An inventory system is “broken” when it cannot provide reliably accurate on hand quantities to drive MRP and workflow processes. A broken inventory can be fixed by implementing a set of proper inventory practices and performing an initial stock count:
Practices to Be Implemented
To address the source of chronic inventory problems, you must implement the following practices:
Issue material to jobs in real time
In order to insure accurate on hand quantities, it is essential that material be issued to jobs in real time through the Work Center Schedule screen prior to starting associated job sequences. If any errors exist among BOM component specifications, they are likely to be detected at time of use and can be corrected to prevent future errors. The most common source of inventory errors is to wait until job finish to “backflush” material after the fact without any scrutiny of actual components and quantities used.
Use locations
Do not avoid locations by using a single dummy location that has no meaning. Use multiple locations so that stock quantities are tracked against actual locations. Using multiple locations reduces errors, increases inventory accuracy, and saves time by facilitating job issuing, order picking, and stock counts.
Detect and correct BOM errors immediately
Inaccurate BOM component specifications are a major source of inventory errors. Material gets issued by memory instead of from a pick list or dispatch list and then is pre-filled in the Job Issues screen without scrutiny, in which case errors go undetected. Instead, issue material from a pick list or dispatch list so that errors are detected when the issued material does not conform to what is needed on the shop floor. When BOM specification errors are detected out in the shop, see that the BOM gets corrected immediately so that errors do not get perpetuated in future jobs.
Correct on hand discrepancies immediately when discovered
Whenever a discrepancy is discovered where the physical stock quantity within a given location differs from the on hand value, see that the on hand quantity gets corrected immediately with a stock adjustment so that the discrepancy does not adversely affect future processes.
Use cycle counting
Instead of conducting mass physical inventories, which are highly disruptive to operations and notoriously error-prone, implement a cycle counting program where you count selected items, item categories, or location groups on a periodic basis. Small cycle counts are relatively easy to conduct and can be performed with minimal disruption to ongoing operations.
Assign all PO lines a realistic supplier price
It is essential that all PO lines are assigned a realistic supplier price, which is translated into a unit cost that is applied to PO receipt transactions. The receipt cost updates the item’s inventory cost and is the cost basis for any subsequent job issue or sales picking transactions.
Receive finished items at a realistic cost
When finished items are received to inventory in the Job Receipts screen, always make sure the unit cost is realistic, meaning that it is within acceptable range to the estimated job cost and is not affected by an obvious costing error.
Initial Stock Count
After the above practices are implemented, you must conduct an initial stock count to achieve an accurate inventory that can be maintained from this point forward.
Perform a mass stock count
The only way to get a valid starting point for ongoing inventory maintenance is to perform a mass stock count for all items using the Stock Counts screen. Ideally this would be performed when the shop is idle. For example, you may cease production on a Friday and use your workers to help conduct the stock count. Whatever is not counted can be finished on Saturday so that inventory is corrected by Monday when you can resume full production.
Correct item inventory values, if needed
If your inventory is also broken in regards to item inventory values, you must make a mass correction to item inventory costs, which is done by taking these steps:
Step 1 – Update P Item Costs
Use the Estimated Purchase Costs screen to update P item estimated costs.
Step 2 – Run a Mass Cost Rollup
Use the Cost Rollup screen to run a mass cost rollup on all your M items.
Step 3 – Make a Mass Inventory Cost Update
Go to the Change Inventory Cost screen and generate a list for all items. Use the Mass Replace option to replace inventory costs with each item’s Est Cost.
NOTE: The mass replace will likely create a massive posting to your Inventory Adjustments account that will result in a large profit if your inventory was understated or a large loss if your inventory was overstated. There is no way to avoid or smooth out this one-time posting event.
