Analyzing Inventory Adjustments

by Jon Schreibfeder

I just spent two great days working with a large food distributor. The company has begun a program to achieve effective inventory management. As part of the program, they are cycle counting products (see Cycle Counting Can Eliminate Your Annual Physical Inventory!) and entering inventory adjustments when they find discrepancies between the quantity of a product in their warehouse and the perpetual inventory maintained by their computer system.

Though the company has implemented a system that corrects current inaccurate inventory balances, it still needs to adopt a system that will improve future inventory accuracy. That is, they need to improve their methods of handling stock to prevent additional stock discrepancies.

How will they do this? By carefully analyzing the reasons for inventory adjustments. Why? Because most inventory adjustments are the result of problems encountered in the normal handling of material. Here are some common reasons for inventory adjustments:

Material is missing from inventory.
More of a product is in inventory (or in a bin location) than is recorded in the computer system.
Some of the product in inventory is damaged and cannot be sold.
Part of the quantity in inventory is outdated or cannot be sold because it has been in inventory for too long a period of time.

The product is obsolete.
The remaining inventory in stock is less than the quantity a customer would normally purchase.
Along with the quantity and item, this company will accurately record the reason for each adjustment. Every month, a summary of adjustments (by item and reason) will be reviewed to see if changes to policies and procedures can help prevent future discrepancies. Let's take a quick look at some of the underlying reasons for adjustments:

Material Missing from Inventory:
Does a particular warehouse person have problems pulling the right quantity of this product for outgoing orders? Are they filling orders from the wrong bin location? Can this problem be solved with additional training or re-assignment?

Are pickers confusing this item with similar products? Can this problem be solved with additional training or by separating the stocking locations of the two items?
Are employees substituting one product for another without recording what product is actually shipped? Can the procedure for noting substitutions be improved?
Are sample quantities of the item being removed from inventory without being recorded? Is it feasible to establish sample accounts for each salesperson?
Do you suspect that the product is being stolen? Can the inventory of the item be caged or secured by some other means?

More Material on the Shelf Than Expected:
Are stock receipts being processed in a timely manner? Can you streamline paperwork to expedite the receiving process?
Are pickers confusing this item with similar products? Can this problem be solved with additional training or by separating the stocking locations of the two items?
Are employees substituting one product for another without recording what product is actually shipped?

Some of the Product in Inventory Is Damaged:
Are the receiving people failing to identify damaged material as it is received? Can retraining and specific corporate policies for receiving damaged material solve this problem?
Is material being damaged in your warehouse? For example, are employees climbing on boxes (and crushing them) to retrieve material stored on a high shelf? Can more training or additional material-handling equipment help to protect inventory from damage?
Is material broken in the process of being delivered to your customers? Should you consider using better packaging materials for outgoing shipments?

Some of the Product Is Outdated:
Do warehouse employees have a problem properly rotating stock? Can more training or gravity racks ensure that the oldest stock is always shipped first?
Should you buy smaller quantities of these items, more often?
Would it be effective to offer material that is about to be outdated and offer it at a substantially reduced price?

The Product Is Obsolete:
As most dead inventory is the result of leftover quantities of new stock items, do you carefully monitor the accuracy of the projections of new product sales?
Do you regularly identify obsolete products and try to liquidate this material as soon as possible?

Remaining (Remnant) Inventory:
Can you limit sales of the item to the vendor package or to some other minimum quantity?
Can remnant inventory be used as samples or consolidated and repackaged for sale?
Every inventory adjustment should be viewed as an opportunity for improvement that can lead to greater corporate profitability. If you use inventory adjustments merely to correct the on-hand balances in your computer, you will probably continue to correct the same items until the end of time. Things will only get better if your company decides to learn from its mistakes!