Inventory Accuracy and Optimization

Inventory Accuracy is Not Sexy Until…

Inventory accuracy and optimization is often overlooked by company management, even by executives responsible for operations, manufacturing, and supply chain.  It is arguably one of the least exciting parts of managing a business, until you discover it is the root cause of a few million dollars in lost profits.

Why is there comparatively little attention given to inventory accuracy? 

There are many reasons.  For starters, management often feels that it should be easy enough to keep under control without devoting a lot of resources.  Why should there be a difference between “what the system says” and what physically exists in the warehouse? 

The reality is that achieving inventory accuracy is challenging and requires discipline.  Anyone who has actually rolled up their sleeves and participated in a complete physical count of inventory knows that it can be a very humbling experience.  In reference to a popular television series, counting inventory is considered by some to be a “dirty job”.  Boxes are often mislabeled, disorganized, mislocated, and unique packaging causes confusion.  Breakage, damage, and obsolescence add further complication.  Counting activities can be physically challenging; boxes are heavy and often difficult to reach (e.g. think using a scissor lift to the 3rd level of the warehouse).  All of this adds up to a use of precious resources that could be deployed elsewhere, especially considering that cutting a few corners on inventory management does not usually have an immediate effect.  It’s all too easy to “kick the can down the road”.  

What are the benefits of achieving a high level of inventory accuracy?

Inventory accuracy results in maximum sustained profitability, with contributions in the following areas: 

  • Maximum revenue recognition and on-time-delivery – there are no surprises when operators attempt to fulfill the “pick list”.
  • Lower cost-of-goods-sold (COGS) – there is no need to expedite small quantities of missing materials in order to satisfy a customer order.
  • Lower overhead costs – the urgent reactions to unexpected consequences related to missing inventory affect all departments.
  • Reduction or even complete elimination of theft/shrinkage and related “write-offs” – it is far less likely that inventory will be misappropriated by bad actors if everyone knows that the inventory is closely watched.
  • Harmony with external auditors – financial auditors rightly see inventory accuracy as a sign of overall company process integrity.  Inaccurate inventory invites additional scrutiny and auditing hours, along with higher associated costs.

Once inventory accuracy has been achieved, there must be continued commitment. When daily cycle counts show repetitive accomplishment of virtually 100% accuracy, executives need to realize that constant effort was required “behind the scenes” across the whole operational ecosystem to achieve it.  There are no shortcuts; success will not be sustained by relaxing the standards and reducing resources.  On the bright side, the relatively small investment in establishing and implementing procedures to maintain inventory accuracy is more than offset by the profit that results from removing the parasitic effects that are otherwise absorbed throughout the organization. 

Can companies struggling with inventory accuracy simply fix the problem on their own? 

The simple answer is: “No they can’t”.  One might think otherwise, but you can’t solve a problem using the same mindset and resources that got you into the problem in the first place.  Here’s a related question: What is the primary goal of daily cycle counting? If your answer is: “to true-up the system inventory to the physical count”, then your answer would unfortunately be incorrect!  But don’t feel bad, over 90% of operations professionals answer this question incorrectly.

Windstream Capital has the solution for fixing a company’s inventory issues. 

We work with your team, usually within a 4 to 6 month limited engagement, to establish a proprietary and proven 3-step program that solves inventory problems permanently, putting you on a path towards greater efficiency and improved financial performance.  Take the first step and learn more by scheduling a free, no obligation consultation.  Contact us at: hello@windstreamcapital.com.

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