One of the most common issues supply chain management professionals struggle with is accurately identifying the causes of inventory discrepancies. If a discrepancy is discovered when users pick an item or perform a count, an inventory correction typically is made. Less often, actual root-cause analysis is performed to figure out why the discrepancy happened in the first place. Sometimes, this task is avoided due to uncertainty about how to begin the identification process and unfamiliarity with the key, structured steps involved. Following are simple tactics to initiate the analysis.

Every inventory problem has a specific technique that can be employed to resolve it. Start by determining the most likely or easiest-to-identify possibilities and either proving them or eliminating them from the list of root causes. This part of the process first requires confirming the calculations. Perform a recount of the inventory in question, preferably by someone who was not involved in the initial count. Make sure you didn’t miss something in work in process (WIP) that wasn’t entered in the system. Look for unposted transactions for the item in your enterprise resources planning (ERP) system. Ideally, shipping and receiving should not occur while you are counting; if they must, then be sure to account for them in your procedures.

Next, verify that labels and units of measure are correct. If the discrepancy is a multiple of the unit of measure, you most likely have a shipment or receipt that was made in the wrong unit type. If you use counting scales or other automated counting tools, ensure that they have been calibrated and that users know how to work with them properly.

Consider keying or data-entry errors. If you commonly find this to be the source of discrepancies, consider implementing bar coding, radio frequency identification or other automated processes. If all else fails, look for inventory of the item in other locations.

Key questions

If your ERP system indicates that you have less on-hand than your physical count and the inventory item can be sold as a finished good or serviced part, examine the following:

• Have you shipped a customer the correct part, but the wrong part was on the sales order? This causes two inventory errors.
• Do you have parts waiting to ship, but the sales transaction already has been posted?
• Have you shipped less than the order quantity, but the sales order was posted as complete?
• Do you have a return merchandise authorization that has been physically received, but it has not yet been posted in your ERP system?

If the inventory item is purchased, investigate these possibilities:

• Do you have parts that were put in inventory, but the receipt has not been posted? Perhaps the packing list was lost and not processed.
• Have you received the wrong part number or the wrong purchase order with the same item, but in a different quantity?
• Have you received a quantity that is less than what the purchase order required or the unit of measure is wrong? This is more likely if the item is measured by length, weight or volume.

If the item is a component or subassembly, consider these actions:

• Search recent pick lists that contain the item, or do a where-used inquiry on your active bills of material (BOMs).
• Look for instances where the item has a quantity that is too high, has an incorrect unit of measure or was placed on a BOM that doesn’t require that part.
• Search for any engineering change orders that include the part number.
• If you use kanban, determine if the actual container size is less than what the inventory system is expecting, if it is not being filled to the required quantity or if it is not clearly marked with the required quantity.
• As stated previously, make sure you are not counting WIP.
• If you have rework, accurately track the material consumed by or created in the rework process.
• If your manufacturing process creates coproducts or byproducts, ensure that transactions are being created for these items.

Essentially, you are looking for a transaction in your ERP system that doesn’t belong. This is one of the easier problems to find. The more difficult issue is identifying a transaction that was never created. This is when you have more inventory in your ERP system than you physically have on-hand. There should have been a transaction, but there wasn’t.

There are some options available to you if you find yourself in this situation. First, if the inventory item can be sold (finished goods or service parts), ask these questions:

• Have you shipped a customer the wrong part, but the correct part was on the pick list? This causes two inventory errors.
• Have you shipped more than the order quantity required on the pick list?
• Have you shipped the part, but the shipment has not yet posted to inventory?
• Is there a return merchandise authorization that was posted but not physically received?
• Has a salesperson, engineer or quality assurance inspector pulled a sample and not recorded it in the system?

If the inventory item is purchased, take a look at these possibilities:

• Do you have parts that were received in ERP, but they have not yet been put in inventory?
• Have you received the wrong part number or the wrong purchase order with the same item, but in a different quantity?
• Is there a vendor return that has not yet shipped?
• Have you received a higher quantity or the wrong unit of measure than what was physically on the shipment? This can happen when someone takes receipt of an item based on the packing slip rather than counting the receipt quantity.
• Do you have products that expire? The material may have been scrapped without a transaction.

If the inventory item is a component or subassembly, examine these options:

• Do you have the wrong part on a BOM? This will result in two inventory discrepancies, with one item having too much and the other having too little.
• Do you have a quantity on a BOM that is less than what is actually consumed on the plant floor? The system thinks you are using less than you actually use.
• Is there an engineering change order that includes the part number?
• If you use kanban, determine if the actual container size is less than what the inventory system is expecting, the container is not being filled to the required quantity, or it is not clearly marked with the required quantity.
• Have you allowed for WIP? If you use backflushing, material may have been physically put into WIP but not yet backflushed.

One of the best ways to identify manufacturing-related inventory issues is by using a picklist or traveler — which the APICS Dictionary defines as a copy of the manufacturing order that moves with the work through the shop. A traveler with times, parts, units and quantities following an item through its production is a great way to identify discrepancies. Instruct employees to annotate any discrepancies between what the traveler lists and what happens in reality. If the quantity is incorrect, don’t just grab some more; write it on the traveler. Then, be sure to turn in travelers to the shop office so that corrective action can be taken.

Another common problem to look for is scrap that has not been recorded. Implement a process for recording parts that have been removed for testing, engineering or sales samples, and ensure that everyone follows these procedures.

You also should look to see if there are complementary discrepancies in a similar item. This might indicate that there is some confusion or a labeling issue for two parts with similar characteristics. This can cause your system to show too much inventory of one part and too little of a similar one.

Up for the count

Your ERP system simulates your manufacturing environment. The more accurate information you give it, the better the simulation. When the simulation is out of sync with reality, problems occur. The further you are in distance and time between something happening and recording it, the more opportunity for error you have.

The time to identify the root cause of an inventory discrepancy is right after it happens. There will be far fewer transactions to look through, and the people you talk to are more likely to remember if some related event happened. This is where cycle counting comes in. Many managers set up items for counting on a scheduled frequency by ABC order and perhaps add counts when an item quantity reaches zero or a bin is empty. The prevailing wisdom is to change the count frequency of an item with discrepancies to daily (or weekly for low-transaction-volume items) until the root cause has been identified and eliminated. Just think how much easier it would be to trace the cause of a problem if you only had to look back 24 hours.

Finally, whatever the cause of an inventory discrepancy, make sure to close the loop by notifying the appropriate person so the problem is corrected. Once the responsible party has been made aware of the issue, keep monitoring the inventory to ensure that the corrective action is effective. Don’t expect to fix everything at once; incremental improvement will get you to your goal. Over time, this will have a powerful impact.