Development of Internal Audit and Cycle‐counting Procedures for Reducing Inventory Miscounts

Focuses on schemes to reduce inventory miscounts from the operational management point of view. An internal audit procedure is devised for identifying most of the data‐entry errors, which are one of the main causes of inventory miscounts during the flow of material through in‐transit stations. Inventory miscount errors, which escape the internal audit procedure, are further reduced through cycle counting. Divides stations with a material‐flow network into two categories – external and internal stations. Further subdivides internal stations into in‐transit and stock stations. Identifies and corrects most of the data‐entry errors by monitoring the compliance of certain rules individually at each in‐transit station and collectively at all in‐transit stations. Optimally determines the frequencies for cycle counting by minimizing the sum of the cycle‐counting cost and the penalty cost owing to additional stockouts and over‐stocking on account of inventory miscounts. The suggested internal procedure and cycle counting with revised frequencies were implemented in a company dealing with spare‐parts distribution; realizing an annual saving of about $1 million just a year after the implementation of the programme.