Control Inventory Record Inaccuracy via Cycle Counting

Literature review on to control Inventory Record Inaccuracy via cycle counting method

Abstract:

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Inventory Record Inaccuracy is a biggest challenge in supply chain. Considering the importance of the subject, various research has been done in this area and commonly researchers have suggested to conduct a periodic inventory audit as preventive measure. However, it is not yet established that how inaccuracy at different locations affects supply chain performance and how an effective cycle-count program for a multi-stage supply chain should be designed. This paper aims to answer these questions by considering a serial supply chain that has inventory record inaccuracy and operates under local base-stock policies.

Introduction: Inventory is an integral part of supply chain. It is a list of items which business holds within the supply chain including raw material along with manufacturing supplies, work-in-progress, semi-finished goods and finished goods. An expert management of inventory is a key to success within supply chain because inefficiencies in inventory record management leads to an ineffective replenishment decisions which could be disastrous for the business.

Inventory record inaccuracy means difference between actual units available in stockroom and number of units reflects in information systems. There could be various reasons for it such as shrinkage, scanning errors, thefts, wastage, counting errors and transaction errors. This inaccuracy leads to ineffective procurement decisions, which results in poor service deliveries and extended inventory costs. This is a major issue which affects supply chain performance of manufacturers, distributors and retailers. According to ECR Europe (2003), the value of lost inventory due to shrinkage in 2000 was e13.4 billion for retailers and e4.6 billion for manufacturers in Europe.

According to KÄok and Shang (2007), cycle count is most commonly used method to reduce the inventory control inaccuracies. In this process, inventory records are reconciled with physical stock. Although it is an expensive method however, companies have to go for it in order to avoid any disastrous situation.

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Researchers also argue about the location of inaccuracy. Some argue that inaccuracy at downstream locations has a greater impact because of proximity to customers, inaccuracy at an upstream location affects the supply for all downstream locations. Similarly, one may argue that maintaining accurate records at a location with a longer lead time is more important because such locations are slower to respond to demand changes. On the other hand, such locations generally have more pipeline and safety stock, which implies that they would be affected less by record inaccuracy. Hence, it is not clear how inventory inaccuracy at different locations affects the supply chain performance and how an effective cycle-count policy should be designed in a supply chain.

The present paper aims to address the above questions about design of cycle count policies.

Literature Review: This paper addresses an emergent issue of inventory record inaccuracy in supply chain. This is a very wide topic and numerous studies have been done so far in this field.

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For any business it is necessary to maintain a minimum stock level because none of the business can afford to go beyond this level as it directly affect the delivery lead time and makes customers unhappy. At the same time, to keep count of inventory is equally important so that the procurement team should be aware that at what time they need to replenish the stock.

Usually for this purpose, earlier companies used to conduct a “physical inventory” count once a year of each and every stock item available in stock. After having done the count, stocks in book of accounts are adjusted to know what is really available in stock rooms. However the problem used to reoccur very next day when at many occasions counts were found wrong. To resolve this, Cycle Counting is the most efficient and commonly used method in supply chain management.

According to Chaneski (2000), Cycle Counting involves counting part of your inventory every day and several times a year. It is a method of inventory auditing that supplements your annual physical inventory and, in some cases, replaces it. Cycle Counting gives you “real-time” information that will help you identify and correct inventory problems before they become widespread.

Cycle Counting involves five steps:

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• Count a representative sample of specific parts. Critical items can be counted more often than less important items.
• Once the count has been taken, compare it to the inventory records.
• If the cycle count and inventory records agree, you are in good shape. However, if there is a discrepancy, do not simply adjust the inventory records! Instead, investigate the discrepancy and find the cause.
• Once the cause or causes of problems have been identified, educate warehouse employees on the findings.
• Once causes are identified and corrected, use Cycle Counting to assure problems do not reoccur.

Cycle Counting has various advantages including provides more correct inventory records at any time and nurtures an environment of problem solving and continuous improvement via ongoing and preventive corrective action.

The right time to do the cycle count is during the day when material is not moving before or after normal working hours. The chance of counting errors is reduced if Cycle Counting is performed during these “off hours. There are a number of ways to select items to be cycle counted. One method ranks all parts by value and directs you to count the items with a large number of dollars flowing through inventory more often than slower-moving products.

However Manuel, Gumrukcu, Buyurgan, and English (2007), suggested two-echelon cycle counting approach which is the systematic method of solving inventory inaccuracy at all levels. It is nothing but counting of a small set of items during a period with the objective of determine errors in the process, as well as identifying causes for inventory inaccuracy. It has various methodologies, each having pros and cons. Generally the process has following five basic steps of cycle counting:

1. determining the items to count,
2. preparation for counting,
3. counting the items,
4. recounting variances,
5. determining and documenting causes.

Success of each method depends on its careful implementation.

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Fleisch and Telkamp develop a simulation model of three echelon inventory system with one product to reduce the total supply chain cost and the stock out level. The research concludes that eliminating inventory inaccuracy can decrease the total supply chain cost and the stock-out level. Under the (Q-R) policy, Kang and Gershwin [4] study two specific models of inventory systems as stochastic and deterministic. They revealed that if no correction is done, even a small error can cause big impacts on system performance.

References:

K¨ok, A.G., K. Shang. 2007. Inspection and replenishment policies for systems with inventory record inaccuracy. Manufacturing Service Oper. Management. 9(2) 185-205

Rossetti, Manuel D, PhD., P.E., Gumrukcu, S., Buyurgan, N., PhD., & English, John, PhD., P.E. (2007). Inventory accuracy improvement via cycle counting in a two-echelon supply chain. IIE Annual Conference. Proceedings, , 913-918.

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ECR Europe. 2003. Shrinkage: A collaborative approach to reducing stock loss in the supply

chain

Chaneski, W. S. (2000). Cycle counting can improve your inventory accuracy. Modern Machine Shop, 73(7), 52.

Fleisch, E., Telkamp, C., 2005, “Inventory Inaccuracy and Supply Chain Performance: A Simulation Study of a Retail Supply Chain,” International Journal of Production Economics, 95(3), 373-385.

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