Winning at the Tool Management Game

Using tool management software to improve productivity and the bottom line

Using tool management software to improve productivity and the bottom line

One of the most widespread problems companies face is effectively managing their inventories, specifically tool inventories  a constantly mobile and notoriously easy-to-access body of assets that can be worth millions. The National Insurance Crime Bureau estimates that the construction industry alone loses $1 billion annually from equipment and tool theft. But there are far greater financial repercussions of mismanaged tools than merely lost or stolen inventory: Time is lost when projects are delayed to search for missing tools, or missing equipment is replaced only to reappear several weeks later. Whether through misuse, mismanagement or theft, these losses can produce significant financial shortfalls over time.

But poor tool management runs far deeper than the perceived warehouse difficulties. It affects every department in the company. Ineffective tool management results in issues that span safety, accounting and human resources:

  • Human Resources  Time spent searching for lost tools is time taken away from a job, leading to slowed completion and possible penalties for nonperformance

  • Safety  Ineffective management of tool calibrations results in tools that don't work properly in the field and can cause injury, and the inability of a company to prove necessary testing was performed increases company liability in the event of an accident

  • Accounting — Ineffective tool management leads to higher rates of lost, stolen or broken tools, the costs of which are absorbed by the company. Additionally, since the tool inventory can be a substantial asset for large public companies, an effective tool management system helps ensure compliance with the Sarbanes-Oxley Act of 2002

Understanding The Problem

The loss of just one tool results in much more than a loss of the value of that tool. For starters, when a tool is lost on a jobsite, the job that must be completed with that tool is inevitably delayed. When one job is delayed, subsequent tasks are postponed, slowing down the entire jobsite.

Additionally, time is spent by employees searching for the tool. If they don't find it, the project manager is included in the task. Still not located, a replacement tool must be ordered, involving the warehouse manager, and accounting must allocate funds for the replacement. Once the tool arrives, it must be recorded and transferred to the jobsite.

In the end, the time and efforts of nearly a dozen employees will have been used to replace just one lost tool. All of this time spent to replace or find a lost tool is diverted from the real task of finishing a job on time and within budget.

Compliance and Consumables

Regulatory agencies require that tools be regularly certified, creating liability problems for companies that cannot provide proof of such measures. Various tools have various requirements, all of which must be performed according to set schedules. In large inventories, just keeping track of what pieces of equipment are due for recertification can be a difficult task. Beyond certification, employees must be trained to use specific tools, and companies should have a way to access such information. If a company allows an employee to use a tool and he or she has not been properly trained to do so, the company could be held liable in the case of injury.

Related to the problem of tool loss is the likelihood that many items must be continuously replenished. These consumables raise a new issue of inventory management, because without effective tracking, effective ordering is impossible. Without access to reliable inventory levels, accounting is left to guess at how much should be allocated for consumables replenishment. Often, the result is misappropriated funds that could have been better spent elsewhere. Or worse, not enough money will be allocated for such purchases, leading to a shortage of supplies and the slow-down of a project.

Automated Tool Tracking Systems

These problems have the potential to be solved with the implementation of an effective automated inventory management system, which can compile and categorize information for easy access. The result is a more efficient warehouse, and in turn, a more efficient company.

Many options exist for those companies seeking automated tool management software. Most employ some kind of unique identifier, such as a barcode label, which is attached to individual items that are to be tracked. This barcode label is scanned to check items in and out of the warehouse, assigning them to a specific job or employee. This information is then transferred to the main database through a docking station, computer USB port or even through a wireless connection.

A more recent addition to the world of tool tracking is radio frequency identification (RFID) to manage tool inventories. This technology works similarly to barcode labeling, but the RFID tag is inserted into a tool rather than applied to its exterior, making the identification tag difficult to remove. The RFID tag holds an identifying number that can be read with an RFID reading tool. This information is then transmitted to the main database in like manner to the barcode information. RFID can be integrated into a barcode scanning system, allowing the company to choose the most appropriate option for each tool. Some companies offer scanning tools that can read both RFID tags and barcode labels, so the technologies can be used side by side.

The software controlling the main database is the core of the tracking system. When an item is scanned, its unique barcode is linked to a host of information within the database. It is then possible to track not only a tool's location, but also its repair history, warranty information, maintenance schedule and billing information. Users can generate reports from the database that show every tool assigned to a job, what has been billed to a particular job or tools that are due for certification.

Warehouse and Field Efficiency

Any tracking system is, to a certain extent, prone to human error. Even well-trained data entry employees experience entry and read-error rates equal to approximately one error in every 300 characters using manual data entry. However, an automated tool tracking system that employs barcode labels and laser scanning or RFID tags and readers reduces this factor: Errors rates have been shown to drop to approximately one error in one million characters. Such a significant reduction in data entry mistakes ensures that information available to the company is reliable and ultimately saves money because companies know where items are exactly when they need them.

For example, when a large general contractor in the South implemented its tool tracking software, it found that 30 percent of its assumed inventory was missing, and another 25 percent was broken. Just getting a realistic view of the actual tool inventory is a valuable result of a tool tracking software purchase.

Using an automated tool tracking system can also increase employee efficiency in the field. Project managers can receive weekly lists of tools assigned to their jobsites. If a tool goes missing, project managers then immediately can talk with the employee last responsible for the tool, cutting down on wasted time searching for missing tools and allowing employees to focus on their jobs. And if a tool is lost, the company has a reliable record of who had the tool last and where it was supposed to be.

Increasing Safety on the Jobsite

For some companies, an automated tool tracking system is attractive because of its ability to track such information as the calibration of certain items in the tool inventory. Many safety tools used on construction sites must be regularly tested to ensure they are working. Other tools must be correctly calibrated to be effective in the field. Many of these tests are monitored by regulatory agencies such as OSHA, and companies can be held responsible if they fail to comply or cannot prove compliance.

Welsbach Electric, a large electrical contractor in New York, uses tool tracking software to manage calibrations of safety tools and ensure they are completed on schedule. Such information used to be recorded in spreadsheets before implementing the new software, making it difficult to prioritize activities. Now, the software reminds managers when a tool is due for calibration. The warehouse foreman can print customized reports of tool calibrations, certifications and locations.

For instance, Welsbach uses the software to track calibrations of gas meters and other indicating equipment. When such precision equipment is not working in the field, it costs the company time and money: the tool must be returned and exchanged for another that works properly, and just one insulation megger that performs incorrectly in the field could take out a switch wire, potentially costing the company millions. Even worse, an employee could face serious injury from an improperly calibrated megger.

Additionally, the company also owns 100 pairs of high-voltage gloves that must be tested annually. Before implementing the tool management system, testing the gloves was managed by ledger. If the gloves were not working correctly, workers could be severely injured in the field. Welsbach now uses its tool tracking software to monitor testing schedules. The software issues reminders to the warehouse foreman, which allows him to locate the exact gloves that are due for testing and record results of the test. Because Welsbach can prove it's completing these tests on schedule, it reduces its liability in the event of an accident.

Using Tool Management to Increase Profitability and Accountability

Decision-makers often resist investing in a tool tracking system because they think it's just a high-priced toy for the warehouse. However, while tool tracking can improve tool retention and organization within the warehouse, it can also affect a positive financial impact throughout the company. In fact, many companies that invest in an automated tool management system find that the product pays for itself within the first six months of use.

A large general contractor in the Northwest experienced just such a scenario. Within six months of recording new tools and logging returns from jobsites, the company had a solid handle on its $2.5 million tool inventory. At the end of the six-month period, the company identified an additional $200,000 in revenue, improving the company's financial performance by 16 percent. The company attributes the immediate, tangible return on investment directly to the purchase of an automated tool tracking system.

A tracking system contributes to a company's profitability in many other ways, too. Because having a tight reign of tool inventory leads to better tool retention, a company ultimately benefits through a reduction of funds that previously were allocated to replacing missing tools. And since those missing tools often reappear after they have already been replaced, clearly the funds spent replacing them could be better invested elsewhere. Typically, a comprehensive tool management system will save $0.40 per hour per employee compared with the $0.80 per employee per hour typically lost by replacing small tools. For a company with 1,000 employees, that translates to $16,000 saved each week, or $832,000 each year.

The software's features also let companies compare the cost of similar tools over their lifetimes. By comparing the number and costs of repairs, warehouse managers can make smarter purchase decisions. And, large companies can use the software to combine tool orders from all divisions. Pooled ordering allows companies to negotiate better prices for tools.

And let's not forget that with the passing of the Sarbanes-Oxley Act of 2002, public companies face requirements for managing and disclosing their assets. In a public construction company, tool inventories can easily be worth millions of dollars, a substantial asset by any assessment. Under Section 404 of the act, companies are required to attest to the internal controls that are used for financial reporting. Such controls include software programs that firms use to track and monitor hardware. Companies are also required to account for all assets valued at more than $100, a floor many tools easily meet. Tool tracking software records the movement or disappearance of company-owned tools. Without a system in place to effectively track these assets, accurate reporting of assets is impossible.

Because Sarbanes-Oxley holds corporate officers personally responsible for distortion of company performance, and CEOs and chief financial officers must personally certify financial reports. A monitoring system that tracks tool inventory is vital to Sarbox compliance.


An automated tool management system is much more than a toy to solve problems in the tool warehouse. Tracking tools using barcode labels or RFID tags provide a way to secure the valuable investment a company has in its tool inventory. Combined with a powerful database, a company can use these specific pieces of information about each tool to profit through better business decisions, potentially saving hundreds of thousands of dollars while improving efficiency, increasing returns on asset investments, reducing liability and helping employees make smarter purchasing decisions.

About the Author: Don Kafka is president and founder of ToolWatch, which provides solutions to manage corporate assests.