It is impossible to account for inventory properly without first having accurate inventory records. The accounting staff cannot create a proper inventory balance unless it has reliable inventory information. In this article, I will describe the nature of inventory errors, factors that cause the errors, data entry methods that mitigate errors, and similar issues.
Inventory Record Errors
Many of the techniques available for valuing inventory are predicated on the existence of accurate inventory records. Unfortunately, there are many ways in which inventory transactions can be incorrectly recorded. Here are a number of examples:
- Received goods are not recorded at all
- A receipt is recorded against the wrong item, or in the wrong quantity
- The wrong quantity or the wrong product is picked
- A picker correctly picks an item, but scans the wrong bar code
- A picking transaction is not recorded, or recorded twice
- Picked goods are assigned to the wrong customer order
- A counting scale is incorrectly used, resulting in the wrong pick quantity
- The quantity picked is transposed when entering the information
- Data entry does not occur until the following day
Cycle and physical counting
- A counting error is discovered that is caused by late data entry of a prior transaction, resulting in a correcting entry that compounds the problem
An inexperienced person incorrectly counts inventory during a physical count, resulting in the “correction” of an on-hand balance
- A data entry person assumes the wrong unit of measure, such as centimeters instead of millimeters.
Another factor that impacts record accuracy is the speed of operations. If goods are picked from stock and immediately sent to customers, transactions are only needed to record the pick and the shipment. Similarly, if items are picked for inclusion in the production process, a rapid manufacturing flow may require only transactions for the picking of raw materials and the putaway of finished goods. However, if these processes are slowed down, inventory must also be recorded in the temporary storage locations where it may reside. Each of these additional transactions increases the risk of recording a transaction error. For example:
- Goods are picked from stock early and are not expected to be delivered to the customer until the next day. This requires that the goods be recorded in a staging area prior to shipment the following day.
- Goods are taken from one customer order to satisfy another order. This means that the first order is shunted aside to temporary storage until the goods can be replaced. The remaining goods must be recorded in temporary storage until shipped. Alternatively, the goods may be returned to the stock until the order can be fulfilled, which requires an extra putaway transaction.
- The production process requires that many subassemblies be delivered from suppliers before final assembly can be completed. The process allows for partially completed assemblies to be held in temporary storage until subassemblies arrive. Each instance of temporary storage requires a transaction to track the location of the goods.
In short, there is a multitude of areas in which inventory record errors can arise. In the next few sections, we will discuss how a variety of factors can have a negative impact on record accuracy.
Employee Factors Impacting Record Accuracy
There are major differences in the ability of certain individuals to correctly record transactions. These differences are not immediately apparent when someone is hired, but will become apparent over a relatively short period of time. The following factors all contribute to an employee causing inventory record inaccuracies:
Attachment to work
Those employees that truly care about what they do have a much higher level of record accuracy than those who are disinterested.
When employees receive feedback about an incorrect inventory transaction, some immediately accept the feedback and others become defensive.
A person with minimal experience will inevitably make more mistakes than someone with years of experience in the same environment.
Only the last of the preceding factors (experience) will improve record accuracy over time. The other factors are ones that an employee must make the decision to correct.
Ultimately, everyone who is involved with inventory is responsible for the accuracy of the associated records. This means that there is no place in a company where minimally accurate employees can be parked. Unfortunately, some employee turnover will likely be required before a company arrives at the point where inventory record inaccuracies are no longer associated with the incompetence of employees.
Labeling Issues Impacting Record Accuracy
The types and durability of the labels used to identify inventory and storage locations can have a profound impact on inventory record accuracy. Labels can easily be ripped or destroyed in the high-impact environment of a warehouse, making it much more difficult for the warehouse staff to record transactions. To mitigate problems with labels, follow these practices:
Buying inventory labels is a serious business, since the wrong ones may not adhere to cardboard or shrink wrap, or fall off after minimal impact or due to high humidity levels. Consequently, obtain a sample of the labels to be used, and subject them to the full range of adhesion scenarios that are likely to be encountered. The testing may last for several months, to see if adhesion wears off over time.
Subject a set of test labels to rigorous inventory handling practices, and determine the extent to which they are damaged. This can be impacted by the thickness and fiber content of the labels.
Packing tape is frequently run over labels, especially location labels in the storage racks. If so, and bar codes are used, determine how many layers of packing tape (if any) can be used without interfering with the ability of a bar code scanner to access bar code information.
Develop standards for where labels are to be placed on inventory items so that they are easily accessible by the staff. For example, placing a label on the backside of a pallet does little good if it cannot be seen from the front of a storage rack.
There is no such thing as excessively large font, especially in a low-light or dirty environment. If there is excess space on a label, use it to more prominently display information with a larger font.
Proper attention to these issues can largely eliminate labeling issues as a source of inventory record accuracy problems.
The Data Entry Backlog Problem
What if a company cannot afford these systems, and continues to use a manual record-keeping system? This is quite likely in smaller organizations with lower inventory turnover levels. In this situation, the single most important issue impacting inventory record accuracy is the data entry backlog problem.
In a manual system, paper-based transaction documents are continually arriving from all over the warehouse, documenting receipts, putaway, picks, restocking transactions, scrapped items, kitting activity, shipments, and so forth.
Given the significance of these issues, a great deal of effort should be put into eliminating any data entry backlog. This can be done by overstaffing the data entry function so that any backlog is eliminated in short order, and there is sufficient staff on hand to deal with a sudden surge in transaction volume. In addition, consider having data entry staff in any shift during which there is warehouse activity so that the records are always up-to-date by the start of the next shift’s work.
The best solution to the data entry backlog problem is to not use paper-based transactions at all. If the warehouse is a small one and transaction volumes are low, automated systems required to avoid data entry issues will appear to be too expensive. However, if the cost of data entry staff and the time required to correct errors are included in the analysis, the cost-benefit of implementing a non-paper system may become more apparent. If not, continue to examine the situation if warehouse transaction volume grows over time, to see if paper-based transactions can be eliminated at a later date.
Inventory Naming Conventions Impacting Record Accuracy
A key element in the record accuracy problem is the complexity of the information being entered. If inventory identification numbers, units of measure, and location codes are excessively complex, there is an increased chance that they will be entered incorrectly. For example:
Instead of using random digits to identify an item, consider the inclusion of at least some meaning in the name, so that a data entry person will understand what they are entering. For example, a large blue widget could be identified as Widget-Blue-L instead of 123ABC04#. However, the result can be extremely long part numbers. Also, a numbering scheme that made sense several years ago may no longer be practical, as a business transitions to new product lines and configurations.
A typical location code describes the aisle, rack, and bin in which inventory is located. For example, location 04-M-03 signifies aisle four, rack M, bin three. Or, if goods are to be located in a bulk storage area, use just an aisle address to denote a lane in which all pallets containing a specific item are to be stored. These approaches are simple and widely-used naming conventions. Trouble can arise when the coding system varies by section of the warehouse, or for different warehouses using the same computer system. Instead, do everything possible to require the same coding convention for all storage areas.
Units of measure
It may seem simple enough to record a unit of measure, such as EA for each. However, some companies obfuscate the obvious by including too much information. For example, a label stating “8/20 kg” might be intended to convey that there are eight units in a box, each of which weighs 20 kg. This label can be misinterpreted, such as 8/20ths of a kg, or 20 units weighing 8 kg in total.
There are other benefits of having simplified naming conventions. Stock pickers will have a much easier time finding and picking the correct goods from stock. It is also less likely that incorrect pack sizes will be sent to the production area or to customers.
One might believe that the issues raised in this section do not apply when the entire data collection system is automated. For example, if scanners are used to extract information from bar code labels, who cares about the complexity of the labels? This is an incorrect assumption, for information must at some point be encoded into the labels, and this can be done incorrectly. If a bar code label is incorrect, all subsequent scans of that label will also be incorrect. Thus, the use of automated data collection simply makes errors more widespread.
Inventory Data Collection Methods
The method chosen to collect information about inventory transactions can have a profound impact on the accuracy of inventory records. Here we discuss two types of inventory data collection methods – Paper-based and bar-code scanning.
All transactions are recorded on paper and forwarded to a warehouse clerk for entry in a manual ledger.
Advantage: Can be maintained under primitive conditions and high-stress environments where computer systems are not available or usable.
Disadvantages: Subject to data entry error at the point of origin as well as by the warehouse clerk. Notification documents may also be lost or seriously delayed before they reach the clerk. These delays can interfere with cycle counting.
Bar code scanning
Bar codes are assigned to all bin locations and inventory items. The bar codes for other commonly-used information, such as employee identification numbers, quantities, and activity descriptions can be included on bar code scan boards that employees carry with them. The warehouse staff scans bar codes to initiate a transaction and then uploads the information to the computer system. No manual entries are required.
Advantages: Eliminates data entry errors, reduces the time of the warehouse staff in recording transactions, and eliminates the data entry work of the warehouse clerk.
Disadvantages: Scanners are moderately expensive and can be broken. There is a risk of data loss if the memory component of a scanner is broken before scanned transactions can be uploaded. Does not work if there is no direct line of sight access to a label. Labels are subject to tearing, which can make them unreadable. If a label is encoded incorrectly, this will result in the recordation of incorrect information for as long as the label is used.
The bar code scanning approach noted above can be expanded upon by requiring suppliers to label all goods shipped to the company with designated bar codes that identify the part number and quantity shipped. Then, when the goods are received, their attached bar codes are immediately scanned, and the stored information is loaded into the company’s accounting software. This approach is more accurate than having the receiving staff attempt to decipher the contents of each incoming load and create bar code labels on-site.
Controls over Record Accuracy
Ideally, it should only be necessary to record an inventory-related transaction once, and then assume that the entry was made correctly. Doing so achieves a massive decline in data entry labor. However, the number of errors actually experienced is likely to drive an additional need for controls that examine whether transactions were initially handled correctly. The following table shows the nature of a potential record accuracy problem and the related controls that can mitigate the error rate.
- Conduct cycle counts to look for general errors
- Match what is on the shelf back to the inventory report
Suppliers send incorrect quantities
- Count all pallets, cases, or units as received, or a selection of these items
- Weigh pallets, cases, or units as received
- Visual inspection of received goods for obvious errors
Shipping department sends incorrect quantities
- Clearly delineate staging areas for each truckload, so that orders are not mixed
- A Second person independently counts pallets, cases, or units prior to delivery
- Weight pallets, cases, or units prior to delivery
- Visual inspection of goods to be shipped for obvious errors
- Count the number of pallets or cases shipped and match to customer order
- Do not load a truck until the entire shipment has been staged; otherwise, it is difficult to ascertain what has already been loaded
- Match recorded received or putaway to actual locations
- Run a report showing locations with zero inventory, and match to actual locations to see if they contain inventory
New employee/inexperienced staff errors
- Sort transaction logs by employee number and verify all transactions associated with new employees
Other controls than the ones noted here may be of more use, depending on the structure of the process flow and the types of inventory being handled.
When deciding upon a set of controls to install, always consider their impact on the process flow. A number of labor-intensive controls may indeed improve record accuracy but at the price of slowing down the record-keeping process. Ideally, there should be a balance between adding additional controls and losing process efficiency.
Negative inventory balance
An unfortunately common occurrence is that the inventory records indicate a negative on-hand balance. This situation always arises from either a delay or an error in data entry. Here are several situations that can cause a negative inventory balance:
- Goods are cross-docked from the receiving area, straight through to a truck for delivery to a customer. The shipment transaction is entered but not the receipt, resulting in a negative balance.
- Goods are replenished from reserve storage and then picked. The pick transaction is recorded but not the replenishment move, resulting in a negative balance.
- A receipt is incorrectly recorded with too small a quantity or with the wrong unit of measure and then picked from stock. The receipt amount is too low, resulting in a negative balance.
- Goods are removed from stock, and the forklift operator accidentally records the transaction twice. With a double pick recorded, the on-hand balance appears to be negative.
As the examples above indicate, a negative balance is sometimes a case of transaction documentation being delayed. If so, waiting a short period of time for the transaction to be recorded will yield a corrected inventory balance. However, other negative balances are indicative of more serious problems where transactions are lost or entered incorrectly. Since it is impossible to tell which scenario applies to a negative balance, it is best to immediately investigate every negative balance as soon as it is detected.
Given the massive number of transactions involved in the receipt, handling, and shipment of inventory, it may be useful to schedule a periodic audit by the internal audit department. These audits are usually highly targeted, so those specific activities are reviewed in detail. For example, the warehouse manager might be concerned about record accuracy related to picking activities, and so requests an audit to investigate these transactions. Even more specifically, the manager may ask for an audit of picking within a certain aisle, where error rates are unusually high.
Inventory audits are particularly useful when there is a suspicion that some employees in the warehouse area are stealing inventory. In this situation, cycle counting may not work, since the people counting goods may also be engaged in theft. By using the audit staff instead, there is a higher probability of locating specific fraudulent activity.
A variation on the auditing concept is self-auditing. Essentially, self-auditing means that employees review the transactions recorded by each other, either through the review of a small inventory count or a full-blown transaction reconstruction.
This approach is only feasible if there is a sufficient amount of excess staff time available for self-auditing. Possible self-auditing methods include:
- Cycle counting. Have the warehouse staff review any exceptions found by their fellow cycle counters. This can also include a mutual review of any changes made to the inventory database for a location or unit count alterations.
- Picking. Have inventory pickers compare what they picked to what is stated on their pick tickets.
- Transaction entry. The data entry staff can compare the paper transactions from which information was entered to a log of entered information from the computer system.
While useful, it is difficult to enforce the use of self-auditing, for several reasons. First, it is difficult to monitor auditing activities. Also, employees may pressure each other to not report any errors found. These issues can be reduced by paying a bonus to the warehouse staff that is based on the accuracy of inventory records.
The inventory record accuracy issue is not an insignificant one. It is entirely possible that a mix of many environmental, technology, and employee issues all contribute to different types of errors. It may take a detailed investigation to discern the base-level reason for a particular issue, and even more time to determine a reasonable correction that will eliminate the problem.
When there are so many possible ways to cause errors and so much time is required to correct them, it is essential to focus on the largest classifications of errors first, and gradually work through those problems causing the fewest errors. Doing so generates the most immediate return on investment, and also provides an immediate improvement to the many activities that depend on record accuracy in order to function properly, such as purchasing, production, and shipping.