When a director of finance or accountant conduct inventory checks at the end of a year and find that the total deviations in money are negligible compared to cash flow, they will be content and progress with their financial reports. But that which is good for your accountant is not necessarily good for the whole company – inventory can give us a very important view of the business and many chances for improvement.
Mess Value Index
When Nestle delved into daily performance in Osem (at the time I managed a large profit center), they showed us, for the first time, the need to measure how many unites were counted in inventory checks in the field, compared to data in the company's digital records.
Our ombudsman at the time called this index "Mess Value Index". And indeed, when we measured this for the first time we got such a low result I rather not even list it.
Reasons varied: incorrect product trees, using alternate materials without noting it in the work order, incorrect issuing on the production floor and returns from it (both physical and in the digital records), and mostly flawed inventory management.
We began a procedure of random checks of ten items a week and analyzing sources of differences.
Within a year we reached 75% inventory compliance and after a few more months we passed 90%.
This improvement in inventory compliance didn’t represent improvement in work in the warehouse, but mostly the communication between it and the production department: correct product trees, daily issuing of raw material and packaging (physically and in the computer) from storage to production and return of leftovers.
Since then, in every place I worked, I would check the inventory compliance index, and the initial result was always 30% or under (meaning – inventory recorded digitally were only accurate for 30% of items in storage).
In one of the companies with which I worked several years ago, the warehouse was so meticulously managed and was always locked, that we didn’t see fit to check the issue to the beginning. One day we did and found that 0% (zero percent!!) of the items in storage matched the records.
After a thorough examination of the issue, we discovered that service staff would come to the back door of the warehouse every morning and take what they needed… nothing would be recorded and no leftovers returned.
At another large company with which I've worked in the past, materials were very substantial (over 60% of sales went to purchase materials). There were many types of items and the work of the warehouse was very complex.
The last inventory check which took place before I began working there, it was discovered that only 1% of items in the warehouses matched digital records.
A few years earlier the CEO decided (to achieve short term savings) to open the warehouses, to stop issuing materials, and to stop manage inventory all together.
Production workers would take materials themselves and leftovers were never returned but were rather strewn across the factory.
We found pallets of finished products or raw materials, in various places across the factory and despite having been counted in the inventory check and listed in the records, were not previously located and no one could find them when necessary.
This way they were for a year or more, recorded but unused.
When of the sales executive told me that sometimes a product would be listed as existing in the system, yet could not be found and was re-manufactured.
At the same company, there was one warehouse of especially expensive materials given out in small quantities. The warehouse was locked and no one entered it apart from the warehouse worker in charge of it. Items in that warehouse were managed exactly and all matched the records.
The described above may present an extreme situation, but it is not unusual.
I recommend to always measure inventory compliance, or to what extent what is recorded and what actually exists match.
Once a week check ten items, in order to test inventory compared to records and analyze, using an improvement team made up of employees, the reasons for one or two differences.
Improvement will be quick and steep.