How a Client is Solving Write-Offs, Via Technology and Frequent Physical Inventory Counts

A multinational materials company that manufactures and distributes cement, ready-mix concrete, aggregates and materials including coal, recently approached Stockpile Reports. They were searching for a solution to reduce write-offs, time, and costs associated with inventory measurements across multiple sites.

Technological advances are now shrinking the time needed to perform company-wide physical inventory counts from 3-5 weeks down to 3-5 days. Measurement methods include the iPhone, drone, and airplane.
Technological advances are now shrinking the time needed to perform company-wide physical inventory counts from 3-5 weeks down to 3-5 days. Measurement methods include the iPhone, drone, and airplane.

The materials company had been performing inventory counts on multiple sites and regions. They’d hired an expensive third party survey team, who’d utilized a truck-mounted laser for measurements. Using a truck-mounted laser was accurate, but the costs associated with the surveys only allowed for physical inventory measurements to be performed once yearly.

During the rest of the year, team members kept a perpetual inventory by performing self-reported monthly estimates of material on hand. They estimated these amounts monthly, and sent the totals to the Finance Department.

As a result of not using current, accurate measurement data, the company had been experiencing major write-offs every year. This also corresponded with large financial swings.

Stockpile Reports was engaged to perform monthly physical inventory counts, utilizing a mix of measurement technologies. These included using iPhones, drones and planes. It was determined that using a combination of collection methods was the most appropriate solution. The location of material’s company sites are wide-spread across multiple states in the US. Each site also varied in material types, safety, stockpile placements and stockpile sizes.

The Solution for Write-Offs

Since the materials company has a company drone, a portion of one location is now measured monthly via drone for tall coal piles. This is in a high-traffic area, making it unsafe for ground measurements.

Bunkered material and smaller stockpiles are measured monthly with iPhones using internal labor. This is to spot-check incoming deliveries, and also ensure that outgoing deliveries meet production expectations.

A physical inventory count is conducted quarterly at all locations on the same day if weather permits, using Stockpile Reports’ flyover service. This is providing a running perpetual inventory for the company.

The Savings

The client recognized immediate costs-savings. There is no third-party labor needed to implement Stockpile Reports’ solution. The time-savings enables the company to perform company-wide measurements regularly. For example, the average time required using internal labor and Stockpile Reports’ flyover service was only 20 minutes per each site. Internal labor used for piloting a drone for site measurements averaged about 45 minutes per site. The average measurement by iPhone was 3-5 minutes per stockpile and bunker.

The materials company has successfully accelerated physical inventory counts, and are now performing monthly measurements. Measuring often, regularly, and accurately is the key to inventory control. They are making data-driven material handling decisions, and are greatly reducing financial write offs.

This blog post is a continuation of  “The Case for More Frequent Physical Inventory Counts” and last week’s entry “Controlling Swings in Inventory with New Technologies.

We are always happy to share our success stories. Contact us for more details about how we can assist your company and reduce write-offs.

 

 

 

The Case for More Frequent Physical Inventory Counts

How many hammers and screwdrivers are currently on the shelves at your local hardware store on any given day of the year? The store’s management has a very accurate count of every product type. Products arrive in neat, countable boxes tagged with codes or RFID devices, and are subsequently sold using bar code scanners. The on-going perpetual inventory of those items is highly accurate, due to the traceability or measurability of the products. Accurate perpetual inventory enables stores to make data driven decisions Image of man looking at a row of shoeboxed inventory and a row of bunkers.that improve business operations, and reduce financial write-offs.

Unfortunately, accurate perpetual inventory is much harder to realize in the mining, construction and aggregates industry. That’s because our products don’t arrive neatly in boxes nor get tagged with barcodes. It’s hard to perform an inventory count, as our products are stored in all shapes, sizes, and environments. Our products also change weight, based on moisture and compaction. Our products can be “lost” through erosion and floor loss. We try our best to maintain and manage conversation factors for converting yards to tons. We also produce and sell in tons, yet we inventory in cubic yards or meters. And don’t forget the safety challenges!

Significant Inventory Errors

We have all become accustomed to significant error in our day-to-day perpetual inventories– and the end of year write-off. It is very common to hear a story of a massive, multi-million dollar write-off that a CEO and CFO had to explain to investors and shareholders. Everyone’s site or production manager has had to stand in front of an executive at one point in their career to explain how an error happened– and promise that inventory will be better managed going forward.

Companies in our industry strive to achieve and maintain an inventory +/-5%. However, the actual variation might realistically skew over/under in the range of 20-30% vs.actual. For national or global companies with multiple sites and locations, any variation could easily multiply into the tens, or hundreds of millions of dollars.

Many of us have tried to manage perpetual inventory better by using scales to better manage production and sales. Scales are working well for tracking sales – but still generate variances due to moisture. Scales are being used for tracking critical production, but are challenging to implement for all production, due to cost and maintenance. Therefore, more frequent inventory counts are the most viable solution to addressing perpetual inventory accuracy.

Unlike retailers and manufacturing companies who perform physical inventory counts once or twice per year, materials companies must perform more frequent counts to reduce errors that build up over time. Historically, companies have performed annual inventory counts with quarterly or monthly estimates to help manage write-off risk. Some companies have now advanced to twice-yearly, or even quarterly counts.

The majority of CFOs and controllers would perform more frequent physical inventory counts if time and cost allowed. CFOs and controllers report that the major costs included in conducting a physical inventory count are attributed to management oversight, planning, measuring, reviewing and reconciling data, and updating financial systems. Add to this, the costs of labor and of time, to perform a count using internal or external resources. Every one of these labor and time costs are magnified by the range of a company’s geographic distribution.

Next week’s continuation of this blog post will be: Monthly Physical Inventory Counts are the First Step to Controlling Swings in Inventory