I interviewed John Martinous who discussed Importance of Accurate Inventory Control.
...today, John.And today we're going to discuss the importance of accurate inventory control. Before we start, can you provide a brief background of yourself?
- Thank you for having me. I've been in various supply chain management positions throughout my career. I was an inventory control manager with Merck Pharmaceuticals, and I've been a director of logistics with a slot machine manufacturing company and a senior director of operations in supply chain with a pharmacy benefit manager. So I've had many different supply chain management roles where I've managed large warehouses full of inventory up as high as almost a billion dollars with Merck. It was a billion dollars in drugs in probably, maybe, a 200,000 square-foot warehouse. It wasn't a real big one, but the drugs were very expensive. So it was a lot of money involved.
So the importance an accurate inventory, throughout my whole career, I've always seen the repercussions of not having an accurate inventory. You end up stressing out your purchasing department because they have to buy something that you already have. This is assuming that you don't have an accurate inventory, and there's something in your warehouse that you need. Your system is saying that you have it and that it's in a specific location. And somebody goes to that location to get it, and it's not there. And they send out search parties looking for it, and no one can seem to find it, but you thought it was there, and now you have to end up doing an emergency purchase order and having it expedited and paying expedited shipping and buying the same thing twice. And those are all expenses that you could avoid if you had an accurate inventory. Not only that, but you improve customer service because now the customer has to wait an extra day or two to get the product because you have to buy it again and then prepare it and ship it to them.
One of the more important aspects of inventory control is cycle counting. That's the way that I've found that we could keep very accurate inventory. A lot of people do wall-to-wall inventories every year, and we used to do that at Merck and at the slot machine company which was Aristocrat Technologies. That's one way to keep an accurate inventory. But if you only do it once a year, the inventory will stay accurate for maybe a couple of months after you do your wall-to-wall inventory, and then it will slowly start to creep back into being inaccurate. You might be at like a 95% after your wall-to-wall inventory, and then it will go down to 90 and 85 and 80. And before you know it, you're at a 60% inventory accuracy level,and many things are starting to disappear.
So one of the better things you can do as a warehouse manager or inventory director or manager is put a cycle counting together that will go out and count various items every month. What you want to do is you break down your items into A, B, C, and D movers, and you stratify them. And the A's are your most important ones. They're the ones that make you your most money, and they're the highest velocity and highest dollar amount items. And you have to fig out — there's different way you can do this and figure out which ones are your A's and B's and C's. But usually, it's the 80/20 rule. The A's make up 80% of your sales and 20% of your inventory. Then the B's are usually about maybe 10% and the C's are about 5% and the D's are generally items that you don't really keep on hand that often. You just kind of order them when you need them. And if they are on hand, they're generally pretty slow and don't get used too often. And they may, if they're a drug, they could expire before you even use them.
So what you want to do is put together a team of cycle counters that can count all the A items. Generally, you want to do it about every two to three months. And then the B's you generally count about every six months. And then the C's you can count once a year or once every six to nine months. And then the D's you generally do once a year or during a wall-to-wall inventory.
What that will do is you'll make sure that if the system says you have 100 of your A items and you go out and you only count 95, you're going to know that there is a discrepancy. What you want to do is have a process in place for reconciling those differences. So if somebody goes out at the beginning of the month and counts an A item, and there's supposed to be 100 of them in the warehouse and they only count 95, then you want to come up with a process where step one is you go out and you send a search party out and check some other locations where the same item might be and see if someone put it back in the wrong spot. And then the second step might be to pull some receipts and make sure that when it was received that it was received correctly because a lot of times, people could do what they call a "fat finger" and key it in wrong when they received it.And say they received 10 cases, they may have typed in an extra zero and put 100 cases. Or they could have shorted it and only put one case instead of 10. Then that goes into the system. The product will be there, but it will be represented incorrectly because whoever received it typed in wrong.
So you want to check the receipts and make sure all the receipts are accurate. When I say accurate, you want to make sure that whatever you're getting billed for from the vendor is what you actually received and keyed into the system. And if there was something on backorder or something was damaged in return, you can see that and take that into consideration. But you're just trying to make sure that it matches up.
And there's probably two or three other steps that you want to put into this process that, when you find an inventory discrepancy, that you go through this process to make sure that you get it straightened out. And a lot of times, you'll either physically find it, or you will find that there was a receiving error or somebody may have counted it incorrectly during a previous cycle count, and you have to reverse their adjustment. It could be a number of issues. You want to make sure that when you do an adjustment that you're actually helping the accuracy and not hurting the accuracy.
There's different ways to keep an accurate warehouse. But we'll stick to cycle counting for right now.
So after you count your A's... It's all up to the manager of the warehouse or the director how often they want to do the A's. Because the A's are the most important items. You can do them every week, every month, every quarter. But you want to make sure that you're doing it at an interval that is keeping everything accurate. And if you have any items that are problems, that historically give you problems because they're in an odd lot, like they come in cases and packs and rolls or something that's hard to count and people pick them wrong and pack them wrong... They may give someone extra ones when they shouldn't have or short someone... You want to make sure that you count their more often because those are going to be ones that will pose problems. You'll be able to identify those as you cycle count. There will be ones that are easy, and they're always correct. Then you'll have the ones that need to be counted more often because they get processed incorrectly just because of the way they're packaged.
What you want to do is identify these. As you're cycle counting, you can use your cycle counting results as a sort of training guide where you can say, "Wow. We've counted this one wrong. Every time I count it, it's wrong. Somebody is either picking it wrong, packing it wrong, receiving it wrong, or something, and we need to do some training to make sure we get to the root cause and that this doesn't continue to happen."
I've talked quite a bit now, Dustin. I'm sorry. Did you want to ask any other questions before I...?
No, I think this is great. Do you have any final recommendations?
My final recommendations is I've always seen, when I was warehouse manager or director of operations, training is very important. And you want to have a staff of people, of employees, that understand the importance. So you want to be keeping them informed of what you know as far as which items pose problems and which items are easy and all the things that I just discussed. You keep everybody informed so they're as smart as you and can go through the warehouse and identify those things when you're not around and be able to reconcile them. The smarter everybody on your staff is, the more accurate your inventory will be.
Thanks for sharing today, John.
About John Martinous
Supply Chain Solutions