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M&DCPhysicalInventoryandWarehouseManagement
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M&DCPurchasing&SupplyChain:MaterialManagement

Physical Inventory and Warehouse Management

IntroductiontoMaterialManagement

MasterScheduling

Contents

MaterialRequirementsPlanning
CapacityManagement
ProductionActivityControl

1.

Introduction

2.

WarehousingManagement

Purchasing

3.

PhysicalControlAndSecurity

Forecasting

4.

InventoryRecordAccuracy

InventoryFundamentals
OrderQuantities

1.Introduction

IndependentDemandOrderingSystems
Becauseinventoryisstoredinwarehouses,thephysicalmanagementofinventoryandwarehousing
PhysicalInventoryandWarehouseManagement areintimatelyconnected.Insomecases,inventorymaybestoredforanextendedtime.Inother
situations,inventoryisturnedoverrapidly,andthewarehousefunctionsasadistributioncenter.
PhysicalDistribution

Inafactory,storesperformthesamefunctionsaswarehousesandcontainrawmaterials,workin
processinventory,finishedgoods,supplies,andpossiblyrepairparts.Sincetheyperformthesame
functions,storesandwarehousesaretreatedalikeinthischapter.

2.WarehousingManagement
Aswithotherelementsinadistributionsystem,theobjectiveofawarehouseistominimizecostand
maximizecustomerservice.Todothis,efficientwarehouseoperationsperformthefollowing:

a.
b.
c.
d.

Providetimelycustomerservice.
Keeptrackofitemssotheycanbefoundreadilyandcorrectly.
3.Minimizethetotalphysicaleffortandthusthecostofmovinggoodsintoandoutofstorage.
4.Providecommunicationlinkswithcustomers.
Thecostsofoperatingawarehousecanbebrokendownintocapitalandoperatingcosts.Capital
costsarethoseofspaceandmaterialshandlingequipment.Thespaceneededdependsonthepeak
quantitiesthatmustbestored,themethodsofstorage,andtheneedforancillaryspaceforaisles,
docks,offices,andsoon.
Themajoroperatingcostislabor,andthemeasureoflaborproductivityisthenumberofunits(for
example,pallets)thatanoperatorcanmoveinaday.Thisdependsonthetypeofmaterialhandling
equipmentused,thelocationandaccessibilityofstock,warehouselayout,stocklocationsystem,and
theorderpickingsystemused.

WarehouseActivities
Operatingawarehouseinvolvesseveralprocessingactivities,andtheefficient
operationofthewarehousedependsuponhowwelltheseareperformed.These
activitiesareasfollows:

a.

Receivegoods.Thewarehouseacceptsgoodsfromoutsidetransportationor
anattachedfactoryandacceptsresponsibilityforthem.Thismeansthe
warehousemust:

i.
ii.
iii.
iv.

Checkthegoodsagainstanorderandthebilloflading.
Checkthequantities.
Checkfordamageandfilloutdamagereportsifnecessary.
Inspectgoodsifrequired.

b.

Identifythegoods.Itemsareidentifiedwiththeappropriatestockkeepingunit
(SKU)number(partnumber)andthequantityreceivedrecorded.

c.
d.

Dispatchgoodstostorage.Goodsaresortedandputaway.

e.

Pickgoods.Itemsrequiredfromstockmustbeselectedfromstorageand
broughttoamarshallingarea.

f.

Marshaltheshipment.Goodsmakingupasingleorderarebroughttogether
andcheckedforomissionsorerrors.Orderrecordsareupdated.

g.

Dispatchtheshipment.Ordersarepackaged,shippingdocumentsprepared,

Holdgoods.Goodsarekeptinstorageandunderproperprotectionuntil
needed.

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andgoodsloadedontherightvehicle.

h.

Operateaninformationsystem.Arecordmustbemaintainedforeachitemin
stockshowingthequantityonhand,quantityreceived,quantityissued,and
locationinthewarehouse.Thesystemcanbeverysimple,dependingona
minimumofwritteninformationandhumanmemory,oritmaybea
sophisticatedcomputerbasedsystem.
Invariousways,alltheseactivitiestakeplaceinanywarehouse.Thecomplexity
dependsonthenumberofSKUshandled,thequantitiesofeachSKU,andthenumber
ofordersreceivedandfilled.Tomaximizeproductivityandminimizecost,warehouse
managementmustworkwiththefollowing:

a.

Maximumuseofspace.Usuallythelargestcapitalcostisforspace.This
meansnotonlyfloorspacebutcubicspaceaswellsincegoodsarestoredin
thespaceabovetheflooraswellasonit.

b.

Effectiveuseoflaborandequipment.Materialshandlingequipmentrepresents
thesecondlargestcapitalcostandlaborthelargestoperatingcost.Thereisa
tradeoffbetweenthetwointhatlaborcostscanbereducedbyusingmore
materialshandlingequipment.Warehousemanagementwillneedto:
Selectthebestmixoflaborandequipmenttomaximizetheoverall
productivityoftheoperation.
ProvidereadyaccesstoallSKUs.TheSKUsshouldbeeasytoidentify
andfind.Thisrequiresagoodstocklocationsystemandlayout.
Movegoodsefficiently.Mostoftheactivitythatgoesoninawarehouse
ismaterialshandling:themovementofgoodsintoandoutofstock
locations.
Severalfactorsinfluenceeffectiveuseofwarehouses.Someare:
Cubeutilizationandaccessibility.
Stocklocation.
Orderpickingandassembly.
Packaging.
Withtheexceptionofpackaging,thesearediscussedinthefollowingsections.

CubeUtilizationandAccessibility
Goodsarestorednotjustonthefloor,butinthecubicspaceofthewarehouse.
Althoughthesizeofawarehousecanbedescribedassomanysquarefeet,
warehousecapacitydependsonhowhighgoodscanbestored.
Spaceisalsorequiredforaisles,receivingandshippingdocks,offices,andorder
pickingandassembly.Incalculatingthespaceneededforstorage,somedesignfigure
formaximuminventoryisneeded.Supposethatamaximumof90,000cartonsareto
beinventoriedand30cartonsfitonapallet.Spaceisneededfor3000pallets.Ifpal.
letsarestackedthreehigh,1000palletpositionsarerequired.Apalletisaplatform
usuallymeasuring48X40X4.

Palletpositions.SupposeasectionofawarehouseisasshowninFigure12.1.
Sincethestorageareais48deep,the40sideisplacedalongthewall.Thepallets
cannotbeplacedtightagainstoneanothera2clearancemustbeallowedbetween
themsotheycanbemoved.Thisthenleavesroomfor(120x12)/42=34.3,or34,
palletpositionsalongeachsideoftheaisle.Sincethepalletsarestackedthreehigh,
thereiroomfor34x3x2=204pallets.

Figure12.1Cubeutilization.

ExampleProblem
AcompanywantstostoreanSKUconsistingof13,000cartonsonpalletseach
containing30cartons.Howmanypalletpositionsareneededifthepalletsarestored
threehigh?

Answer
Numberofpalletsrequired=13,00030=433.33434pallets
Numberofpalletpositions=4343=144.67145palletpositions
Noticeonepalletpositionwillcontainonlytwopallets.

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Accessibility
Accessibilitymeansbeingabletogetatthegoodswantedwitha
minimumamountofwork.Forexample,ifnoothergoodshadtobe
movedtoreachanSKU,theSKUwouldbe100%accessible.Aslong
asallpalletscontainthesameSKU,thereisnoproblemwith
accessibility.TheSKUcanbereachedwithoutmovinganyother
product.WhenseveralSKUsarestoredinthearea,eachproduct
shouldbeaccessiblewithaminimumofdifficulty.

Cubeutilization
Supposeitemsarestackedalongawall,asshowninFigure12.2.
Therewillbeexcellentaccessibilityforallitemsexceptitem9,but
cubeutilizationisnotmaximized.Cubeutilizationistheuseof
spacehorizontallyandvertically.Thereisroomfor30pallets,but
only21spacesarebeingusedforacubeutilizationof709~(2130
x100).Somemethodmustbedevisedtoincreasecubeutilization
andmain~tamaccessibility.Onewayistoinstalltiersofracksso
lowerpalletscanberemoved

10

1 1 2 3 4 5 6 7 8

1 1 2 3 4
1 1 2 3 4

Figure12.2Cubeutilizationversusaccessibility.
withoutdisturbingtheupperones.Thisrepresentsatradeoffbetween
thecapitalcostoftherackingandthesavingsintheoperatingcostof
extrahandling.Whethertheadditionalcostisworthwhilewilldepend
ontheamountofhandlingandthesavingsinvolved.

ExampleProblem
AsmallwarehousestoresfivedifferentSKUsinpalletloads.Ifpalletsarestacked
threehighandthereistobe100%accessibility,howmanypalletpositionsare
needed?Whatisthecubeutilization?
SKUA

4
pallets

SKUB

6
pallets

SKUC

14
pallets

SKUD

8
pallets

SKUE

5
pallets

Total

37
pallets

Answer
SKU

Pallet
positions

A:4pallets

B:6pallets

C:14pallets

D:8pallets

E:5pallets

Total

14

In14palletpositions,thereisroomtostore14x3=42pallets.Numberofpallets
actuallystored=37
Cubeutilization=37/42x100%=88%

StockLocation
Stocklocation,orwarehouselayout,isconcernedwiththelocationofindividualitems
inthewarehouse.Thereisnosingleuniversalstocklocationsystemsuitableforall
occasions,butthereareanumberofbasicsystemsthatcanbeused.Whichsystem.
ormixofsystems,isuseddependsonthetypeofgoodsstored,thetypeofstorage
facilitiesneeded,thethroughput,andthesizeoforders.Whateverthesystem,
managementmustmaintainenoughinventoryofsafetyandworkingstocktoprovide

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therequiredlevelofcustomerservice,keeptrackofitemssotheycanbefound
easily,andreducethetotaleffortrequiredtoreceivegoods,storethen~,andretrieve
themforshipment.
Thefollowingaresomebasicsystemsoflocatingstock:
GroupfunctionallyrelateditemstogetherGrouptogetheritemssimilarintheir
use(functionallyrelated).Forexample,putallhardwareitemsinthesamearea
ofthewarehouse.Iffunctionallyrelateditemsareorderedtogether,order
pickingiseasier.Warehousepersonnelbecomefamiliarwiththelocationsof
items.
GroupfastmovingitemstogetherIffastmovingitemsareplacedcloseto
thereceivingandshippingarea,theworkofmovingtheminandoutofstorage
isreduced.Slowermovingitemscanbeplacedinmoreremoteareasofthe
warehouse.
GroupphysicallysimilaritemstogetherPhysicallysimilaritemsoftenrequire
theirownparticularstoragefacilitiesandhandlingequipment.Smallpackaged
itemsmayrequireshelvingwhereasheavyitems,suchastiresordrums,
requiredifferentfacilitiesandhandlingequipment.Frozenfoodsneedfreezer
storagespace.
LocateworkingstockandreservestockseparatelyRelativelysmall
quantitiesofworkingstockstockfromwhichwithdrawalsaremadecanbe
locatedclosetothemarshallingandshippingareawhereasreservestockused
toreplenishtheworkingstockcanbelocatedmoreremotely.Thisallowsorder
pickingtooccurinacompactareaandreplenishmentoftheworkingstockin
bulkbypalletorcontainerload.
Therearetwobasicsystemsforassigningspecificlocationstoindividualstockitems:
fixedlocationandfloatinglocation.Eithersystemmaybeusedwithanyoftheabove
locationsystems.

Fixedlocation
Inafixedlocationsystem,anSKUisassignedapermanentlocation
orlocations,andnootheritemsarestoredthere.Thissystemmakes
itpossibletostoreandretrieveitemswithaminimumofrecord
keeping.Insomesmall,manualsystems,norecordsarekeptatall.
Itislikealwayskeepingcornflakesonthesameshelfinthekitchen
cupboardathome.Everythingisniceandsimplesothingsarereadily
found.However,fixedlocationsystemsusuallyhavepoorcube
utilization.Ifdemandisuniform,presumablytheaverageinventoryis
halftheorderquantity,andenoughspacehastobeallocatedfora
fullorderquantity.Ontheaverage,only50%ofthecubespaceis
utilized.Fixedlocationsystemsareoftenusedinsmallwarehouses
wherespaceisnotatapremium,wherethroughputissmall,and
wherethereareafewSKUs.

Floatinglocation
Inafloatinglocationsystem,goodsarestoredwhereverthereis
appropriatespaceforthem.ThesameSKUmaybestoredinseveral
locationsatthesametimeanddifferentlocationsatdifferenttimes.
Theadvantagetothissystemisimprovedcubeutilization.However,
itrequiresaccurateanduptodateinformationonitemlocationand
theavailabilityofemptystoragespacesoitemscanbeputawayand
retrievedefficiently.Modernwarehousesusingfloatinglocation
systemsareusuallycomputerbased.Thecomputerassignsfree
locationstoincomingitems,rememberswhatitemsareonhandand
wheretheyarelocated,anddirectstheorderpickertotheright
locationtofindtheitem.Thus,cubeutilizationandwarehouse
efficiencyaregreatlyimproved.

Pointofusestorage
Sometimes,particularlyinrepetitivemanufacturingandinaJIT
environment,inventoryisstoredclosetowhereitwillbeused.There
areseveraladvantagestopointofusestorage.
Materialsarereadilyaccessibletousers.
Materialhandlingisreducedoreliminated.
Centralstoragecostsarereduced.
Materialisaccessibleatalltimes.
Thismethodisexcellentaslongasinventoryiskeptlowand
operatingpersonnelcankeepcontrolofinventoryrecords.Sometimes
Citemsareissuedasfloorstockwheremanufacturingisissueda
largequantitywhichisusedasneeded.Inventoryrecordsare
adjustedwhenthestockisissued,notwhenitisused.

Centralstorage
Asopposedtopointofusestorage,centralstoragecontainsall
inventoryinonecentrallocation.Thereareseveraladvantages:

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Easeofcontrol.
Inventoryrecordaccuracyiseasiertomaintain.
Specializedstoragecanbeused.
Reducedsafetystock,sinceusersdonotneedtocarrytheirown
safetystock.

OrderPickingandAssembly
Onceanorderisreceived,theitemsontheordermustberetrievedfromthe
warehouse,assembled,andpreparedforshipment.Alltheseactivitiesinvolvelabor
andthemovementofgoods.Theworkshouldbeorganizedtoprovidethelevelof
customerservicerequiredandatleastcost.Thereareseveralsystemsthatcanbe
usedtoorganizethework,amongwhicharethefollowing:

a.

Areasystem.Theorderpickercirculatesthroughoutthewarehouseselecting
theitemsontheorder,muchasashopperwouldinasupermarket.Theitems
arethentakentotheshippingareaforshipment.Theorderisselfmarshallingin
thatwhentheorderpickerisfinished,theorderiscomplete.Thissystemis
generallyusedinsmallwarehouseswheregoodsarestoredinfixedlocations.

b.

Zonesystem.Thewarehouseisbrokendownintozones,andorderpickers
workonlyintheirownarea.Anorderisdividedupbyzone,andeachorder
pickerselectsthoseitemsintheirzoneandsendsthemtothemarshallingarea
wheretheorderisassembledforshipment.Eachorderishandledseparately
andleavesthezonebeforeanotherishandled.
Zonesareusuallyestablishedbygroupingrelatedpartstogether.Partsmaybe
relatedbecauseofthetypeofstorageneededforthem(forexample,freezer
storage)orbecausetheyareoftenorderedtogether.
Avariationofthezonesystemistohavetheordermovetothenextzone
ratherthantothemarshallingarea.Bythetimeitexitsthelastzone,itis
assembledforshipment.

c.

Multiordersystem.Thissystemisthesameasthezonesystemexceptthat,
ratherthanhandlingindividualorders,anumberofordersaregatheredtogether
andalltheitemsdividedbyzone.Thepickersthencirculatethroughtheirarea,
collectingalltheitemsrequiredforthatgroupoforders.Theitemsarethensent
tothemarshallingareawheretheyaresortedtoindividualordersforshipment.
Theareasystemissimpletomanageandcontrol,butasthewarehousethroughput
andsizeincrease,itbecomesunwieldy.Thezonesystemsbreakdowntheorderfilling
processintoaseriesofsmallerareasthatcanbebettermanagedindividually.The
multiordersystemisprobablymostsuitedtothesituationinwhichtherearemany
itemsormanysmallorderswithfewitems.

Workingstockandreservestock
Inadditiontotheabovesystems,reservestockandworkingstock
maybeseparated.Thisisappropriatewhenthepickunitfora
customer'sordermaybeaboxoracasethatisstoredonpallets.A
palletcanbemovedintotheworkingareabyalifttruckandcartons
orboxespickedfromit.Theworkingstockislocatedclosetothe
shippingareasotheworkinpickingisreduced.Aseparateworkforce
isusedtoreplenishtheworkingstockfromthereservestock.

3.PhysicalControlAndSecurity
Becauseinventoryconsistsoftangiblethings,itemshaveanastyhabitofbecominglost,strayed,or
stolen,orofdisappearinginthenight.Itisnotthatpeoplearedishonest,ratherthattheyareforgetful.
Whatisneededisasystemthatmakesitdifficultforpeopletomakemistakesorbedishonest.There
areseveralelementsthathelp.
Agoodpartnumberingsystem.PartnumberingwasdiscussedinChapter4onmaterial
requirementsplanning.
Asimple,welldocumentedtransactionsystem.Whengoodsarereceived,issuedormoved
inanyway,atransactionoccurs.Therearefourstepsinanytransaction:identifytheitem,
verifythequantity,recordthetransaction,andphysicallyexecutethetransaction.

a.

Identifytheitem.Manyerrorsoccurbecauseofincorrectidentification.Whenreceiving
anitem,thepurchaseorder,partnumber,andquantitymustbeproperlyidentified.When
goodsarestored,thelocationmustbeaccuratelyspecified.Whenissued,thequantity,
location,andpartnumbermustberecorded.

b.

VerifyquantityQuantityisverifiedbyaphysicalcountoftheitembyweighingorby
measuring.Sometimesstandardsizedcontainersareusefulincounting.

c.

Recordthetransaction.Beforeanytransactionisphysicallycarriedout,allinformation
aboutthetransactionmustberecorded.

d.

Physicallyexecutethetransaction.Movethegoodsin,about,oroutofthestorage
area.

Limitedaccess
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Inventorymustbekeptinasafe,secureplacewithlimitedgeneralaccess.Itshould
belockedexceptduringnormalworkinghours.Thisislesstopreventtheftthanto
ensurepeopledonottakethingswithoutcompletingthetransactionsteps.Ifpeople
canwanderintothestoresareaatanytimeandtakesomething,thetransaction
systemfails.

Awelltrainedworkforce
Notonlyshouldthestoresstaffbewelltrainedinhandlingandstoringmaterialandin
recordingtransactions,butotherpersonnelwhointeractwithstoresmustbetrainedto
ensuretransactionsarerecordedproperly.

4.InventoryRecordAccuracy
Theusefulnessofinventoryrecordisdirectlyrelatedtoitsaccuracy.Basedontheinventoryrecord,
acompanydeterminesnetrequirementsforanitem,releasesordersbasedonmaterialavailability,
andperformsinventoryanalysis.Iftherecordsarenotaccurate,therewillbeshortagesofmaterial,
disruptedschedules,latedeliveries,lostsales,lowproductivity,andexcessinventory(ofthewrong
things).
Thesethreepiecesofinformationmustbeaccurate:partdescription(pannumber),quantity,and
location.Accurateinventoryrecordsenablefirmsto:
Operateaneffectivematerialsmanagementsystem.Ifinventoryrecordsareinaccurate,
grosstonetcalculationswillbeinerror.
Maintainsatisfactorycustomerservice.Ifrecordsshowtheitemisininventor)whenitisnot,
anyorderpromisingitwillbeinerror.
Operateeffectivelyandefficiently.Plannerscanplan,confidentthatthepartswitbe
available.
Analyzeinventory.Anyanalysisofinventoryisonlyasgoodasthedataitisbasedon.
Inaccurateinventoryrecordswillresultin:
Lostsales.
Shortagesanddisruptedschedules.
Excessinventory(ofthewrongthings).
Lowproductivity.
Poordeliveryperformance.
Excessiveexpediting,sincepeoplewillalwaysbereactingtoabadsituationratherthan
planningforthefuture.

CausesofInventoryRecordErrors
Poorinventoryrecordaccuracycanbecausedbymanythings,buttheyallresultfrom
poorrecordkeepingsystemsandpoorlytrainedpersonnel.Someexamplesofcauses
ofinventoryrecorderrorare:
Unauthorizedwithdrawalofmaterial.
Unsecuredstockroom.
Poorlytrainedpersonnel.
Inaccuratetransactionrecording.Errorscanoccurbecauseofinaccuratepiece
counts,unrecordedtransactions,delayinrecordingtransactions,inaccurate
materiallocation,andincorrectlyidentifiedparts.
Poortransactionrecordingsystems.Mostsystemstodayarecomputerbased
andcanprovidethemeanstorecordtransactionsproperly.Errors,whenthey
occur,areusuallythefaultofhumaninputtothesystem.Thedocumentation
reportingsystemshouldbedesignedtoreducethelikelihoodofhumanerror.
Lackofauditcapability.Someprogramofverifyingtheinventorycountsand
locationsisnecessary.Themostpopularonetodayiscyclecounting,
discussedinthenextsection.

MeasuringInventoryRecordAccuracy
Inventoryaccuracyideallyshouldbe100%.Banksandotherfinancialinstitutions
reachthislevel.Othercompaniescanmovetowardthispotential.
Figure12.3showsteninventoryitems,theirphysicalcount,andthequantityshownon
theirrecord.Whatistheinventoryaccuracy?Thetotalofallitemsisthesame,but
onlytwoofthetenitemsarecorrect.Istheaccuracy100%or20%orsomethingelse?
Part
Number

Inventory

ShelfCount

100

105

100

100

100

98

Record

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4

100

97

100

102

100

103

100

99

100

100
97

100

10

100

99

Total

1000

1000

Figure12.3Inventoryrecordaccuracy.

Tolerance
Tojudgeinventoryaccuracy,atolerancelevelforeachpartm~be
specified.Forsomeitems,thismaymeannovarianceforothers,it
maybeyedifficultorcostlytomeasureandcontrolto100%
accuracy.Anexampleofthelattermightbenutsorboltsorderedand
usedinthethousands.Forthesereasons,tolerancesaresetforeach
item.Toleranceistheamountofpermissiblevariationbetween
inventoryrecordandaphysicalcount.
Tolerancesaresetonindividualitemsbasedonvalue,criticalnature
oftheitemavailability,leadtime,abilitytostopproduction,safety
problems,orthedifficultygettingprecisemeasurement.
Figure12.4showsthesamedataasthepreviousfigure,butincludes
tolerancesThisinformationtellsusexactlywhatinventoryaccuracy
is.

Part

Inventory Shelf

Tolerance

Within
Tolerance

Outside
Tolerance

Number

Record

Count

100

105

5%

100

100

0%

100

98

3%

100

97

2%

100

102

2%

100

103

2%

100

99

3%

100

100

0%

100

97

5%

10

100

99

5%

Total

1000

1000

Figure12.4Inventoryaccuracywithtolerances.

ExampleProblem
Determinewhichofthefollowingitemsarewithintolerance.ItemAhasatoleranceof
5%itemB,2%itemC,3%anditemD,0%.
Part

ShelfCount InventoryRecord Tolerance

Number

1500

1550

5%

120

125

2%

225

230

3%

155

155

0%

Answer
ItemA.
ItemB.
ItemC.
ItemD.

Withatoleranceof5%,variancecanbeup
to75units.ItemAiswithintolerance.
Withatoleranceof2%,variancecanbeup
to2units.ItemBisoutsidetolerance.
Withatoleranceof3%,variancecanbeup
to7units.ItemCiswithintolerance.
Withatoleranceof0%,variancecanbeup
to0units.ItemDiswithintolerance.

AuditingInventoryRecords
Errorsoccur,andtheymustbedetectedsoinventoryaccuracyismaintained.There

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aretwobasicmethodsofcheckingtheaccuracyofinventoryrecords:periodic(usually
annual)countsofallitemsandcyclic(usuallydaily)countsofspecifieditems.Itis
importanttoauditrecordaccuracy,butitismoreimportanttoauditthesystemtofine
thecausesofrecordinaccuracyandeliminatethem.Cyclecountingdoesthisperiodic
auditstendnotto.

Periodic(annual)inventory
Theprimarypurposeofaperiodic(annual)inventoryistosatisfythe
financialauditorsthattheinventoryrecordsrepresentthevalueofthe
inventory.Toplanners,thephysicalinventoryrepresentsan
opportunitytocorrectanyinaccuraciesintherecords.Whereas
financialauditorsareconcernedwiththetotalvalueoftheinventory,
plannersareconcernedwithitemdetail.
Theresponsibilityfortakingthephysicalinventoryusuallyrestswith
thematerialsmanagerwhoshouldensurethatagoodplanexistsand
itisfollowed.GeorgePlossloncesaidthattakingaphysical
inventorywaslikepaintingtheresultsdependongoodpreparation.
Therearethreefactorsingoodpreparation:housekeeping,
identification,andtraining.
Housekeeping.Inventorymustbesortedandthesameparts
collectedtogethersotheycaneasilybecounted.Sometimesitems
canbeprecountedandputintosealedcartons.
Identification.Partsmustbeclearlyidentifiedandtaggedwithpart
numbers.Thiscan,andshould,bedonebeforetheinventoryistaken.
Personnelwhoarefamiliarwithpartsidentificationshouldbeinvolved
andallquestionsresolvedbeforethephysicalinventorystarts.
Training.Thosewhoaregoingtodotheinventorymustbeproperly
instructedandtrainedintakinginventory.Physicalinventoriesare
usuallytakenonceayear,andtheprocedureisnotalways
rememberedfromyeartoyear.

Process
Takingaphysicalinventoryconsistsoffoursteps:

a.

Countitemsandrecordthecountonaticketleftontheitem.

b.

Verifythiscountbyrecountingorbysampling.

c.

Whentheverificationisfinished,collecttheticketsandlistthe
itemsineachdepartment.

d.

Reconciletheinventoryrecordsfordifferencesbetweenthe
physicalcountandinventorydollars.Financially,thisstepis
thejobofaccountants,butmaterialspersonnelareinvolvedin
adjustingitemrecordstoreflectwhatisactuallyonhand.If
majordiscrepanciesexist,theyshouldbechecked
immediately.
Takingaphysicalinventoryisatimehonoredpracticeinmany
companiesmainlybecauseithasbeenrequiredforanaccurate
appraisalofinventoryvaluefortheannualfinancialstatements.
However,takinganannualphysicalinventoryhasseveralproblems.
Usuallythefactoryhastobeshutdown,thuslosingproductionlabor
andpaperworkareexpensivethejobisoftendonehurriedlyand
poorlysincethereismuchpressuretogetitdoneandthefactory
runningagain.Inaddition,thepeopledoingtheinventoryarenotused
tothejobandarepronetomakingerrors.Asaresult,moreerrors
oftenareintroducedintotherecordsthanareeliminated.
Becauseoftheseproblems,theideaofcyclecountinghas
developed.

Cyclecounting
Cyclecountingisasystemofcountinginventorycontinually
throughouttheyear.Physicalinventorycountsarescheduledsothat
eachitemiscountedonapredeterminedschedule.Dependingon
theirimportance,someitemsarecountedfrequentlythroughoutthe
yearwhereasothersarenot.Theideaistocountselecteditemseach
day.
Theadvantagestocyclecountingare:
Timelydetectionandcorrectionofproblems.Thepurposeof
thecountisfirsttofindthecauseoferrorandtocorrectthe
causesotheerrorislesslikelytohappenagain.
Completeorpartialreductionoflostproduction.
Useofpersonneltrainedanddedicatedtocyclecounting.This
providesexperiencedinventorytakerswhowillnotmakethe
errorsonceayearpersonneldo.Cyclecountersarealso
trainedtoidentifyproblemsandtocorrectthem.
Countfrequency.Thebasicideaistocountsomeitemseachday
soallitemsarecountedapredeterminednumberoftimeseachyear.
Thenumberoftimesanitemiscountedinayeariscalleditscount
frequency.Foranitem,thecountfrequencyshouldincreaseasthe

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valueoftheitemandnumberoftransactions(chanceoferror)
increase.Severalmethodscanbeusedtodeterminethefrequency.
ThreecommononesaretheABCmethod,zonemethod,andlocation
auditmethod.
ABCmethod.Thisisapopularmethod.Inventoriesareclassified
accordingtotheABCsystem(refertoChapter10).Someruleis
establishedforcountfrequency.Forexample,Aitemsmightbe
countedweeklyormonthlyBitems,bimonthlyorquarterlyandC
items,biannuallyoronceayear.Onthisbasis,acountschedulecan
beestablished.Figure12.5showsanexampleofacyclecount
scheduledusingtheABCsystem.
Classification

NumberCount

Number

ofItemsFrequency

ofCounts

1000

12

12,000

1500

6000

2500

2500

Total
Counts
20.500
Workdaysper
Year250
Countsper
Day
82
Figure12.5Schedulingcyclecounts.

ExampleProblem
AcompanyhasclassifieditsinventoryintoABCitems.TheyhavedecidedthatA
itemsaretobecountedonceamonthBitems,fourtimesayearandCitems,twice
ayear.Thereare2000Aitems,3000Bitems,and5000Citemsininventory.Develop
ascheduleofthecountsforeachclassofitem.

Answer
Classification

NumberCount

Number

ofItemsFrequency

ofCounts

1000

12

12,000

1500

6000

2500

2500

Total
Counts
20.500
Workdaysper
Year250
Countsper
Day
82

Zonemethod.Itemsaregroupedbyzonestomakecountingmoreefficient.Thesystemisusedwhen
afixedlocationsystemisused,orwhenworkinprocessortransitinventoryisbeingcounted.
Locationauditsystem.Inafloatinglocationsystem,goodscanbestoredanywhere,andthesystem
recordswheretheyare.Becauseofhumanerror,theselocationsmaynotbe100%correct.Ifmaterial
ismislocated,normalcyclecountingmaynotfindit.Inusinglocationaudits,apredeterminednumber
ofstocklocationsarecheckedeachperiod.Theitemnumbersofthematerialineachbinarechecked
againstinventoryrecordstoverifystockpointlocations.
Acyclecountingprogrammayincludeallthesemethods.Thezonemethodisidealforfastmoving
items.Ifafloatinglocationsystemisused,acombinationofABCandlocationauditisappropriate.
Whentocount.Cyclecountscanbescheduledatregularintervalsoronspecialoccasions.Some
selectioncriteriaare:
Whenanorderisplaced.Itemsarecountedjustbeforeanorderisplaced.Thishastheadvantageof
detectingerrorsbeforetheorderisplacedandreducingtheamountofworkbycountingatatimewhen
stockislow.
Whenanorderisreceived,inventoryisatitslowestlevel.
Whentheinventoryrecordreacheszero.Again,thismethodhastheadvantageofreducingwork.
Whenaspecifiednumberoftransactionshaveoccurred.Errorsoccurwhentransactionsoccur.Fast
movingitemshavemoretransactionsandaremorepronetoerror.
Whenanerroroccurs.Aspecialcountisappropriatewhenanobviouserrorisdetected.Thismaybea
negativebalanceonthestockrecordorwhennoitemscanbefoundalthoughtherecordshowssome
instock.

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