True Costs of Physical Count
Errors in the Energy Industry

Inventory counting may not be the most exciting topic, but it is a critical one – especially in the oil and gas industry. Many companies in the space have hundreds of millions of dollars’ worth of spare parts in their inventories at a given time.

Yet, most of them lack the processes in place to manage physical inventory counting well. Most companies have a procedure that says count every item annually but no work instructions on what is to be done such as removing items from storage, cleaning the location, ensuring the right items are accounted for, checking for expiration dates, condition, time to enter results into the system of record and so on. Inventory counting activities are only conducted for two reasons; to correct on hand quantities before they affect operations and to determine the root cause of discrepancies. In this market, it is imperative that accurate inventories are kept as the result is the phone call any rig manager in the gas and oil industry fears – your drilling is on downtime because your company ran out of a critical supply, like pipe dope

Improving Inventory Management & Physical Count Errors

There are some things you can do to improve inventory accuracy and hence physical counting errors. For instance, look at the way you handle returns. You may want to institute a policy that places the ownership of the task on the crafts person and requires the activity to happen within 24 hours of the work completing. Many companies have a procedure that is not time bound and does not hold anyone accountable for timely returns. This alone can cause inventory to soar as it is false demand and may cause reorders. You might also want to implement a transfer log that maps the movement of materials throughout the company or standardizes the way that receivables are checked in. The sooner materials are checked in, the more their movement is recorded, and the ownership you assign to inventory management tasks will help, but the formula is incomplete.

The Problem With In-house

Are you relying too much on your in-house staff? There are lots of materials coordinators or storekeepers out there who have not had any training on inventory management, except for the basics of completing a transaction in the ERP system. There may be a temptation to cut corners as many of the inventory counting activities at remote locations (like a drilling rig) are conducted by the same personnel who would be held accountable for large discrepancies. It is easy for an employee to fail to update the inventory of a supply that has not moved since the last inventory or has not appeared to move. After all, it takes time to count all those items, ensure they are not expired, physically arranged in a FEFO manner (First Expiring First Out), relabel, etc. and even more time to double check inventory entries. If the materials coordinator/storekeeper at your facility is the only one who checks the accuracy of inventory do you have the proper controls in place? Should someone from another department complete a spot check? Click here for a warehouse checklist for managers to use while visiting their facilities.

The Cost of Error

At the end of the day, physical count errors are introduced into the equation. Issues with inventory accuracy can take a few different forms. Maybe your company is unable to locate items that your system says are on-hand or you are finding items that were never entered into inventory. In either case, you end up ordering extra supplies to keep on hand, you lose money on expedited shipping, and your staff loses time looking for items that aren’t there or while running more frequent inventory counts. It can be a real mess – and no wonder. Most companies only check their inventory once a year, leaving time for all sorts of inconsistencies to go unchecked.

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True Costs of Physical Count Errors in the Energy Industry