A Practical Guide to

Troubleshooting Inventory Discrepancies

in a Manufacturing Environment

Britt Lowry, CPIM, MCP

Chief Technologist

Kraft Enterprise Systems, LLC

10 Cadillac Drive, Suite 380
Brentwood, TN 37027
(615) 665-2545 X105
blowry@kraftenterprise.com

Britt Lowry serves as the chief technologist for

Kraft Enterprise Systems, a systems integration
firm representing Dynamics GP and NetSuite in
Nashville and beyond.
A Practical Guide to Troubleshooting Inventory Discrepancies in a
Manufacturing Environment
By Britton B. Lowry, CPIM

As a manufacturing systems consultant, one of inventory and make sure you didn’t miss
the most common problems I see users anything in WIP, shipping or receiving, that
struggling to resolve is identifying the root hasn’t been entered or posted in the system. If
cause of inventory discrepancies. Suppose you possible, have someone else count the item.
are picking or performing an inventory count Look for unposted transactions in your ERP
and a discrepancy is discovered. Okay, what do system for the item. Make sure shipping and
you do next? Most commonly, an inventory receiving are not occurring while you are
correction is made. Less often, a root cause counting or at least account for it in your
analysis is performed. So how do you do a root procedures. Look for inventory of the item in
cause analysis of an inventory discrepancy and other locations. Verify the labels and unit of
where do you start? The outline below will measure are correct. If the discrepancy is a
guide you through some structured steps to multiple of the unit of measure, you most likely
find the root cause. Start by identifying have a shipment or receipt that was made in
whether you have more or less inventory than the wrong unit. If you use counting scales or
expected. Then, identify if the item can be sold, other automated counting tools, ensure that
if the item is purchased, or if the item is a they have been calibrated and that users know
component of a manufactured item. how to use them. Also, consider keying or data
entry errors. If you commonly find this to be
Analysis the source of discrepancies, consider
Each problem below has a specific technique implementing barcoding, RFID, or other
that can be employed to identify and resolve it. automated processes.
Start with the most likely or easiest to identify
possibilities and try to prove them or eliminate If your ERP system indicates that you have less
them until you find the root cause. The first on hand than your physical count and the
step is to confirm the count. Recount the inventory item can be sold (finished goods or

Inventory Discrepancy Ishikawa Diagram

Item is MFG Item is Item can be
Component Purchased Sold

The Quantity or UOM on the

BOM in ERP is too low Incorrect Item Received
Incorrect Item
Shipped
Item was scrapped but Incorrect PO, UOM, or
not recorded as scrap Quantity Received Incorrect Quantity
or UOM shipped
A Vendor Return was entered RMA Posted but not
but has not shipped Received ERP Count is Higher than Physical Count
Item is missing from a BOM
in ERP that requires it
Item has been received in Shipment has been made but the
ERP but not put away ERP Transaction has not posted

Engineering has pulled a sample Quality Assurance has pulled a Sales has pulled a sample
and not recorded it sample and not recorded it and not recorded it
Inventory
Discrepancy

The Quantity or UOM on the Incorrect item Incorrect item on order but
BOM in ERP is too high received correct item shipped
Incorrect PO, UOM, Incorrect Quantity
Item is on a BOM in ERP or Quantity Received or UOM Shipped
that doesn't require it
Material was returned to vendor but a Order has posted but inventory
transactions was not entered in ERP has not actually shipped
The item is marked as
floorstock but it isn't ERP Count is Lower than Physical Count
Material was physically received and put An RMA has been received but the
away but no receipt was entered in ERP Transaction has not posted in ERP

Item is MFG Item is Item can be

Component Purchased Sold
service parts), please consider the following
possibilities:
 You may have shipped a customer the
correct part, but the wrong part was on
the sales order (this will results in two
inventory errors).
 You may have parts waiting to ship but
the sales transaction has already been
posted.
 You may have shipped less than the
order quantity but posted the sales
order line as complete.
 You may have an RMA that has been
physically received, but not yet posted
in your ERP system.
If the inventory item is purchased:
 You may have parts that were put in
inventory but the receipt has not been
posted or perhaps the packing list was
lost and not processed.
 You may have received the wrong part
number or the wrong PO with the same
item but a different quantity.
 You may have received a quantity that
is less than what the PO required or the
unit of measure is wrong. This is more
likely if the item is measured by length,
weight or volume (e.g., The PO was for
100 meters, but the vendor shipped 300
feet).
If the item is a component or subassembly:
 Search your recent picklists that contain
the item or do a “where used” inquiry
on your active BOMs.
 Look for instances where the item may
have a quantity that is too high,
incorrect unit of measure or perhaps is
on a BOM that doesn’t actually require
that part.
 Search for any ECO/ECNs that include
the part number.
 If you are using Kanbans, your actual
container size may be less than what
your inventory system is expecting or
Kanbans are not being filed to the
required quantity. Ensure your Kanbans
are clearly marked with the required
quantity.
 Make sure you are not counting WIP.
Accidently counting WIP can cause
fluctuations in your count. One day you
will be adjusting inventory up and the
next day you are adjusting it down.
 If you have rework, material consumed
by or created in the rework process
must be accurately tracked.
 If your manufacturing process creates
co-products or by-products, ensure that
transactions are being created for these
items.
Essentially, you are looking for a transaction in
your ERP system that doesn’t belong. This is
one of the easier problems to find.
The harder problem to find is looking for a
transaction that was never created. This is
when you have more inventory in your ERP
system than you physically have on-hand.
There should have been a transaction but there
wasn’t. Here are some things to consider when
you are looking for a missing transaction:
If the inventory item can be sold (finished goods
or service parts):
 You may have shipped a customer the
wrong part but the correct part was on
the pick list. This will result in two
inventory errors.
 You may have shipped more than the
order quantity required on the pick list.
 You may have shipped the part but the
shipment has not yet posted to
inventory.
 There may be an RMA that was posted
but not physically received.
  You may have a sales person, engineer
or QA inspector that has pulled a
sample and not recorded it in the
system.
If the inventory item is purchased:
 You may have parts that were received
in ERP but not yet been put in
inventory.
 You may have received the wrong part
number or the wrong PO with the same
item but a different quantity.
 You may have a vendor return that has
not yet shipped.
 You may have received a higher
quantity or the wrong unit of measure
than what was physically on the
shipment. This can happen when
someone receives based on the packing
slip rather than counting the receipt
quantity.
 If you have products that expire, ensure
that material has not been scrapped
without a transaction.
If the inventory item is a component or
subassembly:
 You have the wrong part on a bill of
material. This will result in two
inventory discrepancies with one item
having too much and the other having
too little.
 You have a quantity on a bill of material
that is less than what is actually
consumed on the plant floor. The
system thinks you are using less than
you actually use.
 Search for any ECO/ECNs that include
this part number.
 If you are using Kanbans, your actual
container size may be more than what
your inventory system is expecting or
Kanbans are being over filed. Ensure
your Kanbans are clearly marked with
the required quantity.
 Make sure you are allowing for WIP. If
you are using backflushing, material
may have been physically put into WIP
but not yet back-flushed. Take care to
account for it.
One of the best ways to identify manufacturing
related inventory issues is by using your
travelers or picklists. If you are not requiring a
traveler or picklist to follow a product through
the manufacturing process, this is a good time
to implement it (even if only temporarily). A
traveler with times, parts, units and quantities
following an item through its production is a
great way to identify discrepancies. Make sure
your workers are told to annotate any
discrepancies between what the traveler lists
and what happens in reality. If the quantity is
incorrect, don’t just grab some more, write it on
the traveler. Make sure to turn in your
travelers to the shop office or equivalent, so
that corrective action can be taken.
Another common problem to look for is scrap
that has not been recorded. Do you have MRB
or QA procedures for recording scrap? Do you
have a process for recording that parts have
been removed for testing, engineering, or sales
samples? Do your people follow the
procedures?
You should also look to see if you have
complementing discrepancies in a similar item.
If there is some confusion or perhaps a labeling
issue for two parts with similar characteristics,
your system may be showing too much
inventory of one part, and too little of a similar
part. Maybe a BOM change was not recorded
properly or users aren’t aware of a change.
Cycle Counting
You ERP system simulates your manufacturing
environment. The more, good information you
give it, the better the simulation. When the
simulation is out of sync with reality, problems
occur. The further you are in distance and time
between something happening and recording it,
the more opportunity for error you have.
The time to identify the root cause of an
inventory discrepancy is right after it happens.
Looking for a problem that occurred in the last
week is far better than looking for something
that happened in the last 6 months or year.
There will be far fewer transactions to look
through and the people you talk to are more
likely to remember if some related event
happened.
This is where cycle counting comes in. Many
managers setup items for counting on a
scheduled frequency by ABC code and perhaps
add counts when an item quantity reaches zero
or a bin is empty. The prevailing wisdom on
cycle counting is to change the count frequency
of an item with discrepancies to daily (or weekly
1
Ross D 2016, ‘Cycle Counting by the Probabilities’,
APICS Magazine September/October 2016
for low transaction volume items) until the
root-cause has been identified and eliminated1.
Think how much easier it is to trace the cause of
a problem if you only have to look back 24
hours.
Whatever the cause of the inventory
discrepancy, make sure to close the loop by
notifying the appropriate person to correct that
problem. This may be the shop office, buyer,
purchasing manager, material manager, QA,
MRB, engineering or other level of
management. Once the responsible party has
been notified, keep monitoring the inventory to
ensure that the corrective action has been
effective. Try to think of ways to prevent the
error from recurring. Prevention is more
efficient than correction. Don’t try to fix
everything at once. Incremental improvement
will lead you to your goal. Remember to make
one thing better every day. Over time, this will
have a very powerful impact.