ManEx KB

We are fast approaching the end of the year. For many of you, that means it is time for the annual physical inventory. That time of year when productivity drops and a few "lucky" employees get to spend their off time counting endless parts. It seems to be a necessary evil and just part of the industry, but is it really?

There are ways to maintain accurate counts in inventory without significantly impacting production, and without waiting for an annual count.

According to our most recent survey, you have an average of 19,400 active part numbers (you may be able to significantly reduce this, but that a topic for a future newsletter). Over 40% of you conduct and annual physical inventory. If it takes an average of 1 minute to count each part, then it will take over 300 man hours to count all the parts. That is almost 4 days for 10 people. No wonder this can be such a dreaded time of the year.

There is a better way, and for this issue, we will address cycle counting. If done correctly, this is an easy way to keep your inventory counts accurate and eliminate the need for a full physical inventory.

As always, we look forward to your participation and feedback as you gain new insights and become a more effective provider of Electronic Manufacturing Services.

Sincerely,

David Sharp
ManEx, Inc.

Business Case - Production

Cycle Counting

North Eastern Company* (N.E. Company) missed another Sales Order due date, but this time it was on a large order. The source of the delay was a long-lead component that was ordered and received, but for some reason was still short and could not be replaced fast enough to meet the delivery due date. Production blamed Purchasing for not providing enough parts, and Purchasing blamed Production for losing and wasting too many components.

Because of the importance of the order, production was very careful to monitor component attrition and was certain that attrition levels had not exceeded expected levels and therefore was not the source of the shortage. Purchasing was also certain that they accounted for expected attrition and had enough on hand, or had ordered sufficient to meet the full demand. For this reason, management suspected the issue resulted from an inventory inaccuracy prior to running MRP and not from purchasing or production process problems.

Reinforcing their opinion, management discovered that their last physical inventory demonstrated that the inventory counts were off by more than 9% on average. Although they suspected that a portion of the physical inventory discrepancy was from requiring a few "select" employees to give up an extended weekend to complete the full count each year, they were confident that a majority was caused by not adequately managing production attrition and regularly adjusting inventory levels throughout the year.

They had discussed implementing a cycle count of their inventory, but didn't believe that they had time to manage a cycle counting program or that it would make a difference. The recent missed shipments had them rethinking the possibility.

Additionally, they calculated that with their then 8% profit margin, they had to sell an additional $1,250 worth of goods to recover each $100 in lost inventory and that didn't account for expedited shipments, wasted time in production, and delayed customer orders.

It was time to make a change to their inventory management practices.

How can N.E. Company more quickly identify inventory inaccuracies? How can they promptly adjust for production attrition to keep inventory levels as accurate as possible? Would implementing a cycle count help them stay on top of their inventory and avoid component shortages and missing shipment due dates?

* Company name has been changed.

Business Case Solutions

The number of active parts and frequency of use affects the accuracy of inventory quantity records. An inventory...

Read the full Business Case Solution

ManEx Case Solution

ManEx has an integrated cycle counting module. This allows users to setup and control their cycle counting...

Read the full ManEx Case Solution

Make YOUR Mark

Please share your ideas and insights on a topic below. Use the questions to direct your response. You can submit your thoughts to mym@manex.com by clicking the topic title. Where appropriate and space permitting, we will post responses in a future newsletter so all may benefit.

Assembly Revisions

How do you reconcile customer and internal revisions?

Do you try to make the internal revisions match the customer's revision?

Do you make an internal revision change each time the customer changes their revision regardless of the significance of the change?

Do you make an internal revision change each time the customer changes the product even if they don't update their own revision?

Kitting

How do you organize your kitting activities to keep the process lean?

What percentage of your kits/parts do you auto-kit?

What is the most time consuming part of the kitting process?

What have you done to make it more efficient?

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In YOUR Own Words

CYCLE COUNTING

"We do not perform the typical cycle count process...[we] recount all parts coming from [manufacturing] (WO-WIP) back to stock and adjust per work order. [We] use a form to handle all other parts issued not on kit for repair and scrap. [We are able to] perform inventory audits on customers due to setting up customer masters with [a] prefix."

- Mike, MS

"We schedule our cycle counting by first of all running an ABC analysis on all of our active part numbers to determine the quantity of A, B and C parts. We then automatically assign an ABC classification to each part number, the desired frequency of the counts and the plus or minus tolerance percentage for each category.

We have approximately 2,400 active part numbers. We count A parts once a month, B parts every two months and C parts every six months.

We cycle count each day between 6:30-7:30am while our stockroom is closed. We are able to do the cycle counting within an hour to minimize the impact on the shop floor."

- Joe, UT

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1.1. Business Case Solutions - 13 - Cycle Counting

Business Case Solutions

The number of active parts and frequency of use affects the accuracy of inventory quantity records. An inventory inaccuracy may cause anything from a minor irritation to a significant delay and lost productivity and profitability. As inventory part numbers and usage increase, a system to manage and review inventory counts becomes more critical.

Cycle Counting is the practice of counting a small subset of inventory on a regular basis. It can be an effective and efficient method for maintaining current on-hand inventory counts. It allows for greater flexibility, greater accuracy, and less interruption to production than an annual physical inventory.

The first step in establishing a cycle counting program, is to determine component groups and group count frequency. Groups are typically designated by their ABC code with A parts counted more often than B parts and B parts counted more often than C parts, and so forth. Some common parameters, in this industry, for determining the correct ABC code are: Value, Lead Time, Usage, EAU Value, and Hybrid.

Value - This method groups components according to their on-hand value. The components with the highest on-hand value are counted more frequently than those with a smaller on-hand value. This method is ideal from an accounting perspective as it typically results in a much smaller variance in inventory value, but may not be ideal from a supply chain management perspective since even inexpensive components can cause expensive production delays and missed shipments. This is relatively easy to calculate and can be assigned manually if needed.

Lead Time - This method groups components according to their lead time. Components with long lead times will receive more frequent counts and thus have higher inventory accuracy. While this makes sense from a supply chain management perspective, it can lead to high inventory value variances since expensive components don't always have long lead times. This is relatively easy to calculate and can be assigned manually if needed.

Usage - This method groups components by their estimated annual usage (EAU) regardless of their value or lead time. The argument for this method is that the more frequently accessed components have a greater likelihood for inventory variances and should therefore be counted more often. This method tries to reduce the impact of human error in inventory transactions. However, it may not minimize variance in inventory value, or prevent long lead parts from stopping production if those parts are not used as often. This may be a little more difficult to calculate manually, but can be done if needed.

EAU Value - This method groups components by the value of the annual usage (EAU). This method attempts to rectify the inventory value variance issue with the Usage method, by including component costs. It is likely to have a lower inventory value variance, but may not fully adjust for inexpensive or low usage parts with long lead times. This may be a little more difficult to calculate manually, but can be done if needed.

Hybrid - This method combines any or all of the methods listed above. This method assigns components with high on-hand value, high usage, and/or long lead times to group A. This ensures that parts with the greatest potential for causing production delays or inventory value variances are counted most often. While this can be done manually, it is better to allow the ERP system to assign and adjust the ABC code according to current conditions.

The second step is to determine how often each ABC code should be counted. Higher count frequencies lead to more accurate inventory records, but also increased handling costs. Management needs to find a balance between cost and benefit. One common frequency is to count A parts every 30 days, B parts every 90 days, and C parts every 180 days. (Although this setup will result in more counts than an annual physical inventory, it reduces impact on production, doesn't require overtime hours, and increases inventory accuracy)

The third step is to determine the best time of day for cycle counting activities. Ideally this will occur either before production begins, or at a time when production and inventory movement will be at the lowest level of the day. This can be early in the morning before production starts or during the standard lunch break.

The fourth step is to determine who should be responsible for performing cycle counting activities. Because cycle counting reduces the daily time required, the focus can shift from speed to accuracy and process improvement. A shift that requires knowledgeable and experienced employees to conduct the cycle counting activities. This is typically limited to employees in inventory.

The final step is to start counting and discovering the sources of each significant discrepancy. As part of the counting process, it is imperative to identify why discrepancies exist and work to eliminate the sources. Initially, it is far more important to identify and eliminate sources of discrepancy than to get through the full cycle each period. Not only will eliminating sources of count discrepancies reduce costs and production delays, but it will speed the cycle counting process as well.

A well designed and executed cycle counting program should achieve an accuracy of 97% or more.

1.2. ManEx Solution - 13 - Cycle Counting

ManEx Case Solution

ManEx has an integrated cycle counting module. This allows users to setup and control their cycle counting activities. It has provisions for assigning and managing ABC codes and their count frequencies, automatically selecting components to count each day, comparing daily counts to system counts, and reporting on the results.

Setup - To setup the cycle counting module in ManEx users must decide how to calculate ABC codes, define ABC codes and parameters, and the count frequency for each code.

Calculate ABC Codes - The three options in ManEx are: Manual, $ EAU, and $ On-Hand. Both EAU and On-Hand also factor in the component lead time.

If manual, then ABC codes are assigned when parts are created based on their class and type and must be updated manually as needed.
If $ EAU, then ABC codes are assigned based on the value of the estimated annual usage and/or component lead time. Users must run the "Calc EAU" and "Calc ABC Codes" programs to refresh the EAU and ABC codes.
If $ On-Hand, then ABC codes are assigned based on the value of inventory on hand and/or the component lead time. Users must run the "Calc ABC Codes" program to update and refresh the component ABC codes.

Define ABC Codes - ManEx allows up to 36 alphanumeric ABC designations. ABC codes are applied to Buy and Make parts separately.

If calculation is based on $ EAU or $ On-Hand, then users must also define the Pareto limits and lead time limits for each ABC code.
The "% of Value" determines the which components will be included in the ABC code based on where their value falls within the total value Pareto (i.e. if A parts have a "% of Value" of 80, then all components comprising the top 80% of value will be included, if B parts have a "% of Value" of 15, then all components comprising the next 15% of value will be included, etc). A full 100% must be assigned to both Buy and Make parts.
The "LT>" determines which components will be included in the ABC code based on their purchasing lead time. This will include all components with an applicable lead time regardless of the on-hand or EAU value.

Count Frequency (Cycle Count) - Users enter the Cycle Count Days for each ABC code. This is used to determine the number of parts to count each day. This is based on calendar days and may need to be adjusted for work days if you will not be cycle counting seven days a week.

Implementation - The three steps to completing cycle counting activities in ManEx are: create an new list, count and record results, and reconcile differences.

Create a New List - Users can generate a new list of parts to count by clicking the "Run Cycle Count Setup" button (Add button).
Count and Record Results - Users should count all components on the list and record the results of the count in ManEx.
Reconcile Differences - Counts with variances outside of user defined acceptable limits (as defined in the system setup) will result in an unfavorable record and require user to document the reason for the discrepancy.

In addition to standard cycle counting, ManEx offers the ability to spot count when closing a kit. This process displays the expected return quantity and allows users to adjust as needed. Completing this process will allocate component shortages to the job responsible for the shortage, and increase inventory accuracy. Components counted in this process will still be included in cycle counting activities, but should have a lower instance of count discrepancies.

CONCLUSION

Shortly after implementing cycle counting, NE Company discovered that their count accuracy was actually below 90%. Further study indicated that most of their shortages resulted from employees not recording some inventory transactions and higher than expected attrition on average. By servicing their machine feeders and slightly adjusting the attrition levels, they were able to significantly reduce unexpected component shortages. They also retrained employees on inventory handling processes.

NE Company has been cycle counting and spot counting for over six months now. Their count accuracy is up to 98.3%. Based on discussions with their auditors, they expect that they will not need to do a physical inventory at their year end. Although difficult to quantify, management believes that the relatively small investment in cycle counting has yielded a significant return and has been worth the time and effort.