Inventory Tolerance

From: Duncan Jones

Date: 11 Jul 2006

Dear Vinet,
Firstly, I always advise my clients to set the
tolerance option to Usage rather than QoH.  QoH doesnt
make any business sense to me.  If you are managing
stocks well, the inventory level will vary between
almost 0 and your buy-in quantity.  The same inventory
discrepancy could be an easy pass or a bad fail
depending on when in the month you do the count. 
Items with high volume but predictable usage can be
run with very little safety stock, so that a small
proportion of unrecorded usage could cause a huge
discrepance versus QoH.

An extreme example is when you try to clear out the
decimal pouints left by MFG/PRO's unrounded
backflushing.  QoH = 0.00001.  Actual = 0.00000. 
Totally insignifcant discrepancy but it counts as a
fail because its 100% of QoH!

Tolerance % have to be lower if you use Usage, because
Usage is a much higher multiplier than QoH.  So if you
switch to Usage you'd probably want lower settings
than the ones listed.

Hate to disagree with Scott, but I dont often get the
chance so will do it anyway!   70% Inventory accuracy
doesnt mean that that the inventory is off by 30%. 
The question is what is an acceptable discrepancy
versus and unacceptable discrepancy.  E.g. suppose we
use about 1000 a month of a part and have about 500 in
stock on average.  Suppose we determine that a
discrepancy of more than 50 will be unacceptable
operationally, causing inability to fulfill demand as
planned, etc.  70% accuracy means that 30% of items
have discrepancies bigger than this tolerance limit. 
In total, the value may be out by as little as 3% (in
this example).  Not a big deal financially, but
operationally this could be a disaster if the missing
items mean we cant ship a high value product and has a
long lead time to get in a replacement.

So to Vinet's question, the tolerances appropriate for
your business depend on what you make, the
predictability of demand and the impact of shortages
(lead times, etc).  

Duncan Jones
Duncan Consulting

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