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Physical Inventory Best Practices Whitepaper

Physical Inventory Best Practices Whitepaper

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Published by: api-3748088 on Oct 18, 2008
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03/18/2014

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 Page 1
 
Seradex White Paper
 
 A Discussion of Issues in the Manufacturing OrderStream
Physical Inventory – ERP Best Practices
GAAP and Inventory
GAAP does require at annual physicalcount. Often cycle counting is acceptedby outside auditors but an annualphysical count is still the most commonscenario.While GAAP is not overly prescriptive onthe methods of conducting a physicalinventory this paper will outline generalprocedures which have been acceptedby many outside auditors. You canmodify the procedure to suit yourparticular requirements
Why Is a Physical InventoryNecessary?
If the people counting don’t realize theimportance of accurate stock balancesto them, your chances for obtainingerrorless counts are slim. So it is criticalto explain to everyone who willparticipate, why a physical inventory isnecessary.
Accurate Physical Counts = BetterCustomer Service
Everyone in your organization mustrealize that the primary purpose of aphysical inventory is not to please youraccountant or the tax authorities. It isto verify that the on-hand quantity of each item in your computer reflectswhat is actually on the shelf. Customerservice personnel need to be able totrust the accuracy of the stockquantities in your computer.
Accurate Physical Counts AreNecessary for EffectiveReplenishment
Most computer systems produce veryimpressive buying reports. Thesereports show you how much of eachitem the computer thinks is in eachwarehouse, how much will be demandedby customers in the near future, andhow much should be ordered from avendor or central warehouse. Whathappens if the quantities in thecomputer are wrong? Disaster! Nomatter how sophisticated the software,the wrong quantities, of the wrongproducts, will be ordered.
The Key to a Good PhysicalInventory Is Planning
A physical inventory is a very expensiveprocess. It usually involves aconsiderable labor expense and lostproduction time. If the resulting countisn’t accurate, the money spent on thephysical is wasted.What can you do to ensure that yourphysical inventory is successful? Set thecount date. Do this as early as possibleso that everyone has plenty of notice.Avoid dates when people arepreoccupied and may not be focused onthe task at hand.
Planning
The key to a successful inventory is thequality of the planning effort. Yourplanning should include when and whowill conduct the inventory and how thecounts will be taken. The completeprocess should be documented forfuture inventories. Provide instructions
 
 Page 2
 
to the count team in advance of theinventory. Some activities to do prior tothe count include:1) Clean up your warehouse. Clean,straighten and organize all areas.Physically arrange items to be countedto facilitate counting. If all the items arein proper bin locations, you will be ableto conduct a faster, more accuratephysical inventory. The cleanup shouldbe completed no less than two weeksprior to the count.2) If it isn’t in your warehouse, youdon’t have to count it. It is in everyone’sinterest to reduce the inventory to thelowest possible level prior to thephysical inventory. This is the perfecttime to clean out the cobwebs andtackle the work that everyone has putaside. Some things to consider:-Ship everything you can before thephysical begins-Order items to arrive after thecount-Dispose of obsolete and damageditems prior to the count or at least:-Isolate obsolete and slow movingstock in a separate location-Return slow moving product to thevendor-Clean out the return goods area-Rework items where possible anduse them in production-Sell off overstocks at a discount-Label all consignment items-Label all non inventory items thatdo not need to be counted e.g. -office and plant supplies, furnitureand equipment-Consolidate rack locations. Makesure the same item is not stored inmultiple racks within one location -this can lead to incorrectadjustments.3) Pre-CountingConsider counting surplus areas andslow-moving products before thescheduled physical inventory – Mostcompanies try to count all of theirproducts in just one day. That’s a lot of work. If some items can be counted inadvance, the pressure is reduced. Thepossibility is small that significantamounts of your dead stock, slowmoving inventory, and surplus materialwill move during the week precedingyour physical. So why not count thebins containing these items before theday of the actual physical?Be sure to mark bins and shelvesthat are pre-counted. And, keep in mindthat you must have some mechanismfor adjusting these quantities if someamount of a product is sold or receivedafter the bin has been counted4) In Seradex ERP
 
Approve and post all receiving,shipping, adjustments, andtransfers
 
Process all completed workorders
 
Run inventory by location reportsfor all inventory held off premises – provide to vendors toapprove or inspect yourself 
 
Adjust all items with negativequantities to 0. Negatives canoccur for several reasonsincluding:
 
Un-posted receipts
 
Items listed on a bill of materialthat is not actually used on thebill.
 
Items that have been scrappedand replaced without recording itin Seradex

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