Inventory Control: What You Must Know

July 8, 2007
Just-in-time production scheduling will not work without adequate material on hand, while carrying excessive inventory strains cash flow and warehouse capacity.
Without effective inventory control, are inventory counts based more on estimates than on verified amounts? Inventory may be the costliest operating expense for a manufacturer, and properly managing that function is crucial to optimizing productivity and profitability. While specific processes will vary from one company to another, taking the following steps enables a manufacturer to attain and sustain inventory control.First, develop effective processes and documentation that answers these questions. What are the best ways to integrate inventory activity with material requirements planning, production scheduling and other functions? How are unit costs for labor and other overhead factored into the inventory value of subassemblies? Are all transfers of inventory to and from the warehouse promptly recorded? How are differences between physical counts and recorded amounts treated? Defining and documenting processes that address such questions provides a framework for effective inventory management.Emphasize the importance of inventory management. A range of individuals touch inventory from the time it arrives as raw material until it leaves the plant as finished product. Proper training is essential. Each person involved must appreciate the importance of inventory control and adhere to related processes, including documenting inventory movements and storing items where they belong, not just where there is open space.Dedicating one individual to full-time inventory management provides continual attention to that function, while rotating various oversight responsibilities among other individuals broadens their understanding of inventory control processes. Such practices also promote accountability and ownership.When inventories are conducted quarterly or annually, how accurate are the counts, and how long can a problem expand before it is detected, let alone be addressed? With a cycle inventory schedule, counts occur much more often, with frequency typically based on the importance of various items. Such inventories repeatedly compare physical counts to operational data and drive continuous improvement efforts.A difference between a physical count and inventory data, for example, would spur examination for the underlying discrepancy cause. That investigation could uncover a data entry error, a misplaced parts carton or a gap between processes. Cycle counting also encourages individuals to regard inventory control as a continual process and not as a recurring project that requires periodic diligence.Purchase appropriate inventory management software. Depending on the scope of a company’s operations, an inventory management system may cost up to $1 million. That cost compounds if the software functions cannot correspond to established processes. Compensating for such incompatibilities requires considerable effort and leads to ad hoc data adjustments and greater opportunities for error. An inventory management system should be industry specific and include numerous customization options, such as user-defined data fields and event-driven functions. With such capabilities, the system then reflects actual activity, enabling management to easily capture crucial information and evaluate key performance indicators.Production demands increase or decline, contractual relationships with vendors undergo revisions, and technological advances make existing systems obsolete. Manufacturers operate in dynamic environments. Monitoring and refreshing inventory management practices alerts managers to any evolving processes, emerging trends or potential risks, and also enables them to identify areas for improvement.Residual Benefits

Developing and sustaining effective inventory control requires investment and effort. Making that commitment may not be easy, but the long-term benefits make it worthwhile. Effective inventory control enhances production efficiency and cash flow. Continuous improvement efforts optimize those benefits, making inventory control a competitive advantage that drives company performance. 
Brad K. Jay, CPA, is an audit partner at Weaver and Tidwell LLP, in Ft. Worth, Texas.