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Andrew C. Stein, CPIM

Real World Warehouse

Location Accuracy

Introduction

• Andrew Stein

– 18 years at Caterpillar

• 3 in Accounting

• 15 in Logistics (Record Accuracy Management)

– CPIM since 2009

– Bachelors in Accounting from University of Illinois

– 6 Sigma Black Belt certification

– Caterpillar and external client logistics experience

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Introduction

• Caterpillar Parts Distribution

– 21 facilities

– 15M sq ft of storage space across all facilities

– Fill 40 million order lines annually

– Serving 190 global dealers & 2,006 dealer branches

– Morton, IL distribution center

• 3.2M sq ft of storage space

• 45k orders filled daily

– 99.8% location accuracy -- right part/right place

– .2% annual shrinkage

Agenda

• Inventory validation methods

• Why you need to validate inventory

• Benefits of improving warehouse accuracy

• Improving warehouse accuracy

• Inventory accuracy measurements

• Bin auditing

• Q & A

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Learning Objectives

• Practical ways of improving warehouse

accuracy

• Why taking a holistic, big picture point of view

is vital to improving your accuracy

• When to embrace the gray (uncertainty) and

when you need to eliminate it

Inventory Validation Methods

• Full physical

– Costly

– Appropriate for high $, theft prone inventory --

e.g. jewelry store, car dealership

• Cycle count

– Industry standard

– Non-value added counting

• Statistical sampling

– Underutilized method

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Why Inventory Validation Matters

• Satisfy internal/external auditors

• Correct inventory errors

• Identify root causes of errors

• Improve processes

Benefits of Improving Warehouse Accuracy

• Reduce stock outs

• Reduces supply chain impacts

• Reduce safety stock requirements

• Reduce need for warehouse space

• Reduce obsolescence

• Reduces inventory costs

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Improving Inventory Accuracy

• First, improve your bin/location accuracy

– Audit your bins/locations

– Fix your errors

– Identify the root causes of poor bin/location

accuracy

• Then, and only then, begin counting your

inventory

Improving Inventory Accuracy

• Develop robust internal controls

– Get buy in from the top and make it a priority

– Inventory tracking at all points in the warehouse

– Electronic movements match physical movements

– If you can’t get real time tracking, reduce your

exposure by entering activities as soon as possible

– Documented and audited processes

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Improving Inventory Accuracy

• Develop a strong control process

– Limit access to performing inventory adjustments

– Trained/dedicated staff

– Escalation of high $ items (requires 2+ signatures)

• Completed timely

– Priority activity, not an ‘as I have time’ activity

– Timeliness is weighed against value

– Too quick is just as bad as too slow

Improving Inventory Accuracy

• Holistic approach

– Include all warehouses in your network

– Include all locations/bins in the warehouse

– Include all processes in your investigation

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Improving Inventory Accuracy

• Review stock records at the part # level, not

the bin level

– Part # level ensures stronger inventory control

• Reduces ‘nervousness’ in the supply chain caused by

over/under ordering

• Reduces stock outs

• Reduces inventory and obsolescence

Improving Inventory Accuracy– Example:

• Part # 1A1 with 8 locations

• Location 1 is short 7 pieces

• Locations 2-8 are over 1 piece each

– Bin level approach: Immediately process +1 piece

inventory adjustments for locations 2-8 (total +7 pieces),

then spends time searching for a 7 piece shortage

– Part # (holistic) approach: Process inventory

adjustments for all locations at once for a net zero

adjustment

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Improving Inventory Accuracy

• Analyze and categorize errors to eliminate the

dreaded ‘unknown’ category

– For example:

• Putaway loss

• Package quantity issue

• Picking error

• Storing issues -- e.g. storing similar items adjacently

• System issues – e.g. incorrect inventory updates

• Supplier errors – always count upon receipt

• Internal process errors – e.g. unauthorized withdrawals

Improving Inventory Accuracy

• Allow for tolerances in the stock record

adjustment process

– Low $/Low % of inventory

• Missing a 5 cent washer can’t have the same scrutiny as

missing a $1000 turbocharger

• Missing 0.1% of your average inventory can’t have the

same scrutiny as missing 10%

• Allow less experienced staff to handle small $/%

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Improving Inventory Accuracy• Current inventory vs. average Inventory

– Average inventory is more stable

– Current inventory can vary widely

– Example:

» Current inventory Average inventory

» 1000 on July 1 1000 on July 1

» 1 piece on July 10 1000 on July 10

» 1000 on July 14 1000 on July 14

» 2000 on July 31 1000 on July 31

Inventory Accuracy Measurements

• Net and gross adjustments

• Part # adjustment detail

• Adjustments by warehouse area or storage type

• Avoid feel good metrics

– Accuracy level of very slow moving parts

– Counting only easy to count parts

– Hiding poorly performing areas in a high level metric

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Bin Auditing• Random sample of bins

– Check that the right part is in the right bin

– Check that empty bins are truly empty

– Do not count inventory

– Assists in identify problem areas

• Sample of prior days putaways

– Find errors as soon after putaway as possible

– Work with staff to correct process errors

– Validates your putaway process

– Helps to get it right from the start

Question and Answer

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Contact Information

Andrew Steinstein_andrew_c@cat.com(309) 266-4344

Survey

www.tinyurl.com/lc3s3fm

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Glossary• Average inventory – The median value of an inventory throughout a specified time period. A basic

calculation for average inventory would be:

(Current Inventory + Previous Inventory) / 2

For example, the current inventory, $10,000, is added to a previous inventory - for example, the inventory

on the same day of the previous year, such as $8,000 - and divided by the two balance points, for an

average of $9,000 (($10,000 + $8,000) / 2 = $9,000).

• Bin level accuracy – A measurement indicating that the right part and right quantity of the part are stored

in the bin.

For example, a sample of 100 bins, yielding 3 errors -- 1 bin with an inaccurate count (Stock record = 10,

count = 8), 1 bin with missing inventory and 1 bin with wrong part number stored in the bin, would be

accurate at 97% (100 – 3 = 97)

• Current inventory – The quantity listed on the stock records for a given part number. This represents the

expected quantity for that bin/location.

• Gross adjustments – The absolute value of inventory adjustments for a specified period.

For example, +$100 and -$100 = $200 gross adjustment

Glossary• Inventory accuracy – A calculation comparing the stock record values to actual values of stock in a

warehouse. Can be validated via full physical, cycle count or statistical sampling methodologies.

• Inventory adjustment – A correction to the stock record triggered by a stock count discrepancy.

• Location/bin – A physical storage space within a warehouse. Refers to any space within a warehouse that

may contain a product/part #/SKU.

• Obsolescence – The state of being which occurs when a product/part #/SKU is no longer wanted even

though it may still be in good working order.

• Net adjustments – A sum of all inventory adjustments for a specified period

For example, +$100 and -$100 = $0 net

• Putaway – Storing inventory in a bin/location in the warehouse.

• Stock out – The inability to fill a customer order. Can be caused by a variety of reasons including not

carrying enough safety stock, heavy customer demand, or lost inventory.

• Stock Records – The inventory quantity indicating what is expected to be physically on hand (in stock).