The rising cost of inventory inaccuracy

By Carol Ortiz Dimensions Salt Lake City, Ut.

\ZOUR salespeople rely on the I computer quantity on-hands.

Your customers are given fast and accurate information regarding stock availability.

Your buyers have reduced the number of hours walking the floor placing purchase orders, since they now use computerized suggested orders.

You've reduced your investment in inventory by thousands, while still attaining the same level of sales.

Your inventory shrinkages have been cut in half.

You no longer close your store to count and lose valuable sales (and fund the local Pizza Hut to feed your counters !).

Story at a Glance

lnaccurate counting is a top inventory management problem how to calculate how much it is costing you.

What?? You say this isn't happening at your company? That you'd like these scenarios to be true, but you just haven't had the time to implement cycle counting yet. No time, you say! You can't afford not to take the time to cycle count.

Let's gather some realistic estimates on what a lack of cycle counting is costing your company:

(l) For one week, have each employee keep track of how many times he or she must check stock. If a salesperson must call a warehouse employee to have an item checked, that counts as two times. (Have a contest-who can guess the closest.)

Determine how long each stock check takes away from an employee's time. Generally, 10 to 15 minutes is a good estimate, by the time the employee initiates the search, responds to a customer, and then gets back to the work at hand.

Arrive at an average hourly wage paid to your employees (perhaps $12, including wages and benefits).

Now for the ugly truth: Multiply this all out to determine the cost for one week's stock checks.

Let's say that 120 stock checks were done (20 per day for six days). Each took an average of 10 minutes, with an average wage of $12.

120 x 10 = L,200 minutes

1,200/60 min./tr. = 20 hours

20 hours x $12lhr = $240

$240 x 52 weeks = $12,480/year!

This $12,480 doesn't even include the cost of poor customer service (by the time you check stock, the customer has already hung up the phone).

(2) Because of inaccurate inventory counts, your buyers must use the "squat-n-squint" method of ordering instead of having your computer provide a suggested order. The weekly hardware order takes six to eight hours per week, instead of two hours, and this isjust one vendor. Your buyers could be negotiating better discounts, researching better suppliers, analyzing product sales and margins results, but they don't have time. They're busy walking the aisles writ- ing up their orders.

Sure, they get a better feel for what's selling and what's not-but they could get this same comfort factor spending 30 to 60 minutes reviewing the suggested order in the aisles instead.

Let's estimate the expense:

$12 wages x l0 extra hours

(all vendors) = $120 per week

$120 x 52 weeks =$6,240lyear

(3) Let's say our inventory shrinks have been right around $50,000 per year. With proper procedures enforced and continual cycle counting, you estimate that this number could easily be cut in half.

Estimated expense reduction: $25,000

Plus: Better sleeping at night, especially around year-end.

(4) Because of better counts, better buying. You estimate that inventory can be easily reduced by 57o, while still attaining the same level of sales.

Estimated savings:

$500,000 inventory x 5Vo = $25,000

Are you starting to get the picture? Having inaccurate counts is costing your company vast amounts of wasted time and money. Get started right now! Don't wait until business slows down. Procrastination is costing you money (by the above estimates, $1,321 per week).

If you're not sure how or where to start, my next article* will offer practical, easy-to-implement suggestions. In the meantime, at least begin counting your top selling items.

* Part two appears next month.