The Fast Close, Part 8 (#23)
/In this episode, we discuss how to improve inventory record accuracy, which can have a massively positive impact on the speed of the close. However, the improving inventory record accuracy is a prolonged process that will undoubtedly take months, and consume the time of the best warehouse workers. Key points discussed are noted below.
Inventory closing is a monster problem for companies that don’t have good tracking systems, and it’s a complete non-event for those that do. This is because the closing difficult almost always stems from tracking the physical quantity of goods on hand, not the cost of the inventory. So, I’m going to focus on how to achieve really excellent inventory record accuracy.
But first, be aware that if you suffer from poor record accuracy right now, you’re doomed to keep on having a slow close for several months to come, because improving your accuracy is a slow process – as you’re about to see. Just keep in mind, there is no magical way to suddenly have 98% accurate inventory records. This is a slow and methodical process.
Let’s see how it works.
Install inventory Tracking Software
The first step is to install a good inventory tracking software package. Most accounting packages already have one, so I won’t get into this part too much. The main software feature you’re looking for is the ability to record a storage location for each item of inventory, and preferably multiple locations for a single inventory item. If you don’t have this, then go look for different software.
Create Rack Locations
Next, you need to create unique rack locations. This means that you designate the first aisle as A, then B, and so on. Within each aisle, you need to number every rack. A common system is to designate the first rack on the left as rack number one, then the first rack on the right as rack number two, then the second rack on the left as rack 3, and so on. Within each of those racks, every level should be numbered. So for example, the fourth bin up in the second rack of aisle C would be designated with the location C-2-D. You need this level of very precise location codes in order to know where all of the inventory is located.
Lock the Warehouse
Next, you have to lock down the warehouse. This may sound medieval, but you really have to do it. I have never seen a warehouse with perfect accuracy that did not fence it off. The trouble is not that employees walk off with inventory, but that they have a bad habit of taking it off the shelf to examine it, and then putting it back somewhere else, which makes it really hard to find.
Consolidate Parts
Next, consolidate parts. The usual warehouse has the same part stored in several locations, which is OK is you have a good location tracking system. But we’re not there yet, so keep each item in one place while you get things organized.
Assign Part Numbers
Now is the time to assign part numbers to every part in the warehouse. A key point is to only use the most senior warehouse staff to do this, because anyone else is extremely likely to assign the wrong part numbers, which will cause all kinds of problems down the road.
Verify Units of Measure
Once those numbers are assigned, Make sure that the units of measure are correct. Where possible, mark the correct unit of measure right on the inventory item, so there’s no mistaking what it is. When someone uses the wrong unit of measure, it’s amazing how incorrect your quantities will be.
Pack the Parts
Next up, pack the parts. This means that you should count loose parts, then seal them up in boxes or bags, and write the count quantity on the box or bag. This makes it much faster to count inventory when you get to cycle counting, which I’ll talk about in a minute.
Count and Load the Inventory Data
Next up is the big weekend project, which is to count all the inventory items, and enter the numbers into the inventory tracking software. And the key part is, you enter this information along with the location codes. The data is not going to be completely correct, but cycle counting will take care of that over the next couple of months.
Cycle Count
The next step is cycle counting. This means that the most experienced warehouse staff will count a small quantity of inventory every single day. When they do a count, they don’t just correct any errors they find – they also spend some time tracking down why the error occurred, and then they fix the problem. By going after the underlying problems, you’ll see a nice, steady rise in the inventory accuracy percentage over several months.
Audit the Inventory
And speaking of that inventory accuracy percentage, send someone from the accounting department down to the warehouse once a week to do a spot check of inventory accuracy. The best way to report this information is to post it on a white board in the warehouse, and preferably by aisle. When you assign specific warehouse staff to each aisle, and then measure accuracy by aisle, this is a really good way to find out who is good a t cycle counting.
However, be warned, a high level of accuracy can simply mean that an aisle contains lots of slow-moving inventory items, so whoever is doing the cycle counts actually has a really easy time of it. Conversely, if you have an aisle with really high inventory turnover and the accuracy is still high, then you’ve got a fantastic cycle counter in charge of that aisle.
Issue Bonuses
Finally, reward the staff with bonuses as the accuracy levels gradually go up. This shows them that accuracy really matters – at least, it really matters to you, since it’s pretty to close the books when you have no idea if the inventory number is even close!
My experience with improving inventory record accuracy is fairly extensive – I’ve taken the accuracy level to about 98% for four different companies. Based on that experience, my key tip is persistence. Accuracy will not be achieved overnight, and it can also drop really fast if you don’t pay attention to it. So – do a few inventory audits yourself, and personally hand out bonuses to the warehouse staff – and keep doing it over and over again.
If you follow the approach I’ve just outlined, then you’ll eventually just print out the inventory reports at the end of the month and not even question their accuracy. This area can truly become a non-event, but it takes time.