Why is accuracy of inventory important:

Inventory management is a complex task. Often companies struggle with maintaining accurate records and the management does not get clear visibility of the correct volume and value of inventory in hand as on a given date. Several key decisions by management are based on the inventory records. Accurate inventory records help your company with the following:

  • Accurate Material Requirement Planning
  • Estimation of working capital
  • Calculation of product cost
  • Calculation of Profitability
  • Compliance reporting to bank (where stock is hypothecated)
  • And various other decision making

 

How to improve accuracy of inventory records:

There are several steps that can lead your company towards accurate inventory records. Some of them are mentioned below:

Standardization of item code and identification

Use a standard nomenclature and coding structure for item codes in your ERP which based on a defined logic. The logic should help you create new item codes automatically which will prevent duplication. Ensure that all the records maintained by your company use the standard item codes as reference.

ERP system for inventory management

Use the Inventory Management module of your ERP system to maintain stock records. Records maintained manually in Registers and spreadsheets are prone to errors and omissions and does not provide reliable data.

Online accounting of transactions.

Ensure that inventory transactions are recorded in the system on a real-time basis. Delay in recording of transaction has a cascading effect on accuracy of other transactions and overall stock balances in the system.

No movement without recording the transaction in ERP System

Processes and internal controls should be designed in such a way that without recording of transactions inventory movement is not allowed. For example, Security Gate is instructed to allow inventory movement ONLY based on an approved challan/invoice which is system generated.

Perpetual inventory verification

Daily verification of small number of items by the Stores team and comparing it with inventory records ensures that the differences are identified early and reconciled to find root cause of difference. This will ensure that there are fewer differences at the annual inventory verification. Also, senior management should at periodic intervals conduct a surprise physical verification of sample items and compare with the system.

Reconciliation of differences

Differences identified in physical inventory as compare to records should be reconciled to identify root causes and appropriate corrective and preventive action should be initiated to prevent differences due to the same reasons in future.

Periodic stock adjustments

Once reconciled, differences should not be kept unattended. Stock differences should be adjusted in System with appropriate approvals to ensure that inventory records are given a fresh start in accuracy.

Regular inventory audits by independent internal auditors

Getting Inventory audited by independent internal auditors helps in getting objective feedback on accuracy of inventory records and inventory management practices. The recommendations received from such auditors should be implemented in a timely manner to improve accuracy of the inventory records.

Tienmo Consulting LLP

Author Tienmo Consulting LLP

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