Understand the Need for Cyclical Counting for A Strong ERP Process Today
Accuracy is the key to successful inventory management. Of course, having an ERP software that has plenty of functions to manage different crucial areas of business is a plus. But, even the most advanced and customized ERP cannot help you get the benefits you expect if a few prerequisites are not met.
Cyclical counting is the most effective methods to guarantee the accuracy of inventory that is one of the preconditions for a strong ERP and MRP system.
Effect of wrong inventory: There are plenty of issues that can occur if there is a difference in the physical and system registered stock. For e.g. where orders can’t be processed if the physical stocks aren’t there, though the system says otherwise. Another issue is when you have the stock, but the order is rejected as the system believes there is no stock for that product. Such issues can affect order fulfillment and satisfaction.
Incorrect inventory records would mean no planning activities, where the ERP or MRP system doesn’t create the required manufacturing plans. This means either work orders are fulfilled in time or delayed and vice-versa for purchase orders that may or may not be delayed.
On the other hand, where stocks and materials are present at the warehouse but not in the system, there can be needless production or purchases leading to increasing in stock though not in demand, erroneous cost records etc. Wrong inventory records can have a cascading effect in every department of your business that can cause inter-departmental conflicts, uncertainty and anxiety.
Need for Accurate Inventory: An accurate inventory management is an important outlay for any company. Correct stock can help with better productivity and in turn, create better customer fulfilment and repeat orders, which helps the bottom line eventually. Accuracy in inventory is crucial for effective operation and management of all business processes.
Tools for Accurate Inventory: There are several executive, procedural, technical or physical methods and tools that organizations can make use of to guarantee stock accuracy. You can use management systems such as Six sigma, ISO 9001, lean methodologies and kaizen to better inventory management and the quality of the process. Technologies like barcode, labeling, RFID, and warehouse management systems also provide technical tools to resolve this issue. Organizing the storage areas in your warehouse can be another physical measure to keep a check on inventory.
Another important tool to make sure the inventory is accurate is counting. Counting or stock taking is done periodically to determine stock errors and take corrective measures. Such counting is called periodic counting if the intervals between counts are long and the whole stock is counted. However, if the intervals are short and counting is based on a sample of stock instead of the whole stock, the system is called cycle or circular counting.
Let's look at the two counting methods a little more
Periodic Counting: To guarantee the accuracy of their inventory, most businesses count all their stock at certain periodic intervals such as quarterly, half-yearly and yearly to identify any faults in stock records and correct if needed. Such counting is called a periodic counting. There are some problems with periodic counting. The chief issue is the halting of all operations in the business. Periodic counting of all stocks takes time, especially if the business has several materials and stores. A short-range count is not preferred in most cases. Counting at long interludes is not a reactive measure, where the reasons for the errors found aren’t usually examined further. Besides, if scheduling and preparations are not made with enough time and resource allocation, then it’s quite possible to produce records that can cause more damage to the accuracy of inventory than wrong counting.
Cyclic Counting: Another inventory counting method is the cyclic count. In the cyclical count, not all stocks are tallied, but enough stocks are measured at frequent intervals like every day, weekly, monthly etc. The operations need not be stopped for cyclic counting. It is easier to tally the whole stock and needs little preparation.
Since, it is carried out frequently, understanding the cause of errors found during counting is quicker. The cyclic count is part of the daily operations and is therefore carried out by the personnel in charge of the operation, which helps to increases their awareness where they can take measures against errors naturally. Circular counting is an active instead of a reactive measure and offers a way to increase stock accuracy, rather than rectifying stock mistakes only. Improved inventory accuracy augments assurance in other connected procedures reducing the need for a constant audit.
Methods of Counting
There are 3 methods that are used to identify the stock to be counted in each cycle.
1. Control group
2. Random sampling
3. ABC sampling
Control Group: The stock counted in the Control Group method are selected as a representation of the complete stockpile. The sample stock sample materials are counted at regular and frequent intervals. Such control group method is used to create and control cyclic counting process in organizations that are new to the circular counting of inventory. It is used to detect and correct any faults in the counting process.
Random sampling: In this method of counting the stock to be counted is selected randomly. For many types of stock, a random count done frequently is used for counting. There are two ways to use the random sampling method. In one, the samples can be randomly tallied in each count, where this method can be followed in a specific period like the half-yearly or yearly for the current year. The count recorded in the earlier cyclic counts can be excluded and continue to be chosen randomly for new count samples.
ABC sampling: Counting stock using ABC sampling is another method of counting. This method is based on the Pareto Principle, where the principle believes that for most cases, nearly 80 per cent of the effects is caused due to 20 per cent of the factors. In the ABC counting method, 80 per cent of stock accuracy and 20 per cent of the stocks are supposed to be used. The 20 per cent stocks in class A. -30 per cent of class B and 50 per cent of class C stock.
Before you begin the circular count, ABC classifications of stock is a must. You can employ different criteria based on different needs. The classification can be based on stock, sales volume, financial value, or other mixed criteria. Class A stocks are routine, while class C records are taken frequently, and circular counts are performed.
Some things must be taken into consideration to make sure the circular count is effective and efficient. First, accurate inventory measurement indicators must be identified, with the frequency of counts identified and planned. Deciding on who will be responsible for various tasks such as counting the stock, the reporting manager, execution, and those deciding on the measures is a must.
Trainers should be trained to understand the basics of circular counting; the processes must be reviewed to make cyclical count a part of the operations in the organisation. The stock field layout must be improved to facilitate a cyclical count. Finally, the increase and decrease must be assessed, and the essential changes must be made with constant evaluations.
Now that you’ve read through, you can understand that accurate inventory is crucial for well-organized operations of the ERP and MRP systems that you’ve invested in. Though the idea of constant counting to attain accuracy in inventory may seem daunting, but a well-organized and efficiently managed cyclical counting program is a powerful tool to have.
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