The motive for inventory performance metrics like inventory turnover and inventory days of supply is to know how much inventory is on hand and to help us decide if that amount is right for our business. That information is useful for finance so that it can reflect its current assets picture. To operations, it indicates the ability to cover production requirements and/or customer orders. But which is the better measure?
Several years ago, an electronics original equipment manufacturer company hired me to salvage its investment in an MRP system. The company had recently been awarded a large contract on the condition it follow an aggressive timetable for the product launch.
After the annual shutdown, a group of concerned employees was waiting for me in my office. The buyer informed me that MRP failed to generate the requirements for the new product and suggested MRP “may work for some products but just doesn’t work for ours.” One of the planners also explained that MRP had generated requirements for old part numbers but the newly created part numbers were missing from the MRP run.
Traditional measures of accuracy can be a double-edged sword. While their objective is to confirm cost or inventory accuracy, these methods often serve as a disincentive by inadvertently discouraging an all-out effort to find and eliminate the real root of the problem. When too many inaccuracies are found, the company’s calculated inventory accuracy drops, and this reflects poorly on the worker or workers responsible.
In this instance, the manufacturer needs to understand that inventory accuracy is only an indicator of performance and is not a true measure of the actual process. By definition, performance measures track a process, but something must have been performed in order to have a performance measure. Cycle counting is a process and has a performance measure related to its effectiveness.
Traditionally, companies judge a cycle-counting process based upon a measure of inventory accuracy. The more the process confirms the accuracy of the company’s inventory, the higher the process’ measure of effectiveness - or so it would seem.
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