Inventory Accuracy and the Effects on ERP
Inventory accuracy is crucial in today’s manufacturing environments. Some people do not realize the impact of what happens within an Enterprise Resource Planning (ERP) system when your inventory is not accurate.
And when I say accurate, I mean at least 98% accurate.
Incorrect Bills of Material (BOM)
A common issue at companies is they do not have the disciplines in place to ensure inventory accuracy. Some common pitfalls of inventory inaccuracy would be that Bills of Material (BOM) are incorrect.
I have a history working with plastic processing (along with other types of manufacturing) and one thing that throws off inventory is incorrect part and runner/sprue weights in the BOMs. A lot of manufacturers also do assembly/secondary processes and the quantity per could be incorrect in the BOMs.
Completing Consumption of Materials
There are two different ways I have seen consumption of materials being completed during production reporting.
#1 – Backflushing Material Based on Parts Produced
One is the function of back-flushing material based on parts produced based on your BOM. Many systems that I have used allow for the backflushing of their materials when they report production. This is the time when you can catch inventory issues due to BOM inaccuracies.
You can check your work center location inventory and verify at the end of shift if the computer matches the actual inventory counts. If not, start weighing your parts and checking your BOM.
#2 – Issue Material to a Job/Work Order
The other type of system out there allows you to issue material to a job/work order. The downside to this is you can’t see this inventory since it is typically removed from any on-hand quantities. You have to reconcile at the end of the job/run.
Moving Material to Proper Locations
Another common factor with inventory inaccuracy is that your users are not moving material to proper locations based on procedures. If your system allows a location to go negative, it’s time to check a negative report and get to root cause of what may have cause this. It can come down to material not being moved or inaccurate BOMs.
I hate repeating myself on the BOM issue but I have seen issues time and time again. In fact, I have recently worked with two customers who are struggling with negative locations. If a location is negative and other locations are positive, what is your true on-hand quantities? One can only guess.
How Inventory Inaccuracy Affects Your ERP
What happens within your ERP when your inventory is inaccurate?
The system might not generate work/job orders for customer orders if it thinks you have finished goods/work in process stock. If you don’t have the inventory or the work orders you will likely miss shipments.
Customers won’t be too happy if you don’t have on-time shipments. In addition, if the work orders are not generated the system will not tell you to purchase material. It’s a downhill spiral from here.
Speaking of purchased material, let’s talk raw materials and purchased on-hand balances. If these are not correct, you will not have product to produce your manufactured parts. You will possibly be expediting material which can become very costly to your company. On top of that, it can cause havoc on the production floor. A scheduler has to decide to keep running parts that might not be due for over a month or lose costly production time by keeping the machine in downtime.
Downtime Costs Example
Think of the breakdown for downtime costs due to material inaccuracy in this way: If a machine rate if $50 per hour and your machines sits down for 48 hours, the cost is $2,400 for two days.
If that happens weekly, the annual lost utilization is $124,800. That is more than a lot of people’s’ salaries on the production floor. For this annual cost, you can justify hiring people to fix the inventory accuracy issues.
Add to this cost, other factors such as the cost to deal with machines that need to be changed over quickly to fill an order because your finished goods on-hand counts were inaccurate.
How much does it cost your company when you have to switch over jobs that you were not thinking you had to run? What is the time it takes to switch over jobs? Depending on the jobs, setup times can range from one hour to ten hours. That is a lot of downtime for changeovers.
What can you do to start fixing these inventory accuracy issues?
- Have the right people handle inventory management – they have to care and be analytical.
- Training/education– you need to make sure that people know what they are supposed to do in the system and what the impacts are if they don’t.
- Get to root cause of the inventory issues and have a corrective action to prevent this from happening again.
- Track the downtime costs due to inventory issues (waiting on material, changeover/setup)
- Create a process to validate bills of material.
- Ensure people are following their procedures.
I hope this helps some of you out there in the manufacturing world.
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