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Record accuracy is a prerequisite to inventory management, production scheduling, and ultimately, sales. For this case study assignment, choose a local organization and research how it manages its inventory. Identify how the company?s inventory is classified and what strategies the organization uses to ensure accurate inventory records are maintained. Specifically, identify at least 8-10 items within the company?s inventory and determine which items should be A, B, and C items. Explain your reasoning behind labeling the inventory items as A, B, or C items. Also, discuss the advantages and disadvantages of using a cycle counting strategy or a complete inventory strategy.Learning Content: Module 5
At periodic and defined intervals, the inventory is counted to reconcile the inventory records as a way to assure that the system shows an accurate depiction of what is actually in stock. This is usually done either by counting the entire inventory at the same time (called a physical inventory) or by counting the total number of items at varying times on a prescheduled basis (called cycle counting).
Inventory accuracy and control are critical components in the supply chain because the impact they have on profitability is substantial. Therefore, it is important for organizations to be aware of the advantages the cycle counting technique has on inventory accuracy. Cycle counting provides five advantages, which include eliminating the shutdown and interruption of production necessary for annual physical inventories, eliminating annual inventory adjustments, allowing only trained personnel to audit the accuracy of inventory, allowing the cause of the errors to be identified and remedial action to be taken, and maintaining accurate inventory records.
Accuracy and inventory go hand in hand. In order for an organization to be effective and efficient, the organization must be aware of what it has in its inventory. There are different approaches and strategies organizations can take to ensure inventory accuracy. One of the tools organizations can use to ensure inventory accuracy is cycle counting. Cycle counting is a type of audit process that focuses on reconciling inventory with inventory records. This approach also uses inventory classifications developed through ABC analysis in which items are counted, records are verified, and inaccuracies are periodically documented. Once the causes of the inaccuracies are determined, remedial action is taken to ensure the integrity of the inventory system. Moreover, cycle counting entails systematically counting each item carried in stock at least once per year at a planned interval or frequency, which is often based on velocity or ABC analysis classification. Cycle counting is also used to correct known errors or to handle special situations.
ABC analysis divides on-hand inventory into three classifications on the basis of annual dollar volume. ABC analysis is an inventory application of what is known as the Pareto principle (named after Vilfredo Pareto, a 19th-century Italian economist). The Pareto principle states that there are a ?critical few and trivial many.? The idea is to establish inventory policies that focus resources on the few critical inventory parts and not the many trivial ones. In other words, it does not make good sense or makes good use of time to monitor inexpensive items with the same intensity as very expensive items.