Inventory Accuracy Measures
Inventory Accuracy Measures
Recently a client contacted us to help them determine true inventory accuracy at their company. They stated that every month their rigs and managers reported accuracy levels between 98-100% (0-2% variance), but they now were experiencing downtime on one rig for a $40 critical part that was supposed to have three each in stock, but in actuality, there were 0 available. They wanted an immediate physical count on the subject rig as well as guidance on ensuring they have a real picture of accuracy on their rigs. The count happened quickly and did uncover additional variances, and a program was suggested and implemented (such as managers following the RigServ Warehouse Checklist when visiting their rigs) to help control this lack of transactional discipline. The next step was to look at their inventory accuracy metrics to see if they were measuring what mattered and also capturing the entire situation. In a review of the metrics, we discovered that they were only measuring the net dollar variances and not absolute variances or any metric related to piece count accuracy which is just as important as variance in value.
Before we go any further, please consider the following example related to measurement precision:
Although Rig X only had .02% (in orange) net dollar inventory variances when reviewing absolute variance, the number changed to 2.59% (in yellow). Even more surprising to the customer was the Bad Count metric (# of unique SKU’s that had a variance) that quickly illustrated that they might have a bigger problem as the critical SKU’s had a large variance (84.23% accurate- in red). The piece count metric further demonstrated that an absolute measure was very important as the net piece variance was a shortage of -245 (in orange) but overall piece variance was over 3500 pieces (in yellow). This occurs because positive and negative net variances tend to offset each other, indicating that net variances are not good measures for reporting detailed accuracy; however, net variance measurements typically indicate systemic trends in inventory data. Most of the time, there will be as many positive variances as negative variances in your net measurements, which are indicative of human errors, but a consistent positive or negative trend in net variances is indicative of more serious issues such as lack of transaction discipline in recording inventory transactions. In contrast, absolute value variances are significantly better at representing operational accuracy and also the overall magnitude of the deviation than their net variance counterparts.
If anything, the users who utilize inventory reports must be familiar with the various nuances of the measurements reported, and how they relate to each other. But of all the metrics used to measure accuracy, the most significant are the measures which show the impact of inaccuracy in inventory reporting.
Another example is below for a small net variance (in blue) but a large absolute variance (red and green).
Some of the often overlooked impacts of Inventory Inaccuracy
Having to speed up or slow down shipments
This inventory accuracy measure includes delivery or quantity adjustments made to existing supply orders or the generation of new supply orders due to inventory adjustments made to correct on-hand balances.
Excess inventory or inventory obsolescence
This is a measure of the items which are later discovered in the warehouse, causing excess inventory balances or outdated/obsolescent inventory.
Supplier payment problems
This is the measure of the number of times errors in the receiving process prevented payments to suppliers from being processed properly. These errors can become costly as you lose discounts on ordered product or have future shipments delayed due to being past due.
Additional labor spent on locating inventory
This is a measure of the number of cumulative labor hours it takes to locate “lost” inventory in the warehouse. As you can imagine, this can become extremely costly.
The cost of creating safeguards
This measure is the cost of implementing cycle counting processes, physical inventory and accuracy audits, location audits, order checking, and any other process checks which are created to catch inventory errors. Obviously, you can never eliminate these safeguards; however, increases in process accuracy will reduce the extent and frequency of these checks.
Typical problems with ERP standard canned inventory reports for Inventory Accuracy Measures:
Inundated with excess information – Do your business users need 50 columns of data for analysis? Or can we exclude some of these unused data fields to offer clarity to our users and manage our data usage on an enterprise level?
Contains metrics which are ambiguous – Does your inventory report contain measures which paint an objective, accurate picture of what’s happening on site? Or do they contain measurements which often create more questions than answers?
Needs constant reconciliation – Do your business users have a standard operating procedure or data quality standards for the information they enter into your ERP? Does your purchasing or inventory data need to constantly be reconciled?
These are questions that every organization must address in their inventory reporting.
When creating measures for accuracy or inaccuracy in inventory reporting for an organization, one should always keep in mind that reporting must always be unique to the organization’s business and needs, and while general measurements such as these often provide a good foundation for creating an all-encompassing report, they must be tailored to fit a specific organization or industry. Furthermore, it’s important to always keep in mind that accuracy measurement though important is often imprecise, and the users who read such inventory reports must understand how their measures are calculated and any potential flaws in their measurement system. If you have any additional questions on accuracy in inventory reporting, please don’t hesitate to contact someone at RigServ; we’d be happy to answer your questions.