Inventory Best Practices - Inventory Policies and Procedures

Inventory Policies and Procedures


Procedure 1: Drop Ship Inventory
Subject: Drop Ship Inventory
 1. PURPOSE AND SCOPE
This procedure is used by the order entry, logistics, and accounting staffs to ensure that products are shipped directly to customers from suppliers, and that the company properly invoices customers for these deliveries.
 2. RESPONSIBILITIES
Accounting Staff Logistics Staff Order Entry Staff
 3. PROCEDURES
o 3.1 Relay Customer Order for Drop Shipment (Order Entry/Logistics Staff)
• 1. If a customer order arrives through an automated Web order entry system, the order entry system automatically flags an item as a drop shipment from a supplier to the customer, and sends an electronic data interchange or e-mail message to the supplier, containing all relevant shipment information.
The order entry system or staff then verifies a return receipt message from the supplier.
• 2. If a customer order is entered manually by the order entry staff, they enter it in the order entry database in the usual manner. The logistics staff planning in-house production and delivery identifies the ordered item as a drop shipment, and notifies the supplier of all shipment information; either by fax, e-mail, or electronic data interchange. The logistics staff then verifies a return receipt message from the supplier.
o 3.2 Invoice Customer for Drop Shipment (Accounting/Order Entry Staff)
 1. Upon shipment of the order, the supplier sends to the company accounting department a shipping notification, identifying the customer, date of shipment, and items and quantities shipped.
 2. The accounting staff prepares two copies of an invoice and sends one to the customer.
 3. The accounting staff makes two copies of the shipping notification, attaches one copy to the retained invoice, and files it in the customer file.
 4. The accounting staff stores the second copy of the shipping notification until the supplier bills the company for the shipped goods, at which point the accounts payable staff attaches the notification to the supplier invoice as proof of delivery and processes the invoice for payment.
 5. The accounting staff sends the remaining copy of the shipping notification to the order entry staff, which logs the shipment into the order entry system, thereby completing the order in the system. If the supplier’s delivery only partially fills an order, the order entry staff contacts the supplier to discuss the delivery date for any backlogged items.
o 3.3 Verify Drop Shipment Delivery (Accounting/Order Entry Staff)
 1. The accounting staff periodically investigates all supplier invoices for which no shipping notification has been received. This involves contacting the supplier for a copy of the shipping notification and then billing the customer based on the information in the shipping notification.
 2. The order entry staff periodically investigates all customer orders for which no supplier shipping notification has been received. This involves sending a summary list of all unfilled orders from the order entry system to the supplier, verifying receipt of the list, and discussing shipment status.


Procedure 2: Receive Inventory
Subject: Receive Inventory
 1. PURPOSE AND SCOPE
This procedure is used by the receiving staff to ensure that incoming goods are properly inspected and logged into the accounting database.
 2. RESPONSIBILITIES
Receiving Staff
 3. PROCEDURES
o 3.1 Review and Accept Inbound Shipment (Receiving Staff)
• 3.1-1. When a shipment arrives, find in the shipping documentation the authorizing purchase order number and locate either a paper-based or electronic copy of the purchase order.
• 3.1-2. Compare the product quantity and quality to the specifications noted in the purchase order. If there are significant discrepancies, reject the shipment.
• 3.1-3. Sign a copy of the bill of lading to accept the delivery.
o 3.2 Enter Receipt into Accounting Systems (Receiving Staff)
 3.2-1. Access the authorizing purchase order on the corporate computer system and record both the received quantity and the warehouse location in which they will be stored. If portable barcode scanners are used, then record this transaction at the time the warehouse move is made.
 3.2-2. Store a copy of the bill of lading in an indexed file.
 3.2-3. Forward a copy of the bill of lading to the accounting department or digitize the image in a scanner and enter the document into the corporate accounting system.


Procedure 3: Track Inbound Consignment Inventory
Subject: Track Inbound Consignment Inventory
 1. PURPOSE AND SCOPE
This procedure is used by the warehouse staff to properly track consignment inventory owned by other parties but stored in the company’s warehouse.
 2. RESPONSIBILITIES
Warehouse Staff
 3. PROCEDURES
o 3.1 Label Consigned Inventory (Warehouse Staff)
• 3.1-1. Upon receipt of consigned inventory, prominently label the inventory with a colored tag, clearly denoting its status.
• 3.1-2. Record the inventory in the computer system using a unique part number to which no valuation is assigned. If a consignment flag is available in the database, flag the part number as being a consignment item.
• 3.1-3. Store the item in a part of the warehouse set aside for consigned inventory.
o 3.2 Review Consigned Inventory (Warehouse Staff)
o Include the consigned inventory in a review by the materials review board (see “Review Inventory for Obsolescence” procedure), which should regularly determine the status of this inventory, and arrange for its return if there are no prospects for its use in the near future.


Procedure 4: Kit Inventory
Subject: Kit Inventory
 1. PURPOSE AND SCOPE
This procedure is used by the warehouse staff to assemble inventory for production jobs, and to process any returns from the shop floor.
 2. RESPONSIBILITIES
Warehouse Staff
 3. PROCEDURES
o 3.1 Collect Parts Kitting Information (Warehouse Staff)
The materials management department issues a parts request form to the warehouse for each new job to be produced. Upon receipt, set up a pallet on which to store the requested items.
o 3.2 Kit Inventory Items (Warehouse Staff)
• 1. Collect the requested items from the warehouse, checking off each completed part number on the list and noting the quantity removed and the location from which they were removed.
• 2. Access the inventory database record for each removed item and log out the quantities taken from the appropriate warehouse locations.
• 3. Deliver the filled pallet to the production floor.
o 3.3 Process Returned Items (Warehouse Staff)
• 1. If any parts remain after the production job is complete, accept them at the warehouse gate using the Inventory Sign-Out and Return Form (see Exhibit 12.3), log them back into the computer system, and notify the materials management department of the overage, so they can adjust the bill of materials for the products being produced.
• 2. If any parts are returned in a damaged condition, record them on the Scrap/Rework Transaction Form, log them in with a damaged code, and store them in the review area where the materials review board can easily access them. Periodically print out a report listing all items stored in this area, and forward it to the materials review board, so they will be aware that items require their attention.

Procedure 5: Cycle Count Inventory
Subject: Cycle Count Inventory
 1. PURPOSE AND SCOPE
This procedure is used by the warehouse staff to ensure that a perpetual inventory’s computer records match the physical inventory.
 2. RESPONSIBILITIES
Warehouse Staff
 3. PROCEDURES
o 3.1 Verify Cut-off Controls (Warehouse Staff)
Ensure that all inventory transactions related to the items to be counted have been entered. To do so, verify with the warehouse manager that all tracking sheets from the day before have been logged into the computer system. Also, conduct the cycle count at the beginning of the day, before any new inventory transactions have been initiated.
o 3.2 Collect Cycle Counting Information (Warehouse Staff)
Print a portion of the inventory report, sorted by location (see Exhibit 12.5). Block out a portion of the physical inventory locations shown on the report for cycle counting purposes.
o 3.3 Compare Physical Inventory to Book Records (Warehouse Staff)
• 1. Go to the first physical inventory location to be cycle counted and compare the quantity, location, and part number of each inventory item to what is described for that location in the inventory report. Mark on the report any discrepancies between the on-hand quantity, location, and description for each item.
• 2. Use the reverse process to ensure that the same information listed for all items on the report matches the items physically appearing in the warehouse location. Note any discrepancies on the report.
o 3.4 Enter Changes in Accounting Database (Warehouse Staff)
• 1. Verify that the noted discrepancies are not caused by recent inventory transactions that have not yet been logged into the computer system.
• 2. Correct the inventory database for all remaining errors noted.
o 3.5 Initiate Corrective Actions (Warehouse Staff)
• 1. Calculate the inventory error rate and post it in the warehouse.
• 2. Call up a history of inventory transactions for each of the items for which errors were noted, and try to determine the cause of the underlying problem. Investigate each issue and recommend corrective action to the warehouse manager, so the problems do not arise again.


Procedure 6: Perform Physical Inventory Count
Subject: Perform Physical Inventory Count
 1. PURPOSE AND SCOPE
This procedure is used to create a structured approach to a physical inventory count.
 2. RESPONSIBILITIES
Controller
Count Teams
 3. PROCEDURES
o 3.1 Preparation for the Count (Controller)
Take the following steps one week before the physical count:
• 1. Contact the printing company and order a sufficient number of sequentially numbered count tags. The first tag number should always be “1000.”
The tags should include fields for the product number, description, quantity count, location, and the counter’s signature.
• 2. Review the inventory and mark all items lacking a part number with a brightly colored piece of paper. Inform the warehouse manager that these items must be marked with a proper part number immediately.
• 3. Clearly mark the quantity on all sealed packages.
• 4. Count all partial packages, seal them, and mark the quantity on the tape.
• 5. Prepare “Do Not Inventory” tags and use them to mark all items that should not be included in the physical inventory count.
• 6. Issue a list of count team members, with a notice regarding where and when they should appear for the inventory count.
o 3.2 One Day Before the Count (Controller)
• 1. Remind all participants that they are expected to be counting the next day.
• 2. Notify the warehouse manager that all items received during the two days of physical counts must be segregated and marked with “Do Not Inventory” tags.
• 3. Notify the manager that no shipments are allowed for the duration of the physical count.
• 4. Notify the warehouse manager that all shipments for which the paperwork has not been sent to accounting by that evening will be included in the inventory count on the following day.
• 5. Notify the warehouse manager that all shipping and receiving documentation from the day before the count must be forwarded to the accounting department that day, for immediate data entry. Likewise, any pick information must be forwarded at the same time.
• 6. Notify all outside storage locations to fax in their inventory counts.
o 3.3 Morning of the Physical Inventory Count (Controller)
• 1. Enter all transactions from the previous day.
• 2. Assemble the count teams. Issue counting instructions to them, as well as blocks of tags, for which they must sign. Give each team a map of the warehouse with a section highlighted on it that they are responsible for counting. Those teams with forklift experience will be assigned to count the top racks; those without this experience will be assigned the lower racks.
• 3. Call all outside storage warehouses and ask them to fax in their counts of company-owned inventory.
• 4. The count supervisor assigns additional count areas to those teams that finish counting their areas first.
• 5. The tag coordinator assigns blocks of tags to those count teams that run out of tags, tracks the receipt of tags, and follows up on missing tags. All tags should be accounted for by the end of the day.
• 6. The data entry person enters the information on the tags into a spreadsheet, and then summarizes the quantities for each item and pencils the totals into the cycle count report that was run earlier in the day.
• 7. The count supervisor reviews any unusual variances with the count teams to ensure that the correct amounts were entered.
• 8. Review the test count with an auditor, if necessary. Give the auditor a complete printout of all tags, as well as the cycle counting spreadsheet, showing all variances.
o 3.4 Job Descriptions (Controller)
 The count supervisor is responsible for supervising the count, which includes assigning count teams to specific areas and ensuring that all areas have been counted and tagged. This person also waits until all count tags have been compared to the quantities listed in the computer, and then checks the counts on any items that appear to be incorrect.
 The tag coordinator is responsible for tracking the blocks of count tags that have been issued, as well as for accounting for all tags that have been returned. When distributing tags, mark down the beginning and ending numbers of each block of tags on a tracking sheet, and obtain the signature of the person who receives the tags. When the tags are returned, put them in numerical order and verify that all tags are accounted for. Once the verification
is complete, check off the tags on the tracking sheet as having been received. Once returned tags have been properly accounted for, forward them to the extension calculation clerk.
 The extension calculation clerk is responsible for summarizing the amounts on the tags (if there are multiple quantities listed) to arrive at a total quantity count on each tag. This person also compares the part numbers and descriptions on each tag to see if there are any potential identification problems. This person forwards all completed tags to the data entry person.
 The data entry person is responsible for entering the information on all count tags into the computer spreadsheet. When doing so, enter all the information on each tag into a spreadsheet. Once a group of tags has been entered, stamp them as having been entered, clip them together, and store them separately. Once all tags are entered in the spreadsheet, sort the data by part number. Print out the spreadsheet and summarize the quantities by part number. Transfer the total quantities by part number to the cycle count report. If there are any significant variances between the counted and cycle count quantities, bring them to the attention of the count supervisor for review.
o 3.5 Time and Place (Count Teams)
The count begins at 7:30 A.M. and ends at 4:30 P.M. on the first day of the count. If the count continues to a second day, it will begin at the same time, and count teams will be released whenever the counts have been completed. On both days, all count teams should meet at the warehouse gate.
o 3.6 Counting Responsibility (Count Teams)
• 1. Count the bin locations assigned to you. These will be marked on a map of the warehouse with a highlighter. When you have counted all of the items in your assigned area, return to the count supervisor, who will assign additional count areas to you.
• 2. For each item counted in a separate bin location, enter the product code and date on the part of the inventory tag that is labeled “Pallet” and tape it to the inventory item. Rip off the other part of the tag and mark on it the product code, description, location, and quantity counted. Also initial the tag or list the number of your count team. Keep this part of the tag and return it to the tag coordinator when you run out of tags. This person will ensure that all of the tags assigned to you have been returned. If some are missing, you must locate and return them to the tag coordinator.
• 3. If there are many boxes of the same item to count, list the individual amounts on a tag, and an extensions calculation person will add them up for you. For example, if there are 18 boxes of 300 and a partial box of 12, just enter (18 X 300) + 12 on the tag.
o 3.7 General Information (Count Teams)
 Do not count any item that has a “Do Not Inventory” tag on it.
 Scales will be provided to all count teams. The warehouse supervisor is available for training in the use of scales.
 Use a pen (not a pencil) to enter information on count tags. To make a quantity correction, put a line through the old quantity, write the new quantity next to it, and initial the change.
 All tags must be accounted for! If you do not use some, return them to the tag coordinator.


Procedure 7: Calculate Period-End Inventory
Subject: Calculate Period-End Inventory
 1. PURPOSE AND SCOPE
This procedure is used by the cost accountant to ensure that the inventory valuation created by a computerized accounting system is accurate, as well as to update it with the latest overhead costs.
 2. RESPONSIBILITIES
Cost Accountant
 3. PROCEDURES
o 3.1 Verify Inventory Quantities and Costs (Cost Accountant)
• 1. Following the end of the accounting period, print out and review the computer change log for all bills of materials and labor routings. Review them with the materials manager and production engineer to ensure their accuracy. Revise any changes made in error.
• 2. Go to the warehouse and manually compare the period-end counts recorded on the inventory report for the most expensive items in the warehouse to what is in the warehouse racks. If there are any variances, adjust them for any transactions that occurred between the end of the period and the date of the review. If there are still variances, adjust for them in the inventory database.
• 3. Print a report that sorts the inventory in declining extended dollar order and review it for reasonableness. Be sure to review not only the most expensive items on the list but also the least expensive, since this is where costing errors are most likely to be found. Adjust for any issues found.
o 3.2 Verify Overhead Costs and Allocations (Cost Accountant)
• 1. Review all entries in the general ledger during the reporting period for costs added to the cost pool, verifying that only approved costs have been included. Also investigate any unusually large overhead entries.
• 2. Verify that the overhead allocation calculation conforms to the standard allocation used in previous reporting periods, or that it matches any changes approved by management.
• 3. Verify that the journal entry for overhead allocation matches the standard journal entry listed in the accounting procedures manual.
o 3.3 Review Variances from Prior Period (Cost Accountant)
Print out the inventory valuation report and compare its results by major category to those of the previous reporting period, both in terms of dollars and proportions. Investigate any major differences.

Procedure 8: Calculate Lower of Cost or Market Value
Subject: Calculate Lower of Cost or Market Value
 1. PURPOSE AND SCOPE
This procedure is used by the cost accountant to periodically adjust the inventory valuation for those items whose market value has dropped below their recorded cost.
 2. RESPONSIBILITIES
Cost Accountant
 3. PROCEDURES
o 3.1 Identify High-Value Inventory Items (Cost Accountant)
Export the extended inventory valuation report to an electronic spreadsheet. Sort it by declining extended dollar cost, and delete the 80% of inventory items that do not comprise the top 20% of inventory valuation. Sort the remaining 20% of inventory items by either part number or item description. Print the report.
o 3.2 Conduct Market Price Review (Cost Accountant)
• 1. Send a copy of the report to the materials manager, with instructions to compare unit costs for each item on the list to market prices, and be sure to mutually agree on a due date for completion of the review.
• 2. When the materials management staff has completed its review, meet with the materials manager to go over its results and discuss any major adjustments. Have the materials management staff write down the valuation of selected items in the inventory database whose cost exceeds their market value.
o 3.3 Document Change in Valuation (Cost Accountant)
• 1. Have the accounting staff expense the value of the write-down in the accounting records.2. Write a memo detailing the results of the lower of cost or market calculation. Attach one copy to the journal entry used to write down the valuation, and issue another copy to the materials manager.


Procedure 9: Reorder Supplies with a Visual Review System
Subject: Reorder Supplies with a Visual Review System
 1. PURPOSE AND SCOPE
This procedure is used by the purchasing staff to place orders for supplies not tracked through the inventory system.
 2. RESPONSIBILITIES
Purchasing Clerk
 3. PROCEDURES
o 3.1 Discuss Visual Review Parameters (Purchasing Clerk)
• 1. Meet with the production manager and discuss any revisions to the bin sizes and reorder lines used in the current two-bin ordering system.
• 2. If necessary, alter the bin sizes used or move the reorder line marked inside the bins.
o 3.2 Visually Review Supply Stock Levels (Purchasing Staff)
• 1. If a two-bin reordering system is in use, note on a reorder form the part number of any item for which its replenishment bin is empty.
• 2. If a single-bin reordering system is in use, note on a reorder form the part number of any item for which the inventory level has dropped below the reorder line.
• 3. Refer to the standard order quantity summary for each part to be reordered, and note the quantity on the reorder form next to each part number requiring replenishment.
o 3.3 Reorder Required Supplies (Purchasing Clerk)
• 1. Obtain a purchase order number for all items shown on the reorder form.
• 2. Enter the purchase order number at the top of the form.
• 3. Fax the reorder form to the single-source parts supplier.
• 4. Call the supplier to confirm receipt of the fax, and obtain an expected delivery date from the supplier.
• 5. Enter the delivery date in the purchase order record in the computer system.
• 6. File the reorder form.


Procedure 10: Receive Sales Returns
Subject: Receive Sales Returns
 1. PURPOSE AND SCOPE
This procedure is used by the accounts receivable clerk to calculate the correct amount of credit to apply to a sales return.
 2. RESPONSIBILITIES
Accounts Receivable Clerk Receiving ClerkQuality Assurance Clerk
 3. PROCEDURES
o 3.1 Assign Sales Return Authorization Number (Accounts Receivable Clerk)
Upon receipt of a sales return inquiry from a customer, assign the customer a unique sales return authorization number. Enter this number on the Sales Return Authorization Form (see Exhibit 12.7), as well as quantity, product number, and description of the items being returned. In addition, enter one of the standard reason codes on the form into the “Reason for Return” field. Store a copy of the form in the sales return file, sorted by date. Send another copy to the receiving department.
o 3.2 Accept Sales Return (Receiving Clerk)
• 1. When a customer returns a product to the receiving dock, compare the sales return authorization number listed on the package to the list of open sales return authorization numbers. Accept the delivery if there is a numerical match and the product quantity and type is the same. If the number does not exist, or the product type is incorrect, or the quantity is too large, reject the order.
• 2. If the order is acceptable, log it into the inventory database in the “Requires Review by Quality Assurance” category. Notify quality assurance that it needs to inspect returned product. Forward the shipping information attached to the delivery to the accounting department, and enter the receipt into the receiving log.
o 3.3 Determine Damage Credit (Quality Assurance Clerk)
Upon receipt of notification from the receiving staff, the quality assurance clerk must inspect the returned goods, verifying the condition of the packaging, documentation, and product. If any of these items require replacement, complete a Product Repair Ticket and attach it to the returned goods. Send a copy of the Ticket to the accounting department.
o 3.4 Calculate Sales Return Credit (Accounts Receivable Clerk)
• 1. Upon receipt of the shipping information attached to the sales return, the accounts receivable clerk uses the Sales Return Credit Calculation Form (see Exhibit 12.8) to determine the correct amount of credit to be granted to the customer.
• 2. Enter the product number, quantity returned, product description, unit price, and extended price for each item returned on the form.
• 3. Calculate the amount of damage credit to enter on the form by multiplying the required product repairs listed on the Product Repair Ticket by the standard product cost listed in the computer system for each item.
• 4. Reduce the amount of credit by a ___% restocking fee, and also subtract a $___ transaction fee.
• 5. Calculate the net credit granted.
• 6. Sign and date the form.
• 7. File one copy of the form in the customer file, sorted by date. Forward another copy to the clerk who processes credits (see the “Issue Customer Credits” procedure).


Procedure 11: Review Inventory for Obsolescence
Subject: Review Inventory for Obsolescence
 1. PURPOSE AND SCOPE
This procedure is used by the warehouse staff to periodically review the inventory for obsolete items and account for items considered to be obsolete.
 2. RESPONSIBILITIES
Warehouse Staff General Ledger Accountant
 3. PROCEDURES
o 3.1 Determine Disposition of Inventory (Warehouse Staff)
• 1. Schedule a meeting of the materials review board, to meet in the warehouse.
• 2. Prior to the meeting, print enough copies of the Inventory Obsolescence Review Report (see Exhibit 12.9) for all members of the committee.
• 3. Personally review all items on the report for which there appear to be excessive quantities on hand.
• 4. Determine the proper disposal of each item judged to be obsolete, including possible returns to suppliers, donations, inclusion in existing products, or scrap.
o 3.2 Dispose of Inventory (Warehouse Staff)
• 1. Have the warehouse staff mark each item as obsolete in the inventory database.
• 2. Issue a memo to the materials review board, summarizing the results of its actions.
o 3.3 Write Down Inventory (General Ledger Accountant)





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Inventory Best Practices - Inventory Policies and Procedures