Inventory

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Introduction
Inventory
Cost Acccounting
Chart of Accounts
Budget Formation
Standard Unit Costing
Managerial Accounting
Auditing

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Inventories may disappear but mostly they are mismanaged.

Introduction

Most Local Inventory Management can be accomplished with a simple off the shelve inventory accounting systems. However, for a true and accurate picture of the overall movement of inventories through the distribution channel, each distribution point must have a inventory management system. If there is a broken link in the chain, inventories cannot be managed. An example, is the system that can measure the inventory from supplier, to distributor, to the clinic, but cannot identify the clients to which the drugs were given. This system cannot tell you whither the client received the drugs, nor can it manage the resources.

Management of Inventory

Management of Inventory implies two things: (1) that the Inventory that is required by the unit to do its job be available and (2) that no more than that required to do the job be available.

Management of Inventory first starts with determining what is needed and when it is needed. This requires a prediction of the service units that are to be provided. Without this prediction, inventory cannot be managed.

There are many inventory management application packages on the market. Most have the ability to use different modeling algorithms to calculate reorder levels based on trend analysis, time that it takes to receive an item, and its obsolescence rate. Today the buzz work is "Just in time Delivery." This means that no more inventory is kept than is needed to service the clients; Inventory is delivered exactly when it is needed to replenish stocks.

The critical factors for effective inventory management includes:
The amount of the product currently on hand at each location
How fast the product is being used
How long it will take to get more of the product
How long it will take to move the product from one location to another
The velocity of the inventory-how fast the inventory is moving through the warehousing system
The cost of storing the product in the warehouse

Cost of Inventory

The cost of inventory is one of the most under-evaluated costs in accounting. It is more than just the purchase price of the inventory. It includes, at least, the following items.

Ordering Costs

Labor of staff writing request
Labor of Supervisors approving request for orders
Labor of notifying vendors to made a "quote"
Labor of approving the vendors bid
Telephone, Paper work, etc to place order
Errors in ordering

Purchase Price

Freight and Handing Charges

Freight Charges
Labor of receiving and checking receiving order against what was order.

Accounting Costs

The cost involved in keeping records of the receiving, inspecting, approving, authorizing, stocking, using, and reordering.

Carrying Costs

Interest expense on carrying the item. The interest expense is the interest on the money that is invested in the physical inventory.
Cost of carrying those items over and above what is directly needed (safety stock)
Warehousing. The cost of the physical space required to hold the inventory
Utilities. The cost of the utilities that are needed to light the room or to cool the area that the inventory is stored.
Taxes. Property taxes or other type of taxes that may be levied on inventory.
Obsolescence. Inventory that is no longer of any use because of its obsolescence or expiration date
Shrinkage. Another name for shortages, misplacements, or thief.
Insurance. Insurance against fire or other type of damages.
Cost of periodically checking inventory quantities (annual/semiannual audit)

And the largest cost of all...the client not receiving the proper drug that he or she requires or the health care unit not receiving the equipment that it needs to do their job.

Types of Inventory Control Systems

There are three principle methods of inventory models.

Snapshot
Purchase Order Model
Item movement Model

The snapshot model is simply the recording of the amount of inventory that is available each day, or every week. Its database includes three primary dimensions: time, item number, and location. It may have a supplier dimension for reordering purposes. There is no management involved other than, if someone feels like it, and think that they need more of an item, it is reordered. Inventory comes and goes but no one knows why.

The Purchase Order Model is based on the delivery status of the item. The amount of inventory that is received on a particular order is entered into the database. For each time period, as determined, the amounts of inventory that has been used is marked off and a running inventory level is maintained. This model is just a little better than the snapshot model in that at least an estimate can be obtained of the amount of usage that has occurred during a determined time period.

The Item movement Model or the Transactional Model records each an every inventory movement. It generally records the total movement from who and to who. It records the ordering of, the receiving, the inspection, the returns, the authorization, the picking, the packaging, the shipping, and the billings. It is only by using this Model that Inventory can be managed.

Discussion

And the largest cost of all...the client not receiving the proper drug that he or she requires or the health care unit not receiving the equipment that it needs to do their job. In many cases it is impossible to measure the harm done from being out of a badly needed drug or supply item.

Most times, staff will use what they have in the quantities that they have available. What this means is that if a clinic has a large supply of an item, the staff will tend to use it in large quantities. If the clinic is short of an item, it will be used sparingly. This is an example of what in another section of this Web, we call "Supply driven use" instead of "demand driven use."

It is extremely difficult to perform cost-benefit analysis on "supply driven" processes.

We need to synchronize demand with supply – not the other way around.

In one organization a detail flow chart was created of an "inventory item." This flow chart represented the work involved from the initial request for an inventory item to the point that item was actually used and then reordered again. This is not a short story!

A unit staff member relieved that he or she needed an item.
The unit staff member filled out a 6 part form listing the item, why is was needed, when it was needed, the budget code, and several other items of "importance."
He then gave this to his unit manager for approval.
The unit manager signed the form and gave it to his department manager for approval.
The department manager signed the form and gave it to his division manager for approval.
The accounting officer in the division office, signed it and sent it to the accounting department.
The accounting department routed it to the officer in charge of budgets for her approval.
The approval officer had to look up manually to determine if the budget code of the requestor had sufficient money available to purchase the item. If not the up-to-this point process was reversed. If there was sufficient funds, then the purchase order was approved, and sent to the chief accounting officer.
The chief accounting officer then sent the request to the financial director for his approval.
The chief accounting officer then sent it to the purchasing department.
The chief purchasing officer would prepare the necessary paperwork to give to one of the staff for ordering
The chief purchasing office would then sent a copy of the order to another staff for recording the purchase order status.
The staff responsible for ordering would then send out a request for bids (if the item was over a certain value) or otherwise he would have to make telephone calls to try to find the item requested.
When the bids were received, a committee opened the "sealed" bits to select the lowest price winner.
The order was prepared and sent to accounting for allocation of funds.
When the item was received the receiving order had to be checked against the purchase order by the receiving department.
Partial shipments and incorrect shipments had to be dealt with.
The paper work was then sent to accounting for input into accounts payables.
The payable clerk selected items for payment. She sent this list to the chief financial officer for approval.
The approved items were sent to the check writing department.
The checks were written and sent back to the chief accounting officer for his signature.
The checks were then sent to the chief financial officer for his signature or to a division director if the chief financial officer was not available.
The checks were sent back to the accounting department for mailing.
The requested item was delivered to the requesting staff.
The received item form was signed by the requesting staff and sent back to the accounting department for filing.

[I am sure that I left something out...but I am tired!]

The shameful fact about this story, is that the "Management" had never investigated this process. They had never been to the purchasing department. "Management" thought that the proper way to save money was to reduce salaries instead of improving processes and making the operation more efficient.

Inventory counts were taken but the inventory was not managed (controlled)

An inventory reporting system was created in order to demonstrate to the administrators of a health care organization how to “manage” their inventory. This inventory represented a significant amount of money invested in the organization. On the first run, the following was discovered:

The number of days in inventory of the average tem was over two years (approximately 4 times the amount of inventory than was needed based on amount of time needed to reorder
The highest valued inventory item had been in inventory for over 20 years and was obsolete, yet is was still being stored, taking up space and staff time.
The second highest valued inventory item was supplies for a machine that had been discontinued over 5 years before.
On a random check of the number of items that were suppose to be in inventory against the actual inventory, all ALL the items that were checked were deficient.
Drugs were found in storage next to the pens, pencils, and paper. No special handing was provided. No aging was kept No control of narcotics or costly antibiotics was performed.
The organizations staff clinic was one of the largest users of the drugs, yet no inventory usage records were kept.
The guesthouse used three times the amount of food than could be accounted for by the number of guest

This information was obtain from a very simple report using MS Access.

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