How to Increase Inventory Accuracy with Cycle Counting in QAD
Posted on: February 9, 2021 | By: Guy Logan | QAD Financials, QAD Manufacturing, QAD Business Process, QAD Distribution
For automotive manufacturers to remain as competitive as possible in today’s environment, these organizations must consider the importance of cycle counting when seeking to improve inventory accuracy. This article discusses the concept of cycle counting, its long-term benefits and best practices, as well as the solutions QAD can provide.
A Review of Inventory Accuracy and Cycle Counting
Inventory accuracy is vital. If a business’s inventory is inaccurate, the business may think it has more inventory than it actually does, which may lead it to try to ship a product to a customer when it doesn’t have that product on hand, potentially leading to dissatisfied customers. Organizations may also think that they have less inventory than they actually do, which may lead to them obtaining more inventory than necessary, which can lead to wasteful spending. Additionally, obtaining excessive inventory could also mean that the uncounted inventory may remain in inventory, undiscovered, until it becomes obsolete and no longer sellable. To maintain inventory accuracy, many businesses utilize the process of cycle counting.
Cycle counting is the process of counting inventory levels in small batches—and on a continual schedule. Cycle counting allows for businesses to count inventory without having to disrupt normal operations by performing a physical inventory count.
Typically, businesses implement an “ABC” approach to cycle counting. Instead of counting items randomly, businesses will often separate their items into three classes: the “A” items constitute roughly 20% of inventory and roughly 80% of cost of sales, the “B” items constitute roughly 30% of inventory and roughly 15% of cost of sales, and the “C” items constitute the remaining 50% of inventory and 5% of cost of sales. The business counts “A” items more frequently and counts the “B” and “C” items less frequently. For example, “A” items may be counted monthly, whereas the “B” items are counted quarterly, and the “C” items are counted once per year.
According to a 2012 report from Tompkins Supply Chain Consortium, the average company achieves an inventory accuracy of 98%.
The Benefits of Cycle Counting
Even a one percent increase in inventory accuracy is shown to carry significant benefits. A report from APQC found that a one percent increase in inventory accuracy (from 98% to 99%) is associated with a higher percentage of supplier orders delivered on time, a lower dock-to-stock cycle time for deliveries, and a higher amount of sales orders delivered on time.
To harness the benefits mentioned above, many organizations will have to reconsider their cycle count procedure. Without proper cycle counting, inaccuracies will re-emerge, preventing businesses from obtaining the benefits of increased inventory accuracy.
How QAD Helps the Cycle Counting Process
Manufacturers can utilize QAD to assist in the cycle counting process.
Cycle Counting Setup
The user has a few options when setting up the cycle counting process. The user may use QAD to assign ABC classes to the different items in the inventory; he or she can also set the system to operate within a certain tolerance, or error margin. In the case of a discrepancy between counted inventory and written inventory, the system accepts those numbers when the difference is less than the tolerance. For example, if the counted inventory of an item is 100 and the tolerance is 3%, a written inventory count of 101 would not trigger a recount from the system, but a written inventory count of 106 would, because the difference is greater than the tolerance.
The user can then enter count and recount quantities into QAD, then review the cycle count results report.
Best Practices
Following these best practices can make cycle counting more effective:
- Your facility should schedule cycle counting to be a part of the normal operations of the facility.
- Schedule cycle counting frequently. Higher frequency of cycle counting allows for higher inventory accuracy and lower inventory write-offs. Many warehouse operations do cycle counts daily, counting in different areas of the warehouse each day.
- Rather than doing random counts, the most effective way to do cycle counts is classifying items into A, B, and C groups. It makes sense to spend the most time doing cycle counts with the inventory that represents the highest value.
- If you need to make quick adjustments to your inventory accuracy, focus your attention on the A’s. Typically, the A’s will account for approximately 20-25% of your total item numbers but provide the highest return. Also, if you can identify deficiencies in these groups, it’s likely you can identify the root cause of discrepancies that can be applied to all groups.
- The assignment of dedicated cycle count teams allows the company to train several individuals to perform these tasks. The size of the team will be dependent on the size and complexity of a company’s inventory. A large organization could have a cycle count team of several full-time employees. However, a smaller organization could have as few as one or two employees that perform cycle counts for a small part of their workday.
- Cycle counts should move methodically throughout the warehouse so that all products get counted on their appointed schedule
- Two separate individuals should count the products when possible. A blind comparison of their counts should be made before adjustments are recorded. Any discrepancies should be reviewed.
- Before cycle counting is performed, all open transactions such as receiving, shipping, and WIP should be closed out for the items that are selected for cycle counting.
- You can prevent errors by investigating sources of error. It is crucial to identify and fix any processes or training issues that cause inventory errors.
- You should track inventory accuracy metrics over time. Also, you can set targets for inventory accuracy. Knowing your numbers and tracking improvements (or declines) can help identify where systems are working (or failing).
- Cycle counting should be done at the start of the day before the operations of the facility have begun in full-swing or at the end of the day after operations have closed out.
- The cycle counting process should be well-defined and documented.
- Separate the process of cycle counting and inventory recording to ensure accuracy.
The True Purpose of Cycle Counting
QAD and other software programs may provide the user with helpful tools in carrying out a cycle count, but much of the work of a useful cycle count must be done outside of the system. Once the user finds inaccuracies, he or she must attempt to find the cause, then correct the issue to ensure these inaccuracies do not reappear. Otherwise, the cycle count does not provide the long-term inventory accuracy benefits that an effective cycle count should produce. This is because inaccurate inventory may be a symptom of other issues such as training issues or equipment issues, and proper cycle counts should look to resolve these problems, whereas merely adjusting inaccurate counts simply buries the issue.
Next Steps
Better inventory accuracy is just one aspect of ensuring an optimized automotive manufacturing business. Logan Consulting is a Chicago-based firm that has transformed numerous automotive organizations. To learn more about how they can transform your business, please click here.