed some “hand journal vouchering” procedures that circumvent the purpose of the system. Run tests to ensure that operations and accounting reports balance and that all transaction types process correctly and all transactions are accounted for.
Sometimes, system reports are too cumbersome to be helpful to the reconciliation effort. For example, in one company, Finance received a huge 16 inch thick report every month that didn’t balance and didn’t lend itself well to analysis. They worked to get better inventory cost sub-ledger/account data, better suited to check against other cost and operations data and reconciled in more frequent intervals.
System set-up concerns cited above are equally applicable to Accounting.
Conduct Control Studies
Many industries, like wire manufacturing, for example, have complex wrinkles. For example, the way wire strands are twisted and compacted, wire customer requirements and the shape of wire drawing dies, can all have a significant effect on material consumption and inventory. Even when these are brought under control, the way transactions are reported can also affect accuracy.
To test the system out on a real life basis, conduct a limited number of highly structured “control studies,” count and double check everything issued, everything consumed, all scrap, rework, and compare that to what the computer transactions/database thought was happening. It may be discovered that some bill of material, process, tolerance and transaction problems, need correction. Product lines with unacceptable process capability and tolerancing issues may be identified and targeted for correction, usually by a separate project.
Other Useful Things
• Conduct frequent walking tours through the facility with the project team, local officials and employees. Listen to what they say and look for obvious problems. Make assignments or take action on the spot. A picture is worth a thousand words, and the real thing is worth a thousand pictures.
• Focus on housekeeping. A sloppy, crowded, disorganized area is a warning that there are deficient attitudes, procedures or that facilities and equipment aren’t up to the job. These things don’t always stand out in reports. There’s no substitute for being on the spot. Attack housekeeping problems head on. Consolidate material, improve marking and labeling, have a proper place for everything, work on rescheduling/re-routing materials to alleviate congestion. If housekeeping can’t be resolved by checklists and new emphasis on orderliness, then go deeper down into the root causes and start solving the underlying problems.
PROCESS-RELATED DIFFERENCES
Most inventory accuracy literature uses conventional discrete manufacturing as a model. Repetitive, JIT, cellular flows, process and project-oriented models all introduce some special requirements. This section provides a brief overview of these.
Repetitive, JIT, Process-Oriented Flows
Repetitive process inventory control needs some different approaches. It’s about 80% the same as discrete, but that other 20% is extremely important. Much of the product moves so fast that it’s hard to even verify. To summarize some key differences:
• Yields require much more attention, especially where process capability is an issue.
• Because of high volume and more continuous flow, small errors, even one or two percent, quickly add up to massive variances.
• “Backflush” automated component relief needs to be watched closely, due to the above two items and also if there are component substitutions, bill-of-material errors, or discrepant material moves. In some cases, it may be advisable to go to discrete, counted material issues, then reconcile yield upon completion.
• A process flow or cellular layout/management approach makes it much easier to control inventory than for a functional or job shop scheme. Many companies realize this and are gradually shifting to a cellular paradigm for this and other reasons.
• In a process with many activities, don’t try to count and reconcile every activity. Instead, reconcile various “pay point” or milestone activities, or even logical stocking points. If there are persistent discrepancies, consider extending controls into the upstream activities of most likely error sources until the causes are found and corrected.
• Trends in repetitive manufacturing indicate a move towards point of use delivery and storage, supplier-managed inventories (including consignments), backflush and work-orderless/paperless activity control, including “rate-based schedules.” Some companies periodically close and reconcile rate-based master orders, to help determine performance.
• Some process plants are actually continuous process operations. Inventory control may be accomplished with check points, such as periodic meter readings, or with production rate monitoring. Material consumption may be checked against product characteristics such as specific gravity, density, durometer, coating thickness, etc. If one parameter is off, it can significantly affect other key parameters or resource consumption.
• Cells and dedicated lines generally have process-oriented flows and focus on families of similar items. Such facilities are inherently easier to control. Often, cells are largely self-managing, so employees will handle their own inventory control.
• Simplified control techniques, such as visual methods (Kanban, calibrated containers, two-bin), average inventory estimates, gateway/paypoint, and zero inventory make to order-only are becoming more common.
Project Oriented Industries
Make to order businesses often plan and control activities by job, project, order, or even lower level “work packages.” It is commonplace to track inventory and costs by one or more of those entities. Such work is more likely to be engineered to order as well. In addition, customers sometimes have ownership/control over inventories and even designs and specifications.
• Project/job, work package, configuration, lot and serial number control are often additional tracking requirements. This makes inventory accuracy more difficult, because these may be included in inventory control, cycle counting and reconciliation.
• Inventory costing may get more complex as well, since actual or average costs are often maintained and the same item may have different costs for different projects/work packages, etc.
• It often makes sense to cycle count by project in these types of businesses. The ideal time to count is when maximum benefit will be gained, which is just before major decisions affecting cost and schedule are made, such as planning and procurement, or at the end of a project phase, when residual inventory must be determined and dispositioned.
• Since customers sometimes own all or part of the inventory, accountability standards are sometimes higher. It’s not so easy to “write off” a loss of material. In cases of adjustments for common-use inventory, who pays is a burning issue.
CONCLUSIONS
As with most major change efforts, inventory accuracy needs strong, continuing management support to change the culture and practices.
• Very little happens in some companies until top management makes poor results unacceptably uncomfortable to those failing to deliver.
• Even after that, things sometimes don’t improve until meaningful performance measurements and improvement mechanisms are implemented.
• Strong project leadership is the next most important factor, along with a sound approach and an implementation plan.
• The price of continued inventory accuracy success is eternal vigilance. When programs lose “mindshare,” results often quickly deteriorate.
• Inventory accuracy is a permanent state of mind, not a quickie, one-time project. Periodic backsliding needs constant attention. This is one area where zealots and dictators are needed!
Successful inventory accuracy efforts often have five phases:
1.Realization that there is a problem
2.Agreement on a solution approach
3.Problem-solving phase
4.Records correction
5.Ongoing cycle counting/maintenance
• Inventory accuracy doesn’t really improve by counting things. It only improves when basic systems, procedures and training improve.
• Identifying issues and resolving them so that they never occur again is the key to achieving accuracy goals.
• Leadership and peoples’ attitudes are the two most important factors for success.
There are some significant differences in attaining inventory accuracy in non-discrete, process, repetitive, cellular and project-oriented enterprises.
Learn them well and adapt to their needs. Realize also that most companies are a mix of different environments, so mix approaches if warranted.
About the Author:
George J. Miller, CFPIM, is Founder of PROACTION. Prior to selling the company to Paul Deis, George had worked with dozens of companies in assignments involving productivity, quality and service improvement, business systems, change management, acquisitions, divestitures, expert witness testimony, and others. Prior to founding PROACTION in 1986, he was Vice President of Marketing for Western Data Systems; Director of Planning and Development and Assistant Director—Operations for Purolator Technologies (PTI); Consultant for Booz-Allen&Hamilton, and Manufacturing Systems Manager for Becton-Dickinson.
Paul Deis, CFPIM, is CEO, PROACTION. He brings over 25 years of consulting and senior executive experience to his work, including detailed work with nearly 60 companies. Prior to acquiring PROACTION, Paul’s experience includes running a small ERP software company, leading other consulting businesses, prior work with PROACTION, Manager at Deloitte&Touche, VP Manufacturing at Raypak, Inc., where he was very successful with an early Lean management initiative, and dozens of projects in the areas of enterprise software, operations management, crisis resolutions, in a wide variety of industries, business types, and scales.
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