Traking

Tracking

Tracking is crucial for successful inventory management. Item quantities, locations, and transaction dates and times are useful data to track. Without this knowledge, customer service levels will be poor; throughput and lead-times will suffer; and expediting, material handling, and opportunity costs will increase.

As a minimum, warehouses should track inventory by the following. Click on the arrow to see the three minimum recommended ways to track inventory.
 

Although warehouse systems record specific stocking locations to support efficient storage and retrieval, inventory information is also useful at various aggregated levels of detail. For example, the quantities of each item are aggregated within conceptual “nettable warehouses” of physical warehouses. Master production scheduling (MPS) and material requirements planning (MRP) do not plan at the individual stocking location level and use of the inventory data for “nettable" warehouses. Sales and logistics managers are often interested in the inventory quantities for an item or product line in an entire region

Inventory Systems and Identification

As one might expect, special processes, controls, and/or documentation are often put into place when accounting records need to be updated to reflect a change in assets, such as when material enters or leaves a facility. Another special process could be when a non-routine activity like the scrapping of inventory or an inventory adjustment takes place, which is often prone to errors.

Companies traditionally updated inventory information on paper cards. As time went on, the information began to be stored in computers, which allowed users throughout the company to access more easily the information in displays and reports that were useful to their needs (e.g., by various levels of detail by item and location). Larger modern business environments use warehouse management system (WMS) functions that either interface with the rest of their systems or are a component of their enterprise resource planning (ERP) software. Smaller environments (e.g., retail stores) may have inventory functionality that is part of their point of sale (POS) system.

Food, drugs, and items used in safety-critical environments are often subject to lot control. If someone identifies a problem with one unit, the company can recall other units from the same manufacturing process through their common identifying lot number. Items covered under warranty typically require a serial number to identify each unit uniquely. Material handlers may assign a unique identifier called a license plate number (LPN) to facilitate detailed tracking of a container. Whatever additional tracking identifiers beside the part number or item code are used, it is important that the system record this information in the inventory transaction history.

Bar Coding

The idea behind bar coding is to use coded symbols that are readable by scanning devices to identify products and/or locations. This identification may take place during many different processes, such as storage and retrieval, reporting of WIP progress, etc.

The bar code symbols may be linear (a single row of lines and spaces of varying but specified width and height, as shown in the first graphic to the right) or two-dimensional (either stacked linear codes or a matrix of dot-like cells – shown in the second graphic to the right).

The “language” of a bar coding symbol is called a symbology. The standards already in place for one’s business environment and trading partners largely determine the choice of symbology (e.g., UPC, EAN, etc.). Besides the symbology, system designers need to consider printers, labels, scanners, portable data terminals, and the WMS/ERP system.

Barcoding System Elements

Barcoding equipment selection decisions should be made on a total system basis. Compatibility of the three principle pieces of equipment, printer, label, and scanner, is a primary consideration. In addition, the barcoding equipment must be compatible with the production system, information technology system and the people who will use the system. For example:

• Labels must not tear, smear, become overly creased, or become detached in the production process.
• Scanners must be convenient for people to orient with respect to label location on the product or the product to the scanners.
• Label coding must provide adequate information to identify the material to the IT system.
• Printers must be fast or plentiful enough to keep up with production volume.
• Laser scanners may need to be protected or toughened to withstand rough handling in dirty warehouse environments.

The following is a checklist of issues and more frequent problems that should be considered in the selection of barcode systems and specific pieces of equipment.

Radio Frequency Identification

As an alternative to reading bar codes, a company can make use of radio frequency identification (RFID). Tags can be read as long as they are within range. A particular orientation or line of sight is not required. Both the tags (transponders) and the readers (transceivers) have antennas to communicate back and forth between each other. The reader is sometimes called an “interrogator” because it signals the tags and decodes the information sent back. The tags are usually small. The active element is a microchip that can be smaller than a square millimeter (Granneman, Scott. “RFID Chips Are Here.” The Register. http://www.theregister.co.uk/content/55/31461.html).

Tags can be either active or passive. Active tags use batteries. The smaller “passive” tags, more commonly used in supply chain systems, make use of energy transmitted from the reader in the form of radio waves. Companies use RFID in tracking everything from animals to WIP to retail goods. Users can embed ultra-thin RFID tags in product labels to form “smart labels” with extensive information content (“The Latest RFID Equipment.” BuyRFID.com. http://www.buyrfid.com/catalog/default.php?ericpath=1).
Tags can be either active or passive:

PASSIVE TAGS

More commonly used in supply chain systems. Make use of energy transmitted from the reader in the form of radio waves. Passive tags usually cost less than active tags and have a longer operational life. The trade-off is that passive tags have shorter read ranges and require a more powerful reader.

ACTIVE TAGS

Active tags use batteries and cost more than passive tags. They typically have a shorter operational life. However, they have longer read ranges and do not require a powerful reader.

FID tags can also be read-only or read/write:
READ ONLY
Although an RFID tag can hold much more information than UPC symbols, if the tag is read-only, users cannot alter it after manufacture.

READ WRITE
A read-write tag can have identifiers dynamically assigned to it, track distribution points through which it has passed, or be completely re-used. Despite their flexibility, users should consider whether it makes more sense to store certain dynamic information (e.g., prices) in a central location cross-referenced to the tag identifier rather than store that information in the tag.

The cost of RFID, a lack of standards, and concern from privacy advocates who worry that consumer information will be misused has impaired the use of RFID, despite its potential (McCullagh, Declan. “RFID Tags: Big Brother in Small Packages.” CNET News.com. http://news.com.com/2010-1069-980325.html).

Topic Summary

Companies must track inventory quantities, locations, and transaction dates and times to manage inventory effectively. The system must update on hand, allocated, and on order quantities when transactions take place. The information may be stored at various levels of location detail that is useful for distinct functions (e.g., nettable warehouse inventory for planning systems).

Time-phased inventory planning projects future transactions, and identifying discrepancies makes use of past transactions. It is important that users update the inventory system soon after activities take place. Some manufacturers use back-flushing to update component quantities in production environments where a delay in updating quantities is acceptable in return for convenience.

Companies use lot numbers to identify items produced as part of the same batch (lot), perhaps to create the ability to do a lot specific recall of product. Serial numbers uniquely identify each item, which can be useful for warranties. Warehouses track containers with license plate numbers (LPNs).

Bar coding can reduce costs by greatly increasing accuracy and data entry speed. When used together with other tools, such as RF devices, they allow for more timely feedback and enhanced productivity. The selection process of bar code systems needs to consider issues such as the symbology used, accuracy at the expected scanning distance, scanning speed, fixed and variable costs, and suitability for the physical environment.

Although scanning devices can read RFID tags more remotely than bar codes, a variety of issues has limited the use of RFID. RFID tags are categorized based on whether they have a battery or not (“active” versus “passive”) and whether they are read-only or read-write.

Cycle counting

The conversation is so commonplace that it can be scripted. Most of us have played both parts in the tale – customer and employee. Basically, it goes a something like this.

Employee: “I’m afraid we are out of stock on that particular item.”
Customer: “But I just called 10 minutes ago and the person I spoke to on the phone said you have six in stock.”
Employee: “Yes, the computer shows we do have six but they seem to have disappeared. We’ve looked all over and can’t find a single one.”

Although the specifics of each conversation may differ, the result is always the same: a dissatisfied customer.

In this topic, you are going to learn one method that could help reduce the number of occurrences of the situation described above; namely, cycle counting. With the aim of improving customer satisfaction this module will detail the following principles of cycle counting:

• Define cycle counting and distinguish it from physical inventories
• Explain the importance of cycle counting
• Illustrate the steps involved in cycle counting

The Basics – Why Do We Count?

Cycle counting is any program using regularly scheduled intervals to count a portion of inventory -- the portion can be as little as one specific item or as many as half your items. Cycle counting is a continuous improvement program with the goal of improving inventory accuracy. Without accurate stock level information in a database, effective inventory management is impossible.

No matter what sophisticated purchasing and production tools you have in place, if the computer says you have 100 pieces of item A on hand, everyone will think you have 100 pieces; including those personnel in charge of buying raw materials and those involved in producing and shipping finished goods. Improved inventory accuracy will lead to the following:

• Fewer stock-outs resulting in improved customer service
• Fewer labor hours searching for items
• Reduction in expediting costs due to lost/missing items
• Reduction in occurrences of stopping the assembly process because you are out of parts
• Less waste and obsolescence
• No need to carry “just in case” inventory

Differences Between Cycle Counting and Physical Inventories

Cycle counting is different from performing physical inventories. Here is a quick comparison of the two.

Characteristics

Number of items counted

Requires plant to shut down

Time between counts

Performance measured

CYCLE COUNTING

A selected portion

No, regular activities maintained

Ongoing process, never stops

Operational accuracy

PHYSICAL INVENTORY

All ítems

Yes, complete shutdown

One to four times per year

Accounting accuracy

Why Do Errors Occur?

The root cause of inventory errors is unrecorded inventory transactions. It may sound simple, but keeping inventory balanced is a very complex issue. The following list is just a subset of all the possible transactions that can affect inventory balances:

• Receiving raw materials from supplier (addition of inventory)
• Shipping items to customers (subtraction of inventory)
• Transforming raw materials to finished goods (subtraction of one type of inventory, addition of another type – imagine if fifteen different production steps were needed!)
• Removing defective items (subtraction of inventory)
• Customer return of items (addition of inventory)
• Items scrapped while in process of being manufactured (subtraction of inventory)
• Temporary loan of items to sales, engineering or quality control (subtraction and possible addition back to inventory)
• Transfers of inventory from one warehouse to another (addition or subtraction of inventory)
• Incorrect adjustments to prior inventory reconcilements (addition or subtraction of inventory)

While there is usually paperwork and safeguards involved in all of these transactions, no system will be perfect. Imagine how easy it is to lose paperwork for one of the thousands of items made each day on a production line. Wouldn’t it be easy to misplace one receiving invoice over the course of a week or month if you are unloading hundreds of trucks in that time period?

Cycle Counting Steps

Not all cycle count programs are the same, nor should they be. One should design each program uniquely for their intended situation and/or environment. There are five common steps to consider when designing a cycle counting program. Click on the arrow below to see each step.

There are several different methods to select which items to count during a particular cycle count. Each of these methods has advantages and disadvantages depending on the particular situational needs.

• Geographic methods. Simply divide the warehouse into regions and count one region at a time. This method works best when particular items are stored in only one region. Each region can be counted with the same or varying frequency depending upon need and resources.
• ABC analysis. Classify items as A, B or C items. Volume and inventory dollars are two common ways to classify items. To perform this analysis rank order all items based on volume (or dollars). Starting with the top of the rank order classify those items as A items that account for 80% of total volume (or dollars). B items account for the next 15% and C items will account for the last 5%. A items are counted most frequently, followed by B items, followed by C items. One example would be to count A items 10 times per year, B items 4 times per year and C items one time per year.
• Variance methods. Count items where accuracy matters most. If one item or a group of items has the potential to shut down the plant and/or disrupt customer service, count those items most regularly. Items that have very little potential to disrupt operations are counted less frequently.
• Today’s problems. Count those items whose perpetual inventory balance (what the computer shows) is negative and those items that you have run out of, but the computer shows you have in stock.

Performing Counts

Unlike physical inventories where production and shipping functions stop and all paperwork is processed before counting begins, cycle counts are done while operations continue. It is essential that you process all paperwork for the items that you are counting, such as receipts of materials, production of materials, shipment of materials, etc. before you reconcile your count. If the paperwork is not processed, inventory adjustments will be wrong.

For example, if 400 pieces of an item are counted that have just been unloaded off a supplier’s truck but whose paperwork has not been received into the computer the items will be double counted – once in the cycle count itself and once the following day when the receiving paperwork is processed. This will lead to the perpetual inventory records being off by 400 pieces. This example demonstrates that a key issue in cycle counting is timing; the counting process must coincide with the timing of paperwork processing.

In addition, it is essential that you either count all of a particular item or be willing to reconcile both quantity and location. For example, if you decide to count part number 089-777 you must count those pieces in the receiving warehouse, quality department, engineering department, production line, shipping warehouse, etc. Alternatively, on a particular morning you can count all part number 089-777s in the shipping warehouse only, recognizing that any under or over counts for that location may be made up for by misplaced 089-777s in another area. The “investigation of errors” step in the cycle counting process generally involves checking all possible inventory locations until the error is found or reduced to an acceptable level.

Investigate Errors

You can define inventory accuracy from two different perspectives: an accounting perspective and an operational perspective. Select each link to learn more and see an example.

• Accounting perspective.
   
• Operations perspective.

It is extremely important that you investigate all significant variances. Errors generally occur in the processing of paperwork (e.g. wrong part number typed in from a shipping invoice) or omission of paperwork (e.g., 100 pieces of an item scrapped with no inventory adjustment). Safeguards should be put in place to ensure the same mistakes are not made in the future.

Eliminate Errors

While it may seem expeditious to simply go into the system and “change the quantity” or location, this is only a short term, partial solution and a bad habit to get into. A key thing to remember is that cycle counting is a continuous improvement process. It is essential that the root cause of discrepancies are identified and eliminated or minimized.

The investigation step of the process should be continued until the root cause of the miscount is identified. Eliminating errors entails taking long-term corrective actions to eliminating the source of the error. This is an essential step to improve inventory record accuracy.

The following chart shows some examples of errors and corrective actions:
Root Cause of Error
Operator incorrectly entered part number
Parts randomly stacked on a shelf were under counted.
RF scanning equipment was used improperly so several items were skipped on last cycle count.
Scrapped material was not reported due to the perception that management would penalize workers who had high scrap rates.
Inventory on an item was too high because an engineering change order reduced material requirements and the bill material quantity was not updated. Back flushing was used.

Corrective Action
Consider using barcoded labels and scanned data entry
Consider instituting a rule that units must be systematically stacked in groups of ten or some other appropriate number. Alternatively consider using dividers to sub divide shelves into even increments where only a specific number of units can be stacked.
Consider employee training or attaching a plastic coated “cheat sheet” to the scanner so proper procedures can be followed.
Consider rewarding employees for identifying and correcting the cause for scrap which is the real problem management should be concerned with.
Fix the bill of material to reflect the correct quantity usage.