Cycle Counting and Lean – Together

If you’re wondering why I am talking about cycle counting in the Lean Culture department, please be patient – it will all make sense shortly.  In my opinion, a properly conceived and implemented cycle counting effort is lean.

Core Beliefs about Cycle Counting’s Purposes – with a Lean Spin

In 1979 when I started attending APICS education courses, one of the first things we learned about in inventory management was the importance of cycle counting.  Since then I have successfully applied it in several companies where I was the materials or general manager.  I developed two core belief sets about cycle counting that have served me well:

1. Cycle counting’s goal is to eliminate the need for cycle counting.
2. If we can’t get to #1, make cycle counting pay for itself.

First – this is important from a Lean point of view – cycle counting is by definition supposed to be a continuous improvement process.  The reason for doing cycle counting is NOT to keep records accurate but to find and fix the root causes of record accuracy problems.  So, by definition, if you are successful you eventually run out of problems to fix – and can stop or dramatically scale-back cycle counting.

Secondly – for those who take one or more full physical inventories per year where we count and tag everything – you are wasting your money.  Or, better put, you are instead far better off to ‘convert’ this physical inventory cost into a more value-add cycle counting activity (hmmm . . . sounds kind of Lean).  Let me explain.

Implementing Cycle Counting that Eliminates the Requirement for (and Wastefulness of) Physical Inventories

Physical inventories are not cheap.  They are disruptive and arguably cost most companies at least an entire lost day of productivity for each inventory.  So, if your business is doing $250 million, you are losing $1,000,000 in output for a given inventory day.  Let’s say this works out to $500,000 in non-materials lost opportunity.  Stick with me, we are going somewhere with this.

OK, now you get your CFO type in a room and explain to him or her why you can’t afford NOT to have an effective cycle counting program that is funded to support multiple full-time equivalent people and resources to support it.  Here is the challenge that I have won many times when I issued it to the CFO:

“If I prove that our record balances (due to cycle counting efforts) are more accurate than any physical inventory results – can we stop doing physicals?”

After they get up from the floor, they will need to work out with you what kind of statistical accuracy is required for this event to happen.  In most cases, I have been successful in proving that a physical inventory – from an on-hand quantity per item and total value basis, is seldom better than 95%.  Why?  Think about it – you grab everyone (whether they are capable or not) to rush through it or you make a small team work through the night and weekend to get it done.  What is the likelihood that it is accurate?  Any cycle counting process that is effective should yield at least 98% accuracy in units and dollars – every day of the week.

Successful cycle counting processes lead to achieving a level of day-to-day record accuracy that is so good that taking a physical inventory gives a less accurate result.  I know this works because I have eliminated annual physical inventories several times.  Doesn’t that sound a lot like a Lean best practice?

Applying Lean Practices During the Mid-80’s in an Automotive Supplier Stockroom

In years gone by I had plenty of opportunities to teach and apply cycle counting in the workplace.  In one controlled stockroom I managed, we were able to hit 99.8% or better for a year running.

Doing it was not a trivial deal.  In those years Lean approaches as we have become familiar with were quite new.  Learning how to solve problems and work as a team was the rage in those days.  Taguchi Design of Experiments training and experiments were required for managers at the automotive supplier where I worked.

Using 5S and Visual Work to Improve Cycle Counting Results

By carefully capturing some root cause information on why errors were occurring, it was pretty easy for our stock room folks to admit that most of the errors were due to stock keeper mistakes – not people sneaking into our warehouse to steal parts for production to cover up un-reported scrap.  We didn’t know it, but we were pioneering the applications of error proofing, or Polka-Yoke as is it is commonly known in Lean circles, and parts of 5S and standard visual work.

To prevent pulling the wrong things due to part number errors the stock-keepers re-arranged the stock so that each area housed color-specific trim components for the door coverings we made for Ford Aerostar mini-vans.  Then when we were picking for a particular set of color options we seldom had the mistake of getting the wrong color of ashtrays, cargo nets, buttons and other stuff needed for particular door trim panels that were scheduled.

We then put in place stock tracking tickets in all the racks to record standard packs of parts going in and out.  The stockroom folks adopted the practice of always using up odd-lots and broken packs received at each delivery from suppliers or returns from production.  This made it easy to count what we had – everything had a place (5S) and was in standard packs except for a single broken box or pallet.

Teaming Up to Reduce Human Errors

Despite our best efforts we still had too many picking mistakes – wrong quantities, mixing right -vs.- left-hand parts (they looked identical at a glance) and other problems.  Then the teams hit on a strategy – pick and place outgoing in your area – and then audit your neighbor’s picked orders.  This way a ‘different set of eyes’ would review what was picked.  Since we set up our recognition system to reward only total stockroom performance overall for all shifts, it was not hard to get the unionized workers to take pride in getting it right.

We did so well in our stock room that we were asked to also take responsibility for the work-In-progress (WIP) areas – where the door trim was built.  This presented another whole set of problems.  Production was given incentives to produce a product – quickly and little else.  Worrying about parts that fell on the floor (and damaged – unusable) was not their concern.  When sweeping up, parts (especially small ones) would mysteriously disappear.  Who wanted to waste valuable “production time” filling out scrap tickets?  We knew this because our ERP system tracked WIP balances and netted pick lists to the difference between the kit requirements in aggregate and the WIP balance, telling us only to pick enough to finish the production scheduled on each shift.  Then when we got calls for parts we would then simply ask them for the damaged parts they could not use.  This made for some contentious moments for a while.

Later we were able to form a cross-functional effort with production that tracked and rewarded WIP balance accuracies as being as important as the stockroom levels.  This led to some cooperative problem-solving on why parts were hitting the floor in the production processes.  Rethinking how we measured everyone’s performance to include accountability for parts usage in production paid off big time.  This is a common trait good implementers of Lean concepts master – hitting on the right balanced metrics.

Leveraging Kanbans and Pull Systems with Cycle Counting

One of the techniques that are taught in cycle counting to reduce the effort, is to trigger a count when the inventory is at its lowest level.  If you are using Kanbans or Pull signals to replenish from feeder areas, supermarkets, suppliers or stockrooms, consider using them as a similar trigger.  If your enterprise system supports back-flushing of WIP using your bills of materials based on production reporting, use the Pull signal as the trigger to audit the physical reality.  At the time of the trigger, you should be issuing the next standard amount.  When you arrive with it – that’s the time to count the system balance and reconcile.  This is not as hard as it sounds if you are doing a reasonable number of items daily.

Most Kanbans and Pull Systems Promote Handling in ‘Standard Amounts’ – This Can be Leveraged

As you move toward using a standard number of containers and quantities to ‘charge’ the execution system and things stabilize, the maximum amount of material that can be in the system is automatically limited to the designed condition.  This limits how much to look for, as once you account for the standard number of containers/pallets/tubs, you are done looking.  If the system is set up with a standard number of pieces per container and FIFO is maintained, it becomes laughably simple to determine the exact quantity in the system at any time, because all you need to do is count the number of containers times the standard amount – plus the remainder in the ‘in-use’ container. If the 5S team has successfully made “a place for everything and everything in its place” the job becomes even easier – no treasure hunt required.

If you are willing to develop a partnership with production and the stockroom folks it is pretty easy to move toward a free-flowing system wherein you empower the operators to handle their own replenishment and reconciliation of record accuracy.  The trick is to agree on some mutual measures of performance that are tracked concurrently.  These might be the normal ones – productivity, quality and on-time delivery – plus a couple more like record accuracy and driving “shrinkage” of inventory value (un-accounted for scrap and errors) to zero.

Now you are really cooking on a Lean cycle counting journey that continually reduces wastes in transactions, handling and mistakes.