It all adds up

Cindy Ritzman and David Boardman.

3D Coal Stockpile from URCV on Vimeo.

A coal stockpile accurately modelled in 3D from aerial imagery.

How many hammers and screwdrivers are currently on the shelves at any local hardware store on any given day of the year? The store’s management has an accurate count of every product type. Products arrive in neat, countable boxes tagged with codes or RFID devices and are subsequently sold using bar code scanners. The ongoing perpetual inventory of those items is highly accurate, due to the traceability or measurability of the products. Accurate perpetual inventory enables stores to make data-driven decisions that improve business operations and reduce financial write-offs.

Unfortunately, accurate perpetual inventory is much harder to realise in the mining industry. This is because mining products do not arrive neatly in boxes nor do they get tagged with barcodes. It is hard to perform an inventory count as products are stored in all shapes, sizes and environments. Products also change weight based on moisture and compaction and can be ‘lost’ through erosion and floor loss. Extensive effort goes into maintaining and managing conversation factors for converting yards to tonnes. Producing and selling in tonnes is also carried out, yet cubic yards of meters are used to inventory. And do not forget the safety challenges!

It is easy to become accustomed to significant error in day-to-day perpetual inventories – and the end of year write-off. It is very common to hear a story of a massive, multi-million dollar write-off that a CEO and CFO had to explain to investors and shareholders. Everyone's site or production manager has had to stand in front of an executive at one point in their career to explain how an error happened – and promise that inventory will be better managed going forward.

Companies in the industry strive to achieve and maintain an inventory +/-5%. However, the actual variation might realistically skew over/under in the range of 20 – 30% vs actual. For national or global companies with multiple sites and locations, any variation could easily multiply into the tens or hundreds of millions of dollars.

Many have tried to manage perpetual inventory better by using scales to better manage production and sales. Scales are working well for tracking sales – but still generate variances due to moisture. Scales are being used for tracking critical production – but are challenging to implement for all production due to cost and maintenance. Therefore more frequent inventory counts are the most viable solution to addressing perpetual inventory accuracy.

Unlike retailers and manufacturing companies, which perform physical inventory counts once or twice a year, materials companies must perform more frequent counts to reduce errors that build up over time. Historically, companies have performed annual inventory counts with quarterly or monthly estimates to help manage write-off risk. Some companies have now advanced to twice-yearly, or even quarterly counts.

The majority of CFOs and controllers would perform more frequent physical inventory counts, if time and cost allowed. CFOs and controllers report that the major costs included in conducting a physical inventory count are attributed to management oversight, planning, measuring, reviewing and reconciling data, as well as updating financial systems. Add to this, the costs of labour and time to perform a count using internal or external resources. Each of these labour and time costs are magnified by the range of a company’s geographical distribution.

Monthly physical inventory counts are the first step to controlling swings in inventory

Companies that achieve a more accurate perpetual inventory through monthly or quarterly physical inventory counts receive several positive business benefits:

• Reduced financial write-offs.
• Reduced stock-outs by ensuring there is adequate material on hand to support the business needs.
• Better business decisions (i.e. investment in resources or equipment) and the ability to set more realistic performance goals (i.e. incentives) based on productivity or cost per metric tonne.
• Meet and exceed audit requirements.

Accelerate the speed and reduce the cost of physical inventory counts through new technologies

Technological advances are now shrinking the time needed to perform company-wide physical inventory counts from 3 – 5 weeks down to 3 – 5 days. The costs to perform multiple quarterly or monthly counts are now comparable to the historical price of one annual count. Significant advances in image processing, software as a service (SaaS), drones and phones make this possible.

Perform monthly physical inventory counts with a mix of measurement technologies, including iPhones, drones and planes.

Manual photogrammetric processes of the past are now fully automated thanks to advances in image processing and computer vision. High-quality cameras embedded in drones, attached to planes and built into mobile phones are more available and easier to use than traditionally higher-cost GPS and laser-based measurement technologies. The combination of high-quality low-cost cameras, combined with advanced image processing enable rapid low-cost 3D modelling from imagery. Volumetric measurements generated from imagery are now an accepted form of aerial survey.

SaaS is a way of delivering applications over the internet as a service. Instead of installing and maintaining software, companies simply access it via the internet, freeing themselves from complex software and hardware management. SaaS companies leverage cloud computing to cost effectively scale operations to meet customer demand.

Leveraging SaaS, image processing, airplanes, drones and phones makes it possible to accelerate the speed and reduce the cost of physical inventory counts. The time to perform an inventory count is now only limited by how fast the imagery of stockpiles can be collected. Airplanes can be used to quickly take aerial images of hundreds of sites across geographically dispersed operations. Drones used by trained professionals – internal staff or external service providers – can be used to obtain aerial images at localised sites. And now even a phone can be used.

Using a combination of SaaS and image capture methods makes it possible to complete a company wide inventory in 3 – 5 days. Thousands of stockpile measurements can be generated from millions of images in just 24 hr. Finance and operations employees quickly review and approve data via a common website with no need to manually enter or transfer data.

Putting it all together

StockpileReports.com was launched in 2013 by experienced scientists and engineers in the computer vision field to help companies achieve accurate, perpetual inventories through more frequent physical inventory counts. Subscription-based software, along with project management and consulting services, are provided by the company to enable companies to perform a fast and low-cost physical inventory count. The web portal allows employees to successfully plan the count, perform the count and review and approve the results. Software is provided that enables customers to collect their own imagery using drones and iPhones. To completely eliminate field labour, customers can choose to leverage a fleet of over 35 aircraft to rapidly capture aerial images across North America. Now physical inventories that used to take companies 3 – 5 weeks – or even three months for large nationwide operations – can be completed in 3 – 5 days.

A 3D model of a coal stockpile, used for generating volume reports by Stockpile Reports.

Case study

A multinational materials company that manufactures and distributes cement, ready-mix concrete, aggregates and materials including coal, recently approached Stockpile Reports searching for a solution to reduce time and costs associated with inventory measurements across multiple sites.

The company had been performing inventory counts on multiple sites and regions. They had hired an expensive third-party survey team, who used a truck-mounted laser for measurements. Using a truck-mounted laser was accurate, but the costs associated with the surveys only allowed for physical inventory measurements to be performed once yearly.

During the rest of the year, team members kept a perpetual inventory by performing self-reported monthly estimates of material on hand. They estimated these amounts monthly and sent the totals to the Finance Department.

As a result of not using current, accurate measurement data, the company was experiencing major write-offs every year, corresponding to large financial swings.

Stockpile Reports was used to perform monthly physical inventory counts using a mix of measurement technologies, including iPhones, drones and planes. A combination of collection methods were used, depending on an individual site’s location, safety, stockpile placements and sizes:

• A portion of one location is measured monthly by a drone for tall coal piles, in a high-traffic area, which made it unsafe for ground measurement by iPhone.
• Bunkered material and smaller stockpiles were measured monthly with iPhones using internal labour to spot check incoming deliveries, and also to ensure that outgoing deliveries met production expectations.
• Physical inventory count was conducted quarterly using Stockpile Reports’ flyover service on the same day – if weather permitted. This provided a running perpetual inventory for the company.

The cost-savings were immediate, as there is no third-party labour needed to implement the solution. The time-savings enabled the company to perform company-wide measurements regularly. For example, the average time required using internal labour and Stockpile Reports’ flyover service was 20 min. for each site. Internal labour used for piloting a drone for site measurements averaged approximately 45 min. per site. The average measurement by iPhone was 3 – 5 min. per stockpile and bunker.

The materials company has accelerated physical inventory counts and is now performing monthly measurements. Measuring often, regularly and accurately is the key to inventory control. They are now able to make data-driven material handling decisions and are greatly reducing financial write-offs.

Conclusion

Over the last three years, Stockpile Reports has worked with over 125 companies in 18 countries performing physical inventory counts at over 1625 locations. Based on this experience, the company believes that more frequent physical inventory counts (quarterly or monthly) is the most effective way to enable accurate perpetual inventories – with accuracy levels similar to other retail and manufacturing businesses – and reduce write-offs. After all, every stockpile is cash sitting on the ground.

Note: This article first appeared in the March issue of World Coal.

About the authors: Cindy Ritzman is Marketing Director for StockpileReports.com and David Boardman is Founder and CEO at URC Ventures.

Read the article online at: https://www.worldcoal.com/handling/07032016/it-all-adds-up-2016-345/