Not very long ago, in the early 90’s, I was working for a large engineering firm in Chennai. I played multiple hats such as Layout Designer, Coordination with PPC and Inventory Management. Once in a year, that is during the first week of April the whole factory comes to a halt for couple of days. It is not that we didn’t had orders, but it was for inventory counting.
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Out of the 1000+ employees some 50 will be enrolled in the inventory counting exercise. For the rest lucky employees it was a two-day vacation. We start the day with a good breakfast around 9:00 AM. Then, I provide each of them a writing pad, form, pencil and eraser. The form is pre-filled with the Inventory SKU and its Location. All of us will assemble near the flag post around 10:00 AM. This was in April and that too in Chennai. You can image the heat waves. Now my boss will give an overview of the inventory auditing dos and don’ts and then everyone will disperse to their allocated inventory location within the factory.
For the next two-days, the counting will go from 10:00 AM to 5:00 PM. My colleagues physically count the number of items and enter it against the SKU in the form. At the end of the counting my colleagues handover the form to me for consolidation. This becomes the physical counting input for the finance department. After due diligence this inventory counts was adopted as the inventory level of the organisation which appears under the current assets of the balance sheet.
Though periodic inventory accounting has the convenience of doing this exercise just once in a year, you need to ask few questions.
1-Are all these employees thoroughly trained in inventory counting?
2-Do they have product knowledge?
3-What is the cost of shutting down the plant for two-days?
4-Will you be able to find the root-cause of the inventory discrepancies?
5-Does this inventory policy promotes pilferages, frauds and embezzlements?
6-Are you happy if the inventory is accurate only once in a year?
If your answers to most of these questions are negative, then we have another better method known as perpetual inventory audit, which we will discuss in yet another podcast.