Saturday, February 2, 2013

Assurance on Accuracy of Inventory Record

The accuracy of inventory record between system and physical is very important in the inventory management since:

• Inventory is a tangible asset that is easy to lose track of unless properly controlled

• Inaccurate inventory records will result in:

– Lost sales, shortages, & disrupted schedules

– Excess inventory (of the wrong things)

– Ineffective MRP / MRPII / ERP

• Accurate inventory records enable a company or manufacturer to:

– Operate effective materials management systems

– Maintain satisfactory customer service

– Operate effectively & efficiently

– Analyze the inventory

At least this three pieces of information must be accurate:

• The material description both in the system and the physical tagging , including the lot or part number, if any

• Quantity

• Location (plant, storage or bin location)

Here are the most common causes of Inventory Record Errors

– Unauthorized withdrawal of material

– Unsecured stockroom

– Poorly trained personnel

– Inaccurate transaction recording

– Poor transaction recording systems

– Lack of audit capability

In the measurement of Measuring Inventory Record Accuracy, it is not practical to expect 100% accuracy. There is always a room for tolerance where:

• To judge inventory accuracy, a tolerance level for each part must be specified

Tolerance is the amount of permissible variation between an inventory record and a physical count.

• Tolerances are set on individual items based on value, critical nature, availability, lead time, ability to stop prod., safety problems, or difficulty of measurement.

Among other methods, at least these two basic methods are commonly applied in auditing the inventory records:

– Periodic (usually annual) counts of all items

– Cyclic (usually daily) counts of specified items

In this case, auditing the system will enable to find the causes of record inaccuracy and eliminate them. Cycle counting does this; periodic audits tend not to.

Physical Inventory
For a good preparation of physical inventory, these factors shall be taken into account:

• Housekeeping

• Identification

• Training

A physical inventory consists of four steps:

• Count items & record count on an attached ticket

• Verify this count by recounting or by sampling

• When the verification is finished, collect the tickets & list the items in each department

• Reconcile the inventory records for differences between the physical count & inventory dollars

Problems with annual physical inventory:

• Usually the factory/facility has to be shut down, thus losing production or business

• Labor & paperwork are expensive

• Job is often done hurriedly & poorly since there is much pressure to get it done

• Many times, more errors are introduced than are eliminated

Cycle Counting:
Cycle counting is a system of counting inventory continually throughout the year. Some advantages of this method are:

• Timely detection & correction of problems

• Complete or partial reduction of lost production

• Use of personnel trained & dedicated to cycle counting

The count frequency will depend on the number of times an item to be counted in a year

Count Frequency should increase as the value of the item& amp; number of transactions (chance of error) increase, e.g., base the frequency of count on annual dollar value usage. The methods that could be applied are:

• ABC Method

• Zone Method

• Location Audit System

Cycle counts can be scheduled at regular intervals or special times, taking into account

• When an order is placed

• When an order is received

• When the inventory record reaches zero

• When an error occurs