The goal of every warehouse is to have 100% accurate inventory. However, any warehouse manager will tell you that 100% is not possible because of �shrinkage.� Shrinkage is industry jargon for missing inventory, usually caused by loss, theft, shortage in receiving, over shipment or simply misplacement in the warehouse.
Warehouse managers are correct � shrinkage will always be present. But that doesn�t mean you have to accept it. The constant goal is to reduce shrinkage through continuous improvement in the warehouse. Managing shrinkage requires an inventory maintenance plan. This plan will include cycle counting, the industry standard method for improving inventory accuracy.
However, most people don�t understand the true function of the cycle count. A cycle count is not a method for improving inventory accuracy. It is a method for finding inaccuracies in the ware-housing process that lead to shrinkage. The result of a cycle count � fixing process errors found � improves inventory accuracy in the future. There are several keys to a successful inventory maintenance plan.
Senior management interest � This is the first and foremost element to establishing an inventory maintenance plan. Senior management interest will drive the busy warehouse manager to see the forest, not the trees. Inventory accuracy should be part of the warehouse manager�s individual key objectives for a given appraisal period. After all, inventory accuracy is the single most important objective of a service parts warehouse.
There�s good reason for senior management to take interest in inventory accuracy: the bottom line. A large, high-tech company that provides 24 hour service to its customers in the US may have upwards of 130 inventory locations, with close to $300 million in inventory stocked. Writing off four percent of inventory to shrinkage translates to a $12 million annual hit.
Each percentage point the warehouse gets closer to 100% is money straight to the bottom line, and it provides immeasurable value in customer satisfaction.
Documented program � The inventory maintenance plan should be part of a larger quality program. In any case, it must be documented for the warehouse. The plan should establish the date and time of the formal count, how the inventory is frozen and who is responsible for each step. It should further document the process for the count, the reconciliation of errors, reporting and the methodology of selecting parts for counting.
Established methodology � World-class warehouses achieve 99.9% inventory accuracy, but 99.9% of what? Is it piece count or value? A correct count of 99 pieces out of a 100 is viewed differently when the 99 correct pieces cost $10 and the missing piece costs $1,000. With current WMS technology, it is fairly easy to report both the counted variance and the cost variance. When dealing with cost variance, always use the absolute variance. The absolute variance is considered the absolute value of all variances. If two SKUs are counted and the first SKU has an extra $100 part and the second SKU is short a $100 part, a summation of the cost variances zero out and will be viewed as a zero variance. The absolute variance is $200, the true value of the warehouse�s errors.
Counting system � Most warehouses today have a WMS system installed that has a cycle counting function. However, �system� does not necessarily mean an IT system. It is good if the warehouse has an IT system to support the count, but a spreadsheet is just as effective. The important point is to have a systematic way of making and recording the count.
Multiple passes � Each cycle count should have a minimum of two counts or passes. The first pass identifies variances, and the second pass counts the variances to ensure they are truly variances. A different person should conduct each pass. The best method has a supervisory person conducting a third pass on parts that can�t be reconciled in the second pass. This provides supervisory oversight of the count and ensures management is aware of each inaccuracy. Additionally, the first and second pass accuracy should be measured and compared. Is the first pass always low and the second pass high? This indicates lack of attention in the count or unfamiliarity with the parts. The counter should always be familiar with the parts being counted, although all warehouse personnel should be trained in proper cycle counting.
Double check your database � WMS systems usually update the inventory record with a few keystrokes and a password. But a human needs to take the time to view the updated records. Check for correct data entry, and verify that the WMS system is correctly writing data to the database. A warehouse that has a bug in the WMS software, and isn�t occasionally checking it, is compounding error upon error without knowing it.
Reconciliation � Reconciling each variance can be tricky, especially in a very active warehouse. Duplicate counts are a constant problem. Open orders that have been picked but not shipped will cause a shortage on the shelf during the count and, if updated as a shortage, will double the error when the order ships. Additionally, a receipt that is on the shelf and not recorded on the inventory record can cause another duplication error. The part will be added to the inventory record during the count and when it is actually received onto the inventory system.
Pinpointing the problem and fixing it � Once the count is completed and all variances reconciled with receipts or shipments, the improvement function of the maintenance plan takes over. Each variance should be broken down to the root cause. The warehouse manager must track each variance from receipt to shipment to find out where the system failed. Was data entered incorrectly? Was stock placed in the wrong bin? Were the wrong parts shipped in error?  After identifying the root cause problems for each variance, the warehouse manager needs to implement a solution to prevent the error in the future. It is not good enough to fix a single problem; the goal is to prevent future problems.
Document the count � The last step in the process is to record the variance, root cause and what fix was implemented. Now the warehouse has a record of variances, a very useful management tool. The warehouse manager will have a record of problems uncovered that he may use to justify further technology investment. Basic trend analysis can provide the warehouse manager with focus areas for training personnel and will provide justification for training expenditures. Also, it shows that the warehouse is proactively preventing shrinkage and aggressively implementing continuous warehouse improvement.
Inventory accuracy is the top requirement of any warehouse. Confidence in the data in the inventory record is critical when every extra minute counts.
Steven Hall is the general manager of DHL Worldwide Express, Inc.�s Miami Express Logistics Center. He may be reached by e-mail at or by phone at 305-593-9600 ext. 304.