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

 

 

Aggregates Production and Physical Inventory

Rock Products recently published the news: Aggregates Production Rises in Second Quarter, stating “An estimated 607 million metric tons (Mt) of total construction aggregates was produced and shipped for consumption in the United States in the second quarter of 2015, an increase of 3 percent compared with that of the second quarter of 2014, according to the U.S. Geological Survey (USGS).”

However, further down into the article was some less-than-good news: “The estimated production for consumption of construction sand and gravel in the second quarter of 2015 decreased in five of the nine geographic divisions compared with that sold or used in the second quarter of 2014. The largest decreases in percentages were recorded in the West South Central and the Mountain divisions.”Sales Meeting Cartoon

Notice that the word used to describe both the positive and negative production measurements is “estimated“.

How many aggregates producers do you think estimate their production and sales every quarter? How many do you think were either pleasantly, or unpleasantly surprised when they recorded inventory numbers?

Aggregate Research states that the 2015 Q2 production numbers were gained by the USGS via state surveys, with the USGS Mineral Industry Surveys providing more detail.

Estimation and surprises (good and bad) are not new in the aggregates industry. Tracking the quantity of goods on hand has traditionally been difficult to do in dynamic or remote quarries and sites.

There are two types of inventory methods: a periodic inventory method, and a perpetual inventory system.

In a periodic, or physical inventory method, there is no cost of goods sold in an accounting period until there is a physical count.

Challenges with this method include:

  • Estimation errors. You must estimate the cost of goods sold during interim periods, which will likely result in a significant adjustment to the actual cost of goods whenever you eventually complete a physical inventory count.
  • Large adjustments. There is no way to adjust for obsolete inventory or scrap losses during interim periods, so there tends to be a significant (and expensive) adjustment for these issues when a physical inventory count is eventually completed.

If your company physically measures stockpiles weekly, monthly, quarterly, every six months, or by year, you use the periodic (or physical) inventory method. The more often you measure, and record the results, the more accurate your accounting will be.

Discrepancies or errors in accounting are difficult to investigate, if physical measurements are not completed often and accurately, as there are not enough physical inventory records to track through. Write-offs happen. Less accurate record-keeping makes it extremely difficult to set future performance expectations.

Aggregate producers assume degrees of  inaccuracy in measurements (such as density variations and belt calibrations.) For enterprises with multiple sites and locations, any variation could multiply into the millions of dollars.

Walmart knows exactly what is on their shoe shelves. McDonalds knows how many Big Macs a store sells every day, and management at Target has accurate numbers as to how many candy bars are available for events such as Halloween. They know this by constant physical inventory methods.

Perpetual inventory enables site owners and businesses to obtain real-time knowledge and confidence about existing inventory on hand, if measurements are made and recorded often and regularly.

Frequent, accurate measurements provides feedback into the success of production modes, and helps Senior Management team evaluate performance. The results are highly auditable too, because there are continual updates to either the general ledger or inventory journal.

Every stockpile is cash sitting on the ground.

Survey costs, production downtime, labor costs, tool accuracy, site locations and turn-around times have been barriers to achieving a state of accurate inventory.

Isn’t it time for Aggregates producers to finally update measurement processes to enable rapid physical inventory?

Stockpile Reports is the only measurement platform enabling large enterprises to have accurate inventory. We have the lowest costs, our results are highly auditable and available in hours, giving companies the fastest accurate physical inventory measurements available. Getting those measurements performed often, regularly, and accurately is the key to inventory control.

Think about it: if your inventory numbers were better, would it change your business? How would if affect decision-making?

Contact our team for more details about how we are currently solving accurate inventory problems for enterprises, and how we can help you.

 

*From AccountingTools.com

Plans for 2016

Senior members of the Stockpile Reports team converged this week at the Redmond, WA office.

The agenda? Making plans for 2016.

We shared what we’ve learned from our large and small business clients, brainstormed new ideas, and planned for upcoming events and exhibitions. Coming up in the first quarter of 2016, Stockpile Reports will have a booth inside the Technology for Construction pavilion at the World of Concrete in February. We’ll also be attending and exhibiting at AGG1/World of Asphalt in March, with CEO David Boardman as a featured speaker, presenting “Transforming Big Data into Big Results.”

It wasn’t all work. We also had fun working with the new iPhone 6s, and went onsite to measure piles. It was very muddy and slippery, so we were extra careful planning our walks around each stockpile.

Have you begun making plans for 2016? Are you confident that you’ve managed and tracked material inventory throughout 2015 accurately, avoiding a big write-off?

If inventory management was better than it is now, would it change your business? How would improved inventory management affect business decisions, if you were more confident in your data?

2015 is almost over, but there is still time to make changes so that enterprises can feel more confident about their Q4 numbers. It doesn’t matter if you manage 30, 100 or 1000 sites. We provide national coverage so you can do large-scale inventory efficiently, accurately and frequently.

Stockpile Reports is gearing up for a great 2016. We’d like to help you plan ahead for a successful 2016, too. Give us a call at 425-285-4303 or email us if you’d like more information. We’re here to help.

Left: Coffee, donuts and discussions off-site. Right: Maury and Richard on a client call.
Left: Coffee, donuts and discussions off-site.                                                                 Right: Maury and Richard on a client call.
Left: Signing into the site office. Right: A quick pose before measuring stockpiles.
Left: Signing into the site office.                       Right: A quick pose before measuring stockpiles.
Left: Measuring a stockpile using an iPhone. Right: David shows a client his new iPhone 6s and an older model.
Left: Measuring a stockpile using an iPhone.                                                                                Right: David shows a client his new iPhone 6s and an older model.
Left: A brainstorming session idea.                                                                 Right: Marking a control target.