Achieving Inventory Accuracy, Part 1

The new year has begun, and you might have recently completed a physical counting of the parts and accessories inventories in your RV business. Most likely there were some adjustments made to the computer value and to the accounting value of these inventories. This month’s column is the first of a two-part series of columns that offers some methods to maintain the accuracy of and the equivalency of your parts and accessories inventories.

The ABCs of Inventory

So that we can communicate with others, we are taught the ABCs of our language. There are also ABCs of inventory management. It is important to understand them so that your department managers can effectively communicate regarding the values of your parts-accessories inventories. Since effective and accurate inventory management involves other departments — especially the accounting department — I suggest that you circulate this article to those other department managers.

The three values of your parts and accessories inventories can be identified by A, B and C, which represent:

• Actual value of the goods that are physically present in your parts and accessories department
• Book value as recorded in the general ledger inventory accounts
• Computer value that represents the quantity and cost of each item listed in the DMS (dealership management system)

If you want to maintain an accurate and equivalent set of these three values, then it is important that all of the managers meet to discuss how this accuracy and this equivalency can be achieved. The first, and I believe the most important, aspect to be decided is…

What Is To Be Identified as Inventory?

This is important because your RV business purchases many types of goods. It is important that at least the accounting manager and the parts-accessories manager agree as to which of these goods qualifies as inventory and which qualifies as direct expense. This is important because if the parts-accessories manager receives an item to an inventory category in the DMS, yet the accounting manager posts that item to an expense account, then the B and C values are not equivalent.

It might be obvious that a part or accessory that is used to maintain, repair or upgrade an RV should be accrued as an inventory item. However, the decision as to how the supplies used to maintain your RV business should be accrued requires discussion.

Inventory or Expense? Some Thoughts

Let’s look at an example of a supply item and the reasons for assigning it as inventory or expense. Toilet tissue is a necessary supply to maintain your RV business. It could be considered a direct expense item, or it could be controlled in the DMS database as an inventory item. There are reasons for either designation.

If your management team decides to carry it as a direct expense, then it should be accrued to the appropriate G/L expense account(s) upon receipt of each shipment. To simplify the reordering of this expensed item, I suggest you develop a method to remind the parts-accessory manager that the supply is getting low. Or you are welcome to contact me for a copy of my Stock Level Control form.

If it is decided to carry toilet tissue as an inventory item, then I suggest creating a supplies category in your DMS database into which all supplies that are considered inventory could be entered and controlled. The benefits to controlling this item as inventory is that the DMS can suggest reordering based on the usage and stock level. When rolls of toilet tissue are requested, they can be charged to the general expense for the entire dealership and prorated to each department. Since this is an item commonly found in homes, the usage rate could be tracked to determine if any unusual demand is occurring, which could identify internal theft. I have had clients who complained about operating expenses being greater than desired. When I suggested that common supplies be controlled in their DMS database, they realized that the usage decreased because they tracked it. I can offer a DWP (detailed written procedure) for controlling and for issuing supplies.

What About 2-for-1 Accuracy Checks?

During my career as a parts manager/director, I developed some perpetual inventory checks so that my parts associates could assist me in maintaining the accuracy of our parts and accessories inventories while they were performing some of their routine duties. These inventory checks kept the actual and the computer values of the inventories aligned. Here are two of them:

The price and availability check could be implemented and applied when almost every request for a part or accessory is processed. I suggest it be used for goods that have an average on-hand quantity of less than five. A parts associate receives a request for an item (or items). She researches each item and determines if it is in stock with a specific amount on-hand and in a designated bin location. She goes to the location, verifies the on-hand count and issues it to the customer. If the quantity actually on-hand is different than the quantity recorded in the DMS database, then she reports this apparent discrepancy to the parts-accessory manager for resolution.

For those items that are frequently requested and therefore reordered, you could apply the stock order cycle count. Since most of the items contained in a suggested stock order are frequently requested, you have the opportunity to maintain accurate inventory counts for those items that generate a majority of your profits — before they are ordered.

To initiate this process, generate a suggested stock order in your DMS. Select at least 10% of the suggested stock items and verify that the reported on-hand quantity and the actual on-hand quantity are equal. If there is a discrepancy, it will be necessary to investigate and resolve the discrepancy prior to finalizing the stock order. This is important because you want to order the necessary quantity so that you don’t achieve an overstock or an understock quantity. By performing this cycle count, you will be confirming the accuracy of your most frequently requested items.

For either of these 2-for-1 cycle counts (or for any cycle counts), it will be necessary to investigate any apparent discrepancies between the actual value and the computer value. If a discrepancy is verified, then an adjustment must be performed, and this adjustment must be reported to the accounting manager so that the appropriate G/L inventory account can also be adjusted.

What Else Could You Be Doing?

In next month’s column, I will explain some additional aspects of inventory management that relate to achieving enhanced inventory accuracy. Some of these could increase the efficiency of your RECT (repair event cycle time) processes.