Design A Count Programme

The counting program should be customized to the specific operation and business. Do not accept the ‘one system fits all approach. In complex operations, you may have a count programme that uses multiple approaches to countings, such as one method for finished goods, another for WIP, another for raw materials, and other methods based on whether the inventory is stored in fixed or random storage areas.

Why Count

The first thing you need to determine is why you are counting. Specifically, what is it that you expect to achieve through your count programme? If you are setting up a programme just to fulfil a corporate requirement of counting inventory multiplied by times per year or to achieve some subjective accuracy number thrown at you, you will likely not end up with a highly-effective count programme. You should be counting to optimize your business operations and achieve high levels of customer service. If your business has been operational for some time, you have some idea of the areas that have had ongoing problems with inaccurate inventories. This is a good place to start. However, you should also weigh the effects created by these inaccuracies to determine which areas are more critical than others. Small variances in some types of raw materials may have little or no effect on operations, while inaccuracies in others may shut down an operation. Inaccuracies in finished goods tend to have the most obvious direct effect on customer service and get a high priority in count programmes.

Frequency of Counts

Count frequency should be calculated to meet your previously-stated objectives. Factors such as the effects on customer service, manufacturing operations, and the potential for inaccuracy within the specific product group will affect the frequency of your counts. Even factors such as manufacturing, and supplier lead times, should be considered in prioritizing counts. Certain key raw materials critical to your operation, that are highly prone to variances due to high scrap factors or variation in manufacturing processes, may need to be counted weekly (or daily), while some slow-moving finished goods may need to be counted annually. As your count programme evolves, the frequency of counts will change based on the accuracy levels achieved.

The requirements for a monthly surprise check usually follow the end of the annual accounting period. In some organizations it may be waived, provided that the period between the surprise checks, before and after the end of the accounting period, does not exceed 60 days. Where deemed necessary, the management may direct that stocktaking be conducted more frequently.

Timing

Timing is critical in cycle counting. In a perfect world, you should be able to count and resolve discrepancies with no other processing going on during the counting process. If your operation allows you to do this, great. Your job will be a lot easier. If it is cost-prohibitive or impossible to shut down all other operations, it does not mean you cannot have a successful cycle counting programme – It just means you are going to have to work a lot harder at it. You will need a thorough understanding of all operations and must be able to track any transactions occurring during the counts. Even with this, you may have situations where it is just far too difficult to get a correct count on an item and may need to skip it and count it again a couple of days later. Whether you are shutting down operations or not, you must have reliable procedures and thorough control over inventory operations, making sure that all transactions are performed on time.

Most stockrooms conduct stocktaking every month-end and year-end. The frequency of stocktaking can also be determined by what happens in the organization. Emergencies such as when a lot of stock has been taken can prompt stocktaking.

Accuracy Tracking

Your count programme is part of a continuous improvement process. Tracking accuracy is necessary to determine where improvement is needed. The more detail you can provide, the better you will be able to pinpoint specific areas of attention. Breaking down accuracy by product groups, physical area, and operational groups will provide the information needed to improve processes and determine priorities for future counts. Do not get distracted by “benchmarking”. There are so many variables in the way accuracy is tracked from one organization to another that these comparisons tend to be a waste of time. What you should focus on is consistency. Spend time developing your methods for tracking accuracy to meet current and future needs. Long-term data is invaluable, provided that the method used to compile it has not changed.

Two methods for tracking inventory variances are most commonly used are the Transactional On-hand method and the Good Count Bad Count method.

On-hand tracking is the most commonly used method, where variance amounts are divided into on-hand amounts, to give you a variance percentage. The On-hand method gives you a snapshot of what your inventory accuracy is at that specific point in time. It is helpful in projecting the impact your variances might have on subsequent operations and is the only method accountants use. The problem with the On-hand method is that it may not give you enough information to pinpoint process problems and, at a detail level, it fluctuates too much based upon current on-hand balances. For example, if on Monday you count part #XYZ and find you short 20 units out of an on-hand balance of 100, this results in an accuracy rate of 80%. However, if you did not count this item until Tuesday, and 2000 units were received on Monday afternoon, your accuracy rate would now be 99%, even though you are still missing those 20 units.

Transactional tracking compares the variance amount to the amount consumed during the count period, showing the accuracy of your operation. This type of tracking is far more useful in determining process problems. Unfortunately, it is also much more difficult to implement. In the same example where you short 20 units, and you determined that you have consumed 1000 units during the count period, you now have an operational accuracy of 98%. If this item is a raw material used in manufacturing and you determine that your finished goods are accurate, then you may have a 2% variance, either in your bill of material or scrap reporting. Transactional tracking assumes that your receipt quantities are correct.

Good Count Bad Count is the method you compare the number of good counts to the number of bad counts. Tolerances are put in place to allow a count to be considered ‘good’ if it is within a certain percentage/range.

In the end, the measurement must be meaningful. If the measurement is not providing information that will allow you to optimize operations, why are you doing it?