Some Cold, Hard Facts About Stocktakes

One of the key functions that must be carried out with all inventory management is a periodic reconciliation between actual stock holdings and the holdings according to the accounting system. This reconciliation is a requirement of financial management and accounting standards and the primary intent is to ensure that the organization correctly reports its financial position. It may surprise some operational personnel that a stock take is not usually intended to ensure that holdings are appropriate for operational purposes. At this time of year many organizations are planning their yearend or half year stocktakes (depending upon how the financial year is measured) and so today and next month I am going to focus on this stock reconciliation.

Fundamentally there are two ways that this reconciliation occurs: stocktakes or cycle counts. Both approaches are valid but they each have their pros and cons. The following is a summary.

A stock take is an annual (or semi-annual) physical inventory count. Typically a stocktake involves establishing the current stock level for all items in the inventory and comparing this to the quantity held according to the accounting or inventory management system. A stocktake is a snapshot of the inventory holding at that particular point in time.

The pros are that you achieve a complete (hopefully accurate) snapshot of the inventory levels, giving a good picture of the overall effectiveness of inventory management; and adjustments happen at the one time, simplifying that activity and the subsequent reporting.

The cons are that single stocktakes can be very disruptive to operational needs (sometimes requiring a complete shutdown of other work); and, because stock accuracy is only examined once a year, the overall accuracy can deteriorate during the rest of the year.

A cycle count is, strictly speaking, also a stock take but it generally involves only a small percentage of items each time, with the entire inventory counted over the course of the year. The key to cycle counting is to count a small, manageable number of items each week or each month. The system for managing this must ensure that the entire inventory is actually included during the year. Often companies that can demonstrate a reliable system of cycle counting are not required to complete an annual stocktake. This is a decision of their auditors or financial team.

The pros of cycle counting are that they are not disruptive to normal operations as they can be planned and balanced with the regular demands of the work cycle; the regular feedback of inventory information allows a more proactive response to issues that arise; the more active items or those with a history of accuracy problems can be targeted more often; and this leads to a more consistent and higher level of accuracy.

The only real con is that cycle counting requires management on a weekly or monthly basis to ensure that all items are covered and the counts actually happen. This is more sophisticated than the once (or twice) a year approach of a complete stock take. I cannot stress enough that to be truly effective cycle counting must cover the entire inventory at least once per year.

The decision of whether to stock take or cycle count usually comes down to whether the team can effectively manage the consistent demands of cycle counting (including reporting, investigating discrepancies, correcting and updating the system) or whether there is a preference for a single planned ‘event’ (accepting the accuracy issues that may arise during the year).

Developing clear spare parts stocking criteria

To stock or not to stock, that is the question. One of the major flaws in most spare parts management systems is the absence of clear criteria on when to stock an item and when not to stock an item. The absence of any guidelines forces your team into a process of ad hoc and inconsistent decision making. The result of this is that you stock items that don’t require stocking and don’t stock items (sometimes critical items) that should be stocked.
The effect of this is two-fold.

First stock outs occur. The plant stays down, production is lost, blame apportioned, and the ability of maintenance to maintain the plant becomes a focus of management attention – again!

Second, stocking items that don’t need to be stocked provides easy fodder for accountants and consultants who then focus on the symptom, not the cause. To avoid all this you simply need to develop and implement specific guidelines to aid decision making on when to stock an item and when not to stock an item. This will help prevent ad hoc decision making and the consequential flow-on effects.

Participate in the 2010 Materials and Spares Management Survey

The survey, conducted with the involvement of Monash University’s Department of Maintenance and Reliability Engineering, is your opportunity to obtain a FREE report on your spare parts management practices. By participating you get the chance to discover and understand the strengths and weaknesses in your company's approach to materials and spare parts management.

The survey is simple. We have a matrix of management practices that covers five key areas of materials and spare parts management. The matrix includes 25 separate elements and each element has four levels of response.

When completed we provide a series of charts and tables for your own analysis and score your performance.

Please note that your information will be completely confidential - at no time will we use your company name in conjunction with the information, except in the individual report sent back to you.

Who should participate? Companies that will benefit the most from this survey will typically be characterized by their large engineering based assets and reliance on materials and spares for ongoing operational success.

How long will it take? In order to maintain data integrity we conduct the survey via one-on-one interviews (either in person or over the phone). Each interview will be completed in approximately 30-45 minutes.

For more information contact me directly at pslater@InitiateAction.com or visit http://www.phillipslater.com/

Smart Inventory Solutions, Second Edition - Now Available

The new, updated edition of my book Smart Inventory Solutions is now available.

Subtitled Improving the Management of Engineering Materials and Spare Parts, this is virtually a brand new book.  This new and much larger edition features a tighter focus on engineering materials and maintenance spares inventory, while providing broader coverage of the issues faced in managing this inventory. This book will be useful to anyone in industry who needs or wants to optimize inventory and increase cash flow.


Find out more at http://www.initiateaction.com/SmartInventorySolutions.htm
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