1. January 12,2016 The Real Cost of Inventory Accuracy
Manufacturing Systems Corp | www.mfgsyscorp.com
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The Real Cost of Inventory Inaccuracy
In these days of our multi channel economy,shipping and general inventory errors are more
expensive than ever. Since the ERP age began, the ability to maintain an accurateinventory balance
has alwaysbeen a requirement. Many companies resorted to more physical inventory events or a
pro-activecyclecount system. The result was more accurate inventory so planning systems could
provide their benefit of reduced stocking levels or safety stock.Bad counts were adjusted to the
physical inventory on hand, but most users did not have to time to research where the count had
gone wrong.
Move forwardto 2016, where companies selling products to the consumer industry to tier I or II
manufacturers requiring the vendor hold the inventory until the absolute last minute to ship and
the problem becomes magnified and more expensive.
Anyone selling to the big box stores has experienced the need to provide an accurate count of what
is shipped as wellas EDInotification forshipment and invoice. Many of these companies have a set
schedule of ‘fines’ for inaccuracy.So now it’s not just replacing lost inventory but expending cash to
compensate the customer forinaccuracy.
For Example Company ships to several big box stores plus an internet reseller. In the process of
packing the order the warehouse personnel have either place not enough product in the box or too
much. Either way the customer records this as an error. Of course now the advanced shipping
notice or ASN, whichby the way had to be provided within 2 hours of shipment, is wrong. Add to
that the invoice,which was provided electronically,is also wrong. Then there is the physical
product, if short a replacement needs to be shipped at yourcost, to complete the order. If you
shipped too many, they just keep the units, but now you have to checkyour physicalinventory for
the item and adjust the balance.

2. January 12,2016 The Real Cost of Inventory Accuracy
Manufacturing Systems Corp | www.mfgsyscorp.com
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In either example your company has now incurred the burden of reduced revenue to pay the fines,
plus possibly lost product. Once or twicea month would be bearable, but forsome firms doing high
order volumes this is a daily occurrence.If youwere valuing yourcost of carrying inventory at say
10% youare significantly understating the cost.
How do youremedy the situation? If you have a moderate warehouse operation with 10 – 15
employees where do youstart to remedy the problem? Youcould go to some kind of draconian
system of having one person checkanother’s orders. Of course this in effectdoubles your labor just
to pick and ship. We believe warehouse management withthe implementation of bar codes and
scanners is the answer.
In a warehouse management system, orders to be picked are assigned to an individual and his
activity is tracked by the system. Workis organized in the most efficientmanner so they only make
a single trip through the warehouse to pickorders and are not back tracking because the location
they wanted did not contain enough inventory to fill the order.
Upon reaching the suggested bin, the bin location, the order line, the inventory and the box it went
in are scanned into the system. If they picktoo many items, the system stops them; too few the
system prompts for more. Pickthe wrong item and the system rejects putting it into the box. If
somehow the operator management to forget to scan an item, we can weight checkthe container to
see if it’s off.Best of all we know whopicked this order, who shipped this order, what bin to check,
and when the workwas done.
For those companies shipping small parcels directly to the customer similar benefits can be found.
While the consumer is allowedto fine youfor shipping the wrongproduct, invariably the will
expect to be reimbursed for the cost of shipping the return and replacement.
While the primary goal of this activity was to improve inventory and order accuracy,we’vealso
taken some steps to improve productivity. Hour by hour we know who picked how many
orders/sku’s/ pounds etc.,
In a way the same scenario exists in orders moved and received frommanufacturing. Workorder
fulfillments are scanned, workorder receipts are scanned into the system as well.
Properly implemented, inventory adjustments can be significantly reduced and the cost of
misstated inventory balances.