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Keeping Stock Balances Accurate
WINNING STRATEGIES FOR DISTRIBUTION
Stock Balances Accurate is also known as :
stock balances,
stock balances accurate ,
asset inventory control,
Stock Portfolio,
How to Balance Your Stock Portfolio,
Also stood for:
Stock Management,
Inventory Management,
Stock and Inventory Management,
Daily Stock Balance Report,
Stock Balance Report.
Contents
Helping Distributors Maximize Business Potential Through Education and
World-Class Technology
The First Steps to Keeping Stock Balances Accurate
Where to Begin? Understanding the Problem.
Record All Material Movement.
Put Your Best People in Receiving and Stocking.
Consider Bar Coding.
Cycle Count Your Products on a Regular Basis.
Leaping Ahead with Microsoft
Business Solutions for Distribution
Helping Distributors Maximize Business Potential Through Education and
World-Class Technology
From Microsoft Business Solutions
Our goal is to help distributors reach their maximum business potential by
delivering connected solutions designed to meet unique business processes
through trusted partnerships and ongoing service.
This report is the second in a series of white papers designed to help
forward-thinking distributors increase efficiency, customer service and
profitability with smart inventory management strategies based on tried and
proven methods and best practices.
The author, Jon Schreibfeder, draws from decades of experience helping more
than 1,000 distributors achieve better inventory management. A popular speaker
at distribution conferences, Mr. Schreibfeder has literally "written the book"
on this topic, with Achieving Effective Inventory Management now in its second
edition.
As a leading provider of specialized distribution and business management
systems, Microsoft Business Solutions is pleased to sponsor this series. We are
committed to serving the success of companies in the distribution industry
through education and world-class technology.
The First Steps to Keeping Stock Balances Accurate
Where to begin? Understanding the problem.
Many distributors spend thousands (and hundreds of thousands) of dollars
implementing new computer software systems. Often these systems are purchased
to help these companies gain control of what is probably their largest
investment: their inventory. But sometimes these distributors find that they
are no better off after the new software is implemented than they were with
their old system. Management is frustrated and feels that they've wasted a
lot of time and money. We've discovered in 23 years of working with
computerized inventory systems that often the problem causing this
dissatisfaction has nothing to do with the software. The new system doesn't
perform up to its potential because the on-hand or available quantities of
products in the new software do not agree with what is physically in the
warehouse. This situation causes many problems:
- Customers are disappointed because they are promised material that the
computer says is on-hand, but is not physically available
in the warehouse
- Inside salespeople cannot rely on the computer's stock balances and must go
out in the warehouse to physically check stock
- Material is not reordered
when the actual stock balance falls below the minimum quantity in the computer
system. Products are either replenished too early (if there was actually more
than the computer's stock balance in inventory) or too late (if there was
less than the computer's stock balance on the shelf). The result: overstocks of
some items and stock outs of other products.
- Buyers are forced to overstock
inventory. Why? Well compare your inventory to a checking account. If your
spouse refuses to record checks as they are written and balance the checkbook
every month, you are forced to keep a large balance in the checking account
to avoid bouncing checks. If all disbursements and deposits are properly
recorded, a lower balance can be maintained in the checkbook and the freed up
money can be put to better use.
It's obvious that maintaining accurate stock
balances is critical to achieving effective inventory management. In this
document we'll look at some of the policies and procedures you can put in
place to achieve this goal.
Record All Material Movement.
A salesperson
walks into your warehouse and walks out with a "sample" for a customer. A
warehouse worker is cutting two lengths of 10 foot pipe into 20 one foot
pieces. He makes a mistake and cuts one 11" piece. It's thrown in the scrap pile
when no one is looking and he takes another 10 foot piece out of stock to
complete the job. A salesperson brings back a box of assorted left over material
from one of his customer's completed projects. He dumps the box in the
warehouse and takes a list of what he thinks is in the box into the office and
has a clerical person issue a credit. All of the credited material is added
back into inventory (at least in the computer). But when the warehouse
manager finally unpacks the box she finds that more than half of the material is
not suitable to be resold and throws it out.
These are three examples of how
not recording material transactions properly can result in inventory
inaccuracies. Successful distributors develop and maintain a policies and
procedures manual. This is a step-by-step guide for processing any transaction
that affects inventory. To create your company's manual, start by listing all
of your inventory-related transactions: This list might include:
- Normal
stock receipts ' From previously issued purchase orders and transfers
- Unexpected stock receipts ' The stuff that just shows up on your receiving dock
- Requisitions ' A request for material to be consumed within your company
- Emergency requisitions
- Sales:
- Orders to be delivered
- Orders to be
picked up
- Cash sales
- Direct shipments
- Orders for non-stock
products
- Transfers to other warehouses or facilities
- Assembly orders
- Bin-to-bin
transfers within your warehouse
- Returns of stock material
- Returns of
non-stock material
- Returns of damaged material
- Returns to your
supplier
- Adjustments to on-hand quantities ' Who is allowed to approve
adjustments? Under what circumstances?
- Scrapping and writing-off stock
You probably can add other transactions to this list. Circulate the list
among your employees to be sure that you have included every function they
perform that will affect inventory balances. Outline how each transaction should
be processed. Then circulate and review the resulting policies and procedures
guide with all employees who have access to inventory. Make sure that your
procedures do not allow material to "fall through the cracks" and that you
have specified how damaged inventory should be identified and handled. In the
future there will be two ways of handling stock: your company's approved methods
and the wrong way!
Unfortunately, no computer system can guarantee that all
material related transactions will be properly recorded. People tend to find
excuses for going around the system. Some of them may be good reasons. But any
material movement that is not properly recorded results in inaccurate stock
balances. We have found a simple solution to this problem. Post a clipboard near
every exit of your building. A simple form on the clipboard contains five
columns:
Establish an unbreakable policy that any material removed from the
warehouse must be recorded in your computer or on the clipboard form. A
clerical person can enter the transactions listed on the clipboard into your
computer system once or twice a day. But for this simple solution to be
effective you must enforce an unbreakable policy: Any material removed from the
warehouse that is not recorded in the computer or on the clipboard will be
considered stolen! Your employees must realize that you are serious about
achieving effective inventory management!
Put Your Best People in
Receiving and Stocking.
Many distributors have a bad habit. They assign new
warehouse employees to the receiving dock to "learn the business". Management
thinks that because they do not have any direct customer contact, these new
recruits cannot cause any problems or get into any trouble as they are
trained. You must realize that receiving and stocking are the most critical
functions in your warehouse. Only your most experienced and reliable
employees should be assigned to these tasks. Why is receiving and stocking so
important and challenging?
- Receivers must be able to properly identify
products as they are received ' Many items are similar in appearance but
actually are very different products. A receiving person must be so familiar
with your inventory that he or she can accurately verify that vendors have
shipped the right quantities of the products that were ordered and that the
material is in suitable condition to be sold or used.
- Stocking People Must Know Where Material Should be Stored ' If material is put away in the wrong
location how easy is it to find? If you have a 50,000 square foot warehouse,
it may be like looking for a needle in a hay stack. Misplaced merchandise is not
available to fillsales or production orders. Customers may be disappointed
and you may have to reorder a product that is lost somewhere in your facility.
The result: you lose both money and your reputation as a reliable supplier.
Experienced people know where material goes and how it should be put away to
minimize the cost of filling orders. Reserve these jobs for workers you can
trust.
After initial training new employees should pick orders under careful
supervision. It is easy for an experienced person to check their work. And if
any mistakes are found, they can be corrected without much effort
Consider Bar Coding.
Bar coding is a wonderful tool for improving
both warehouse efficiency and the accuracy of on-hand quantities. Advantages of
bar coding systems include:
- Verifying that the correct item is being
picked or put away ' Bar code labels can be printed on warehouse documents as
well as bin locations or the actual product. When a warehouse worker fills an
order, she can scan the bar code on the pick ticket and then the bar code
on
the bin or item. If the bar code reader beeps nicely, she knows that she has the
right product. If it makes a harsh sound the picker knows
that the item is
not the product listed on the order. In the same way bar codes on receiving
documents help ensure that material is put away in its proper location. The
resulting reduction in errors not only saves money but helps to improve customer
service and your reputation as a reliable supplier.
- Instant Updates of
Computer Records If you are using radio-frequency bar code units, your
computer's on-hand quantity of an item in a bin location is reduced as soon
as the picker scans the item as he removes it from the shelf. In a paper system,
the on-hand quantity of the item usually is not reduced until every item on
the pick ticket is pulled, the paperwork is returned to the office and a
clerical worker enters a confirmation of the picked quantities in the
computer system. The real-time information provided by bar-coding helps keep
inventory accurate and allows inside salespeople to have confidence in your
perpetual inventory system.
- Elimination of Many "Keying" Errors Every
time a human being keys information into a computer is another opportunity for a
mistake to happen. Bar coding replaces many manual data entry tasks and has
the ability to verify that accurate information is being entered.
Cycle Count
Your Products on a Regular Basis.
Many distributors conduct an annual
physical inventory. That is they count the products in their facilities once a
year. Unfortunately we've found that most physical inventories are a total
waste of time and money. Why?
- Usually anyone with a pulse is drafted to count inventory
during the physical ' Even people who are not familiar with your
products will be sent out to the warehouse so that all of the products can
be counted in the time allotted.
- Workers do not enjoy the physical count
process ' They probably have better things to do with their weekend than spend
it in a hot or cold warehouse counting products. In all probability their
actual objective is not to perform an accurate count, but to put down on the
count sheet whatever management will accept so they can go home.
- There
is a tremendous time pressure to finish the count ' Shutting down operations for
a physical count is a very expensive process.Usually at the end of the time
allotted management will decide to accept the existing count as being as
"accurate as possible" so that the company can return to the task of
servicing customers. Many discrepancies between the computer's perpetual
inventory and the quantity counted may remain unresolved.
Even if an
annual physical count is 100% accurate, how long does it stay accurate? A week?
A month? Many distributors respond that on hand quantities only remain
accurate until they start shipping material again.
For most distributors
cycle counting provides a much better tool for maintaining accurate stock levels
than an annual physical inventory. Cycle counting is the process of counting
a few products every business day throughout the year. There are three common
methods to determine what products to count on a specific day:
- Random
Selection ' Products to be counted are chosen at random. While this method keeps
potentially dishonest employees on their toes, it does not ensure that all
items in a warehouse will be counted on a regular basis.
- Geographic
Selection ' Products are counted in sequence. Starting at one end of the
warehouse a certain number of products are counted each day until the
counters reach the other end of the building. All products are counted the same
number of times, even though some products are more susceptible to
discrepancies than others.
- Rank Based Selection ' Products that are sold
most often (regardless of quantity) or have the highest cost of goods sold are
counted most frequently. Slow moving products and dead stock items are only
counted once a year.
Of the three methods we've found that rank based cycle counting to be the
most effective at maintaining accurate stock levels. The more frequently an
item is sold, the more chance for inventory inaccuracy. After all, every time
someone fills an order or puts away a stock receipt is another opportunity
for an error to occur. And the products that are requested most often are
probably extremely important to your customers. In order to provide good
service, it is critical that you have accurate counts for these items.
It is
interesting that, for most distributors, relatively few products are responsible
for the majority of product requests (also known as ‘hits'). You may have
heard of the 80-20 rule or "Pareto's Principle". This theory states that 80% of
your sales are derived from 20% of your inventory items. We've found this not
to be true. Usually only 10% - 13% of a distributor's inventory items are
responsible for 80% of activity and 50% of items are responsible for 95% of
sales.
We want to count the few items responsible for 80% of sales very
frequently, perhaps six to eight times a year. Items with fewer hits can be
counted less often. Let's look at a typical rank-based cycle counting program.
Items are sorted in descending sequence by either hits or cost of goods sold.
The items that are responsible for 80% of total activity are assigned to the
"A" rank, products responsible for the next 15% of activity are assigned to the
"B" rank, "C" rank products include the products that are responsible for the
next 4% of activity and "D" rank products are responsible for the last 1% of
activity. Products with a rank of "X" have no cost of goods sold or hit
activity (they're dead stock).
Count the "A" rank products six times a year
Count the "B" rank products three times a year
Count "C", "D" and "X"
rank products once or twice a year
Rank based cycle counting ensures that
your counting activity is productive. Spending just an hour or so a day counting
can make the difference in maintaining an accurate perpetual inventory
system.
It takes a lot of discipline to implement and follow a program in
which you count a certain number of products every business day. Many
distributors have tried cycle counting and abandoned the program. They've been
frustrated as other tasks have interfered with the process or they have not
been able to complete counting all of the products scheduled on a certain day.
The following ideas have helped many of our customers develop successful
cycle counting programs. These companies are working "smarter" rather than
"harder".
- Set up a cycle count schedule for the entire year ' Know in
advance what products you plan to count each day. If for some reason you are
unable to count all of the products scheduled one day, make a commitment to
"catch up" on the following day. Here is a sample count schedule for one of
our customers. They are open for business 250 days per year:
- Determine an
acceptable level for count accuracy ' In a perfect world you would only be
satisfied with a 100% accurate count. But how much effort do you want to
extend looking for five missing pieces worth a total of 35 cents out of a total
inventory of $1,000,000? Most successful distributors set limits on
discrepancies that require a recount and a search for missing material. For
example, one of our customers will order recounts if the counted quantity
differs from the quantity in the computer by more than 5%, or the total value of
the discrepancy is more than $10. Minor differences between the counted quantity
and perpetual inventory are posted without the item being recounted.
- Be sure to check tag and hold and other staging areas for missing stock
before posting discrepancies ' Inventory may not be missing, just temporarily
stored in another location.
- Have counting performed by conscientious
experienced warehouse workers who know your products ' These people know what
they are counting and can count faster and with more accuracy than
inexperienced workers. Inventory are posted without the item being recounted.
- Show the counters the current on-hand quantity ' There is an argument that you
can get a more accurate count if you do not show counters what they are
supposed to find in inventory. But we have found two advantages to showing
counters what they are expected to find in stock:
' Counters can count up
to twice as many products in the allotted time if they know what is supposed to
be on the shelf. With this increased productivity you probably can afford the
time to selectively audit counts to be sure your workers are not taking short
cuts.
' If the counted quantity is less than what is expected, counters will
tend to look in nearby locations for the missing material. If found, it can
be put in its proper location and included in the count. This reduces the number
of count discrepancies and the time spent looking for missing material.
Some people think that you must cycle count before or after normal business
hours, when there is little or no material movement. Though ideal, this is
impractical for many distributors. We've found a simple method that allows cycle
counting to be performed during the business day:
- The counter obtains a
list of the products to be counted that day
- He or she places a label
reading "Cycle Count Today" on the bins that are being counted and a card in or
on the bin. This card lists the item and bin number along with four columns
with the following headings:
- Time
- Transaction Type
- Order Number
- Quantity
- The counter prints a listing of items to be cycle counted
including the current on-hand or shelf quantity. He notes the time the report is
printed.
- If a quantity of a product is removed from or added to a bin
marked "Cycle Count Today", the warehouse person will note the time,
transaction type (i.e., sales order or stock receipt), order number and quantity
on the card that was previously distributed.
- When the counter counts a
specific bin he will examine the transactions listed on the card. If an order
was filled after the count sheet was printed he will add the quantity on that
order to the quantity found in the bin. The total amount should agree with the
on-hand quantity on the count sheet (i.e., the computer's perpetual inventory
quantity when the report was printed). He will make similar adjustments for the
other transactions listed on the card.
Cycle counting is a very important
element in a program to maintain accurate stock balances. Most highly
profitable, successful distributors have established cycle counting programs.
One of the advantages of implementing a radio frequency bar coding system is to
simplify the cycle counting process. Because the computer's on-hand stock
quantities are updated as soon as material is scanned, the quantity in the bin
should always agree with stock level in the computer. These systems can be
programmed to occasionally prompt a picker to verify the remaining balance in
a bin after an order has been filled. As a result cycle counting becomes a
byproduct of the order filling process!
If you don't know what is actually in
your warehouse or storeroom, you cannot provide customers with reliable stock
availability information and you won't reorder products at the proper time.
Maintaining accurate stock balances is a vital component of an effective
inventory management program. Without correct on-hand quantities it is
difficult if not impossible to meet your customer service and profitability
goals. You will also not be able to take advantage of the inventory
management tools available in today's advanced computer software packages
Leap Ahead with Microsoft Business Solutions for Distribution!
Microsoft
Business Solutions (MBS) now offers an integrated set of specialized
distribution and business management systems that we call Microsoft Business
Solutions for Distribution. You'll find deep functionality in distribution
modules such as inventory, order and purchasing management, sales forecasting,
e-commerce and warehouse management. These distribution-focused modules
integrate smoothly with dozens of business management systems to meet the
diverse needs of your business, including accounting, customer relationship
management (CRM), human resources/payroll, distribution and more.
It's all
designed to help you improve profitability by streamlining and connecting every
step of your operations ' from inventory and sales order management through
forecasting and financial reporting. And it comes packed with tools to help
dramatically reduce costs, eliminate time-consuming processes and allow 24/7
access to information across your entire organization.
With Microsoft
Business Solutions for Distribution, you can build a total enterprise solution
that's simple and affordable. It will empower you to:
- Make smarter, faster
business decisions
- Improve employee and business productivity
- Gain a
competitive advantage
It's a Safe Choice ' It's Microsoft.
You can rely on
Microsoft to provide the foundation and resources to support your company's
important goals. With more than 200,000 customers worldwide, Microsoft
Business Solutions is a proven performer in thousands of distribution focused
companies.
With Microsoft Business Solutions for Distribution, you no
longer have to be a large organization to enjoy the big-league advantages of
powerful business-driving applications. From small, networked systems to
large client/server solutions, Microsoft Business Solutions for
Distribution can be customized to your needs. We can do this by leveraging a
range of proven, world-class distribution management systems.
Backed by
the finest support services in the industry, these products are based on
industry-standard Microsoft technology. They share a common code set and
connect easily into the Microsoft development platform, so leveraging
information across applications and the Internet is now simple and effective.
And they're fully compatible with familiar Microsoft productivity tools such as
Microsoft Office Easy-to-use and fully customizable, MBS products deliver
superior integration capabilities with other systems to help you achieve a truly
interconnected experience.
You don't have to wait to get a head start!
With the Microsoft Capital program, you may already qualify to have your
complete distribution solution financed. There's a certified Microsoft
Business Solutions partner near you ' ready to customize your solution to meet
your unique requirements.
Microsoft Business Solutions for Distribution connect easily with the
Microsoft platform a highly versatile environment that scales to meet
nearly any business software protocol. From Windows applications to specific
industry programs, Microsoft integrates seamlessly with your existing and future
enterprise systems, providing solid and reliable performance.
Call toll-free for more information on how
Microsoft Business Solutions for Distribution can move your business to the
head of the pack:
888-477-7989, option 1.
Microsoft Business Solutions
One Lone Tree Road
Fargo, ND 58104-3911
E-Mail: mgpinfo@microsoft.com
Phone: (888) 477-7989
Fax: (701) 281-6868
By Jon Schreibfeder Effective Inventory Management, Inc.
Compliments of Microsoft Business Solutions