Realizing consistent profitability is essential for long-term growth. But how can you be sure that you are profitable if you are operating with reporting discrepancies and questions about your costs? Relying on inefficient or inaccurate reporting and inventory management processes puts your organization at risk and hinders your ability to make informed financial projections.
Sirius Solutions recently collaborated with a premier manufacturing firm facing a critical challenge with inventory accuracy. Our client had conducted inventory counts which identified significant discrepancies and was eager to mitigate the risks of non-compliance and inaccurate accounting of their inventory valuation.
Having worked with Sirius Solutions in the past on financial improvement initiatives and remembering the quality of our specialists, the client reached out to us during this critical moment. Resolving inventory discrepancies and conducting an accurate inventory observation was of utmost importance, but also proved additional value as we identified opportunities to maximize efficiency, productivity, and profitability.
The observations and recommendations from our work with this client are shared in this article have broad application across industries, particularly those that store physical inventory on-site.
Our client required an accurate, reliable, and independent inventory count to correct discrepancies and mitigate financial losses. This included validation and correction of data for materials stored across multiple locations.
Before beginning any project, Sirius Solutions’ specialists work closely with our client’s management team to customize the scope and deliverables based on their primary objectives and goals. With risk mitigation of non-compliance and eliminating inventory inaccuracies and inefficiencies as the top-level focus, the number one deliverable was an accurate and detailed accounting of our client’s on-site physical inventory. A comparison of the new and verified count against the existing inventory sub-ledger reconciliation and variance analysis would accompany the inventory report.
Beyond dealing with the immediate questions around inventory discrepancies, our specialists endeavored to set up our client for future success by also focusing on the future of their business for scalability and growth.
“We were honored to step in to help with our client’s inventory concerns, after successfully resolving a critical financial initiative just a few years earlier,” explains Jim Jackson, Sirius Solutions Managing Director, and project team leader. “Establishing and maintaining open dialogue about the desired outcomes is foundational when setting the scope of any project, and in this case, we were fortunate to be working with a forward-thinking management team open to suggestions and recommendations beyond the scope of simply doing a physical materials count. This meant everyone was aligned with correcting the immediate problem while thinking holistically about implementing procedures to improve inventory and storage processes. What’s happening on the manufacturing floor and in the warehouses has natural synergy with almost every other aspect of the business, so we approached the project with that in mind.”
We designed the project to encompass multiple interrelated activities to solve an immediate problem and for broader business impact. In addition to conducting an accurate physical inventory using best practices, we also set out to:
- Identify potential high-level gaps between the procurement and inventory management systems.
- Assess the effectiveness and efficiency of current practices.
- Generate recommendations for the implementation of controls that would ensure accurate future inventories.
- Evaluate procedures for receiving, shipping, and storage of materials.
- Review existing safety protocols and make suggestions for improvements.
Designing a customized approach for any project is paramount, so we begin by deeply understanding our client’s needs.
After collaborating with the management team, we determined the most streamlined process, and the best results would be obtained by creating multiple inventory teams, each with two Sirius Solutions specialists and two client warehouse team members. Our specialists’ expertise combined with our client staff’s product knowledge created the optimal conditions for managing this large project efficiently.
Our collaborative team worked diligently to conduct an accurate count while documenting areas for improvement. Our client wanted to improve their widespread practice of storing materials in multiple locations on the property. They also knew they needed to resolve slow-moving material kept in containers that were broken down or deteriorated. Materials were also not consistently labeled and stored in various locations and mixed with other unlike materials.
One of the most unique challenges our client faced was related to a large allotment of materials that had been delivered and deposited outside of the warehouses in a way that made it difficult for our client to perform an accurate inventory count. Our specialists’ knowledge of various technological approaches to obtain as precise a measurement as possible led them to utilize an innovative scanning application to accurately measure these materials After discussions with the management team, it was also discovered that the product density previously used by an outside party to calculate the total quantity was inaccurate
After observing the on-site materials and performing calculations using updated densities, we determined that the previous inventory was significantly inaccurate.
Sirius Solutions identified and corrected $2 million in inventory discrepancies, ensuring accurate financial reporting and substantial cost savings by mitigating potential losses associated with inaccurate inventory data.
Beyond providing an observation and variance report, Sirius Solutions specialists provided data-driven recommendations to our client based on their examination of the property and systems, with the management team implementing many of them. Our client now has a more reliable and efficient inventory management system with enhanced accuracy, optimized warehouse operations, and reduced risk of discrepancies and operational inefficiencies.
Several of the observations that we made were also implemented in other client facilities. Gaps in any one area can have an unintended ripple effect on others. Some essential best practices learned from our customized approach to inventory discrepancies are worth noting.
- Store like products together and maintain a grid system to make it easy to locate and access products.
- Label all containers with weight, inventory code, product description, and safety data.
- Use an electronic count sheet to capture each item, ensuring accurate data recording and minimizing manual intervention.
- Keep work-in-process materials segregated from finished inventory.
- Periodically check containers of materials used infrequently to ensure containers are in good condition.
- Stack containers squarely to reduce the potential for collapse and prevent stacks from leaning against walls, which can cause structural damage to the building.
- Keep exit doors and pathways clear and distinctively label designated hazardous zones.
- Ensure safety equipment such as steel-toed boots, eye protection, safety vests, and hard hats are available and used.
- Place eye wash stations strategically throughout work areas.
- Ensure compliance with all OSHA guidelines.
- Ensure that product descriptions match those utilized in the chart of accounts and reference inventory codes in the report.
- Reconcile physical balances (i.e., pounds/kilograms) to the general ledger in accounting periodically.
- Ensure key operational reports correctly reference each product’s inventory code and description.
- Upload final count sheets into an inventory sub-ledger, analyze variances, and adjust as needed to ensure data accuracy.
- Schedule key operational reports to run daily, including:Planned Production Run Report
- Planned Production Run Report
- Production Report
- Warehouse Movement Report
- Inventory Reconciliation Report
Enterprise Resource Planning (ERP) software can be beneficial in managing your operations as it supports many processes such as:
- Manufacturing
- Inventory
- Supply chain
- Workforce management
- Human resources
- Finance
- Accounting
The inventory challenges faced by our client are not unusual for companies handling significant amounts of materials for on-site production and manufacturing. Valuable lessons can be learned by considering how our client resolved their inventory concerns and implemented our recommendations, many that apply across industries. Overall, inventory accuracy should be a priority as it directly impacts a company’s financial health. Here are a few ways improved inventory management can maximize efficiency, productivity, profitability and foster business excellence for broader business impact:
- Efficient Inventory Management: Consistently apply proper product storage and item identification best practices.
Results: Efficient workflow and easy inventory management with reduced time spent searching for items and minimized errors, reducing operational costs. - Worker Health: Prioritize the health and safety of your staff and create a secure and supportive work environment.
Results: Enhanced overall productivity with employees that are motivated, focused, and efficient, leading to reduced absenteeism and higher quality output for long-term success. - Accounting Integration: Integrate inventory and product information into accounting functions.
Results: Consistent tracking and cross-referencing, real-time visibility into inventory levels, and more accurate financial reporting for better decision-making. - Reporting: Regularly run operational reports.
Results: Well-monitored production and inventory for timely detection of discrepancies, trends, and potential issues, reducing operational costs. - Evaluate Tools: Evaluate software solutions like ERP and WMS.
Results: Streamline processes for improved operational and financial efficiency, real-time data accuracy, reduced manual errors, and improved inventory visibility.
Some inventory challenges manufacturers face are industry-specific, but the broader applications across industries are worth consideration. Our clients consistently find value from an outside perspective used in examining and evaluating their organizational processes and procedures.
Our specialists are experts in their fields and global leaders rich with experience. If you face operational or financial challenges affecting your efficiency and profitability, let’s discuss creating a holistic strategy that resolves your current issues while empowering you for long-term growth.
