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.
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