Inventory adjustments
Inventory adjustments are done to match inventory levels so that amount of stock in system records or papers is covered with physical count of stock. Adjustment means here decreasing of increasing amount of stock [1]. Many companies decide to perform monthly cycles of inventory adjustments which takes a lot of time and money [2]. The inventory adjustment process is different in phases of the business cycle [3]
Inventory adjustment documents
Inventory adjustment might be controlled. It should be supported with proper documentation and follow proper policy within an organisation. Documentation should include evidences such as numbers, codes and other related papers [4]:
- stock number,
- quantity,
- document number,
- condition code,
- management code,
- approvals,
- transactions,
- related history of transactions,
- other supporting documentary,
Reasons for inventory inaccuracies
Root causes of all inventory inaccuracies should be identified. The reasons behind might be[5]:
- accounting errors,
- not having enough employees,
- wrong receipt assignments,
- system errors,
- improper storage,
- wrong reporting,
- shipping inaccuracy,
- wrong count on vendor side,
- mistakes in bills,
- unreported scrap,
- lack of data input and data output control,
- lack of knowledge how system works,
- lack of discipline,
- wrong materials requirement planning (MRP),
- other human errors.
Improvements in inventory control methods
Innovations in inventory control might decrease relative stockout costs. First of them were introduced in 1980s like just-in-time techniques or bar coding [6].
System steps in adjusting an inventory
In practise inventory adjustments are done with support of the proper inventory system. To set proper number of stock, usually steps that user has to do in the system are[7]
- Adding an adjustment,
- Choosing the adjustment form,
- Selecting reason of the adjustment,
- Writing down notes about the adjustment (if any),
- Choosing if the adjustment will increase or decrease quantity of item.
Examples of Inventory adjustments
- Internal Theft: This is when an employee takes inventory out of the warehouse or store without permission or paying for it. This can be tracked by examining the sales reports, inventory records, and store security cameras.
- Damaged Goods: This is when goods are damaged or spoiled and need to be taken out of inventory. This can be tracked by examining invoices, inspection reports, and other documents.
- Customer Returns: This is when customers return goods to the store or warehouse. This can be tracked by looking at sales records, customer returns, and customer complaints.
- Shortages: This is when there is not enough inventory on hand to meet customer demand. This can be tracked by examining inventory reports, customer orders, and shipping documents.
- Obsolete Inventory: This is when inventory is no longer in demand or is no longer usable. This can be tracked by examining inventory reports, sales data, and customer feedback.
Advantages of Inventory adjustments
Inventory adjustments are essential in order to ensure accurate record keeping and efficient inventory control. The following are the advantages of inventory adjustments:
- They help in keeping accurate records of inventory levels, which can be used for future planning. This can help in ensuring that the company does not run out of stock and that the right amount of inventory is maintained.
- They can help to identify potential issues with stock levels, such as theft, incorrect pricing, and inaccurate counting.
- They also help to identify any discrepancies between physical and digital records, which can be rectified promptly.
- By adjusting inventory levels regularly, businesses can ensure that they have the right amount of stock and that they can meet customer demand.
- Inventory adjustments can also help to save money on costs associated with ordering too much or too little stock.
Limitations of Inventory adjustments
Inventory adjustments can have some limitations, including:
- Incorrect calculations: Inventory adjustments are based on calculations and if these calculations are incorrect it can lead to inaccurate adjustments.
- Human-error: The process of inventory adjustment is largely dependent on the human input. If the data is entered incorrectly or missing data is not identified then it can lead to inaccurate adjustments.
- Outdated technology: If the technology used to record the physical count of inventory is outdated or not up to date it can lead to inaccurate inventory adjustments.
- Inaccurate tracking: If the inventory tracking systems are not accurate or up to date it can lead to inaccurate inventory adjustments.
- Lack of resources: If the resources required to perform the inventory adjustments are not available, then it can lead to inaccurate adjustments.
Inventory adjustments are done to match inventory levels so that amount of stock in system records or papers is covered with physical count of stock. There are several other approaches related to Inventory adjustments, such as:
- Cycle counting: it is a process of counting inventory periodically, in order to avoid counting all the items at once. It is used to maintain accuracy of inventory records.
- Stock taking: it is a physical check of the quantity and condition of the items in the inventory. It helps to identify the discrepancies between the recorded stock level and the actual stock level.
- Reorder point: it is a point in which the organization decides to order more stock. It helps to ensure that stock levels are maintained.
- ABC analysis: it is a method of categorizing inventory items according to their importance. It helps to determine which items need to be tracked more closely.
In summary, there are several approaches related to inventory adjustments, such as cycle counting, stock taking, reorder point, and ABC analysis. These approaches help to maintain accuracy of inventory records and ensure that stock levels are maintained.
Footnotes
| Inventory adjustments — recommended articles |
| Bin card — Inventory record — Ordering cost — Order point — Stock register — Goods received note — Reorder level — Weighted average method — Cycle stock |
References
- DLCPM Enterprise, (2018), Inventory Management User Guide, Magic Touch Software
- Kvasnicka D., (2013), AR 740-26 02/22/2013 Physical inventory control, Us Department Of Defence
- McCarthy J., Zakrajsek E., (2000), Microeconomic Inventory Adjustment: Evidence From U.S. Firm-Level Data, Federal Reserve Bank of New York & Board of Governors of the Federal Reserve System
- McDonald S. C. (2009), Materials Management: An Executive's Supply Chain Guide, John Wiley & Sons
- Reagan P. B., Weitzman M. L., (1980), Asymmetries in Price and Quantity Adjustments by the Competitive Firm in "Journal of economic theory 27, 410-420", Academic Press
- TeachUcomp Inc., (2008), Mastering Peachtree Made Easy v. 2008 through 2003, TeachUcomp Inc.
Author: Anna Bodura
