It’s December 30, the last Christmas cookies have been eaten and the fireworks for New Year’s Eve are already waiting for their ear-splitting performance. It could be a relaxing start to the new year – if it wasn’t for this annoying thing called inventory.
In Germany, the law dictates it: once a year the entire inventory of a company must be counted. Rules in other countries vary, but one thing is certain, if you have a warehouse, you are likely going to want to know exactly what is in there at one point or another. For most companies, this means all hands on deck! This task is not typically limited to warehouse workers, but also anyone who is available, and in some cases, external counters are required. Counting inventory typically implies checking every individual stock item manually, using one seemingly never-ending Excel sheet. What now sounds like an outdated textbook principle to some, is actually a common practice in the industry and in warehouses across the world. Moreover, warehouses usually have to be closed while they are being counted. This means that goods cannot be received or dispatched, and production must grind to a halt. Altogether this results in additional costs and impedes the flow of deliveries.
Heavy staff involvement and delivery stops are not only costly, but even impossible for certain industries since products, such as medicines, have to meet special availability requirements. Particularly for the pharmaceutical industry, the terms “stockout” and “delivery stop” are on the black list. In the case of life-saving medicine for the supply of hospitals, maximal availability of all items is always the top priority, regardless of whether they are fast-moving medicines or a rarely requested drugs. A warehouse closing for several days or a complete production stop for counting purposes is inconceivable.
Stocktaking without closing the warehouse is not ideal either
There are several counting alternatives which allow the warehouse to remain open, for example, cycle counting. By counting at regular intervals within a fiscal year, this “bit by bit” inventory method allows for warehouses to remain open, and for daily business to continue, while providing a result comparable to a full annual inventory count. But be careful: contrary to the widespread assumption, cycle inventory counting does not necessarily result in the reduction of expenses. The counting effort is merely spread throughout the year and often even increases when warehouse employees repeatedly interrupt their work to take part in the inventory process. Furthermore, it does not offer a complete overview of the entire stock situation at a given point in time.
Continuous company operations may ensure the availability of goods, but cycle inventory counting isn’t the ideal solution for an efficient stock-take.
Digitization as a door opener
But how can companies achieve a quick and easy stock-take without closing warehouses? The answer is: Through the digitization of the warehouse and its inventory count in two steps.
The first step toward an efficient and effective inventory count is the use of a computer-based warehouse management system. Just like Jim Carrey in the lead role of the comedy movie “Bruce Almighty”, most companies have already realized that the accumulation of files and endless paperwork is not very practical for the management of a large amount of data:
The second step is the implementation of an intelligent add-on system, which can simplify the counting process through the use of sample extrapolation. This procedure, called statistical inventory sampling, is characterized by counting only a small fraction of all items in a warehouse and extrapolating the results on the entire inventory. Inventory sampling can be performed using either a test or an estimation procedure, the latter being much more common. The estimation procedure is based on a warehouse phenomenon, the so-called Pareto principle. According to this principle, all stocks are categorized based on their value and are split into a few high-priced and many low-value items (the 80/20 rule). Since the value difference in this context could significantly influence the final result, all of the most valuable items are fully counted. From the remaining stock, only samples are counted, which brings the total counting expenses down to five to ten percent compared to a full count. Using a mathematical statistical technique, the inventory sampling method calculates a total result from several partial results. The final outcome is often even more exact than that of a physical full inventory count, in part based on the fact that human error is minimized.
Conclusion:
In terms of digitization, the use of warehouse management systems represents the first step toward optimized inventory management and successful inventory counting. In the second step, intelligent add-on systems, relieve companies within all industries from closing their warehouses for the time of the count. The use of field-proven algorithms reduces counting effort by up to 95 percent, while at the same time significantly decreasing personnel costs and counting errors.
How often do you count your inventory? What tools do you implement to improve counting accuracy?
2 comments
Dear Ms. Severins:
I’m a believer in Inventory Records Accuracy. https://www.linkedin.com/pulse/20140918200448-120367919-titleavoid-the-mistake-of-taking-inventory-accuracy-for-granted
I agree with your blog article here, except that when I go into small, start-up companies, they do not have a WMS or know “intelligent add-on systems” so we take a “wall-to-wall” physical (which I dislike) and after reconciliation, start cycle counting. I teach cycle counting before we actually start cycle counting. You are correct in what you say, however. Most people forget inventory records accuracy, and as I started to read your article I was looking for it to be missing and it was not. Good for you.
It’s a pleasure to read your article.
Sincerely,
Chuck Intrieri: https://www.linkedin.com/in/chuckintrieri3pl
Interesting article.. I have been involved in numerous stock count…ruined too many new year’s eve. sigh. We did the Pareto Analysis only difference is we counted 20% with full resources that we had and rest 80% with spread out resource. It was 1 week activity counting over million items. I liked the idea of extrapolation but I think it will be hard sell for management unless it gives exact result on each iteration. Because the fear of missing an item is not that we will report our inventory bit lower but that an employee might be able to sell that part on its own. We would never know. This can lead to an organizational behavior which might not be very healthy.
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