Inventory views: Financial vs. Operational

by Blair Bass

Almost all companies with any inventory will reconcile it to the financial ledger at least once a year. I can clearly remember those twice-a-year, wall-to-wall inventory weekends when I was starting out in wholesale distribution. Those were grueling all-nighters – four in a row – until the controller was satisfied that we had somehow “reconciled” the balances back to a net-zero explainable difference.

After all of this time spent with the entire team counting washers and nuts and pipe and insert your widget here, was our inventory accuracy any better than when we started? Looking back on it, I think the argument that it was more accurate after a wall-t

o-wall inventory count is highly debatable.

The finance department needs this reconciliation once a year, at minimum, to close out the books … maybe more often for other financial reporting needs. But operations – and, more importantly, the delivery commitments to our customers – require this information to be 100 percent accurate every single day.

Finance views of inventory ensure the dollars of inventory reconcile and tie off, which is sometimes made possible by “found” inventory of higher-dollar items which cover the “loss” of inventory by lower-dollar items. But daily operational performance requirements suggest that every single widget and piece of inventory has equal value, which – if applied financially – would destroy many reconciliation reports on a wall-to-wall financial audit count.

Wait … you don’t buy this argument?

Years ago, I was called into a company to help them address their delivery-date commitment issues, their inventory control issues and their overall production scheduling and planning process issues. I was having a discussion with the senior executives of this location, attempting to help them understand that every single part necessary to make an item should be included in the planning bill of material (BOM) for that manufactured item, regardless of cost or purchasing category.

To improve their planning and forecasting processes, we needed to make sure their planning systems could accurately plan and schedule all inventory needs. It was near the end of the year and they had a big control valve shipment scheduled. It was an order for approximately 15 to 20 control valves, each worth hundreds of thousands of dollars. This shipment was going to close out their year-above budget. On the day of delivery, the quality inspector noticed that the 10-cent nameplates were not on the base of the control valves, and they had none left in inventory to stamp. Because of this, the order was held up and missed the end-of-year delivery.

The obvious question the senior executives had to answer at this point: How much are these nameplates worth to us now?

The truth is the nameplates were no longer worth 10 cents; they were now worth hundreds of thousands of dollars … and an incredibly upset customer. If you need it to make it, then every single item in a planning BOM is of equal value to every other item.

On another occasion, I had the opportunity to assist a different company with several of its inventory challenges. This company was in the process of taking one more major wall-to-wall inventory to establish a fresh baseline against which to reconcile its inventory going forward. As I was observing the inventory reconciliation, one of the auditors recorded a multimillion-dollar increase in a product where their inventory records showed they had zero quantity on hand.

We asked the outside salesman, one of many extra staff brought in to help with the inventory count, to show us the products he had miraculously discovered. He walked us out to the warehouse and pulled out a roll of product labels. The product number was typed on the labels, so he counted each label as one of these products. And we sometimes wonder why counts are not accurate when we bring in all staff – many of whom typically have never handled the actual inventory parts themselves – to help with wall-to-wall inventory counts.

These are just a few of many examples which have long led me to conclude that, when counting and reconciling inventory, it should always be handled with a view of operational performance accuracy. Daily random cycle counts; full reconciliation when any inventory inaccuracy is found (plus or minus); and full planning BOMs are all required to improve overall inventory accuracy and control.

The impact of tighter inventory accuracy and control will result in improved timely financial reporting, improved ability to forecast and schedule, less shortage chasing and – most importantly – improved customer satisfaction through improved on-time deliveries.