How to Measure Inventory Accuracy
In this lesson we'll review the subject of Inventory Record Accuracy, and how to measure it.
Financial Versus Item Accuracy
We want to measure “accuracy” for a number of different reasons:
FINANCIAL REPORTING: Count it all; roll-up material costs, labor, and overhead burden according to company policy; check aggregate dollar value for marketability, materiality, reasonableness. The goal here is to have an “accurate” number to include in the company’sfinancial reporting. But here’s the challenge:
DOLLAR VALUES CAN BE ACCURATE, but still not reflect the ability of inventory to support production, assembly and shipping in a timely fashion. Offsetting errors, for example, can result in a 100% Operational Inventory Accuracy, but wreak havoc on production.
DEVIL IS IN THE DETAILS: What really matters is not having lots of parts, but having the right parts, in the right condition, in the right amount, at the right time! That’s a different measuring exercise. From a manufacturing perspective, what matters is the physical inventory itself.
Does It Go Both Ways?
Companies may claim to have an inventory accuracy of 97% or better, but they are often referring to the dollar value of inventory, not to an item-by-item accuracy measurement. As we stated in the previous slide, this is what actually matters to manufacturing.
If you achieve high item-by-item accuracy, then your dollar inventory accuracy will also be accurate. It doesn’t work the other way around, however.
Your minimum goal for item-by-item accuracy needs to be 98% or better. In the past, students of MRP were taught that 95% accuracy was the goal for MRP to work properly. In today’s Lean environment, however, that is not good enough.
Here’s how to measure accuracy.
Measuring Item by Item Accuracy
We agreed that item-by-item measurement of accuracy is needed. Now let’s define how you will measure “accuracy”. If “accurate” means that the computer records match exactly the physical quantities on-hand, then even the best manufacturing companies will have very low accuracy (or zero!). Fortunately this is not how you will measure accuracy.
Inventory ABC codes are a common way to classify parts, where A is a high-value or critical item that requires the most attention, B is an intermediate cost and criticality item, and C is a low-cost item that could be critical if you don’t have it. Most fasteners, for example, would be classified as C items, and an engine assembly would be classified as an A.
For each ABC code you will then determine an allowed range of variation, in order to calculate accuracy. Logically an A item will have a lower range of variability (maybe zero), and a C item will have a wider range. For C items, a +5% range may be acceptable, with a +2% range for B items, and a 0% range for A items. You decide what the ranges will be, but stay consistent in your measurements over time, and make them reasonably ambitious.
When you compare a physical count to the computer record, a “Hit” means that the physical count is at or inside the range. A “Miss” is when the physical count quantity is outside of the range. Count up the number of “Hits” compared to the total number of items counted, and you have your inventory accuracy percent.