Principles of Effective Inventory and Stock Control, By Bolutife Oluwadele
… To avoid keeping fictitious inventory in the ledger, simple methods of inventory control can be deployed even by the smallest businesses. Most importantly, every business should strive to establish an inventory system that can work for them. No business should leave inventory management to chance or thieves.
The advance of technology has brought many innovations and developments in stock management (inventories). Advanced supply chain management and just-in-time (JIT) are some of the glaring benefits that have been reaped. Despite pervasive globalization, these advances are not equally appreciated around the world. For example, JIT can only thrive where logistics and communications are top notch. In addition, when many inputs for production processes depend on imports, it becomes virtually impossible to get rid of old methods of stock control, including periodic or annual inventory. In particular, outlets and many SMEs that may not have the means to invest in technology-driven inventory management, which can improve real-time online recordkeeping, will not maybe no other choice but to go the traditional route. In addition to the above, it may be necessary to always reconcile what is in the book with what is on the ground. Such exercises become imperative in an atmosphere of pilferage and other corruptible practices.
Inventory is the process by which the value of the inventory of materials is assessed at a given period for inclusion in the accounts. As stock market valuation is an essential element in the evaluation of a company’s performance (measuring profit), its process must be efficient.
The inventory can be annual or continuous. If it is carried out once a year, that is to say at the end of the financial year, we speak of an annual inventory; however, if it is called periodic or continuous inventory, it is performed periodically.
In practice, the following should be in place to ensure an appropriate and efficient inventory.
(a.) Stock must be planned well in advance and executed systematically by those who can identify the items in stock but who are not generally in charge of managing stocks or movements;
(b.) The stock should be clearly and neatly arranged (preferably in sections) to facilitate control of the counting procedure. The movement of stocks should be suspended whenever possible, or in the alternative (when it is not possible to suspend the movement of stocks), it should be strictly controlled and monitored by tags or other physical means;
(c.) Adequate arrangements must be made to ensure proper shutdown. Shipping documents must be provided for all goods shipped prior to inventory and for goods on hand for which titles have been passed to customers. These inventory categories should not be included in inventory to ensure that sales and purchases are correctly recorded and categorized for the interim period. Goods in transit to and from stores during inventory must also be properly handled in the records;
(d.) Appropriate arrangements should be made to ensure that slow moving, obsolete, discarded, defective, shop soiled and damaged stocks are identified in advance and properly classified;
(e.) Pre-printed inventory sheets with a unique numbering series should be adopted on which detailed descriptions of the items in stock are provided. Tally supervisors should initial the sheet before and after the count, and they should be checked to ensure that all tally sheets are tallied at the end of the exercise.
This method involves knowing the stock levels for all items at all times. A record is kept of all items showing receipt issues and inventory balances. Since in practice physical stocks may not correspond to recorded stock (due to clerical errors, storekeeper errors, pilferage, etc.). It is necessary to control the inventory by continuous inventory. Here, several items are counted and checked daily or at frequent intervals and compared to the records bin cards.
Perpetual inventory or continuous inventory involves keeping two sets of records:
(i.) Bin Cards: they show the physical balance of units in stock at all times;
(ii.) Stores ledger records: they show their valuation at all times.
Physical balances on bin cards and store ledger records must match at all times, unless there have been clerical errors in the records.
Where there are discrepancies in the two sets of records, corrections are made by:
(a.) Correct clerical errors on files.
(b.) If discrepancies arise because inventory units appear to be missing, the lost inventory should be written off (or the additional units added to the warehouse records). The accounting transaction will be signaled by store credit memos, when inventory items have been lost, and debit memos should be installed when more actual inventory is posted.
Benefits of continuous inventory
- A physical control for the annual inventory is necessary due to a continuous inventory;
- The disruption caused by the annual inventory is avoided by the continuous inventory;
- More time is available, thus reducing errors and allowing for investigation;
- Deficiencies and losses are revealed sooner than they would be if the inventory were limited to an annual check;
- Production delays are eliminated because the store staff are so busy that they are unable to deal with material issues with the production department;
- Staff morale is improved and standards high.
The total cost of having inventory can be large, relative to the cost of the materials themselves, or they can be relatively low.
The EOQ model is generally applied to those inventory items, where the cost of having inventory is probably high, i.e. expensive items, possibly with high order costs and high interest charges of stock holding.
Hardware items can be classified as expensive, inexpensive, or medium cost. Due to the practical advantages of simplifying warehouse control procedures without incurring unnecessarily excessive costs, it may be possible to separate materials for selective warehouse control, i.e.
(1) Expensive and medium materials are subjected to careful warehouse control procedures to minimize costs.
(2) Inexpensive materials can be stored in large quantities with a slow turnaround period because the cost savings resulting from careful warehouse control do not justify the administrative efforts required to implement the control.
This selective approach to store control is sometimes referred to as the A, B, C method (whereby the materials are classified A, B or C, depending on their cost).
Order by bike
According to this method, the quantities in stock of each item in the store are reviewed periodically (every 1, 2, 3 months). For low priced items, a technique called the 90.60.30 day technique could be used so that when inventory drops to 60 days supply, a new order is placed for a 30 day supply to increase inventory. to 90 days supply. For high cost items, a more stringent warehouse control procedure is advised to reduce storage costs.
This warehouse control system is a system in which each item in the warehouse is kept in two storage bins. When the first bin is emptied, an order must be placed for a new supply; the second bin will contain sufficient quantities to last until receipt of the new delivery.
Therefore, to avoid keeping fictitious inventory in the ledger, simple inventory control methods can be deployed even by the smallest businesses. Most importantly, every business should strive to establish an inventory system that can work for them. No business should leave inventory management to chance or thieves.
Bolutife Oluwadele, Chartered Accountant and Specialist in Public Policy and Administration, writes from Canada. He is the author of Thoughts of a village boy and can be contacted via: [email protected]
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