A finance executive of a metals manufacturing corporation wanted a physical count of all items at the company’s plants. And he wanted it done in two (2) days.
A physical count consists of a team identifying, counting, and tagging items, such as products, work-in-process, and raw materials. The purpose of a physical count is to reconcile company inventory records with what are actually there at the company’s facilities. The idea is to ensure inventory records are accurate such that financial statements reflect the true value of merchandise which make up a significant part of the company’s assets.
The finance executive dispatched a team of accountants & managers, and asked operations supervisors to assist via making available workers and equipment to help. The finance executive with the blessing of the metals manufacturer’s owners authorised a budget for transportation and food good for the planned two (2) day physical count.
The physical count lasted more than a week and was never completed. Hardly all the items were counted. It was a complete failure.
The company produced metal tubes, pipes, sheets, & plates of different grades of steel and at different lengths or sizes. The accountants couldn’t tell one from the other when they first arrived at the company’s warehouses. Products were mixed up on racks and on pallets. There were no visible identification on the racks or pallets to say what item was what. It didn’t help that there were also unfinished or work-in-process items among the products.
Teams also had to sort items to be able to count. Because items were heavy, they relied on workers, forklifts, and cranes, which were never available outright. Teams often were found idle as they waited for available workers and equipment who were often busy on the production lines.
Frustrated, the finance executive stopped the counting. The food and transportation expenses exceeded budget. The accountants hardly tallied items for an accurate physical count. At the end of the day, the company’s owners didn’t know what the true inventory of items was.
The finance executive blamed the company’s operations managers for the failure. The operations managers accused the finance executive of being ignorantly unfamiliar with the company’s products, not to mention his poor planning.
Physical counts may look easy, but most aren’t.
Physically counting items or merchandise is not a straightforward affair. It isn’t like numbering items one, two, three, and tallying them.
The key word is physical. When people do a physical count, they not only identify, tally, and tag, they also move, sort, and organise items.
And if items are bulky and heavy, the chores can be daunting.
The operations managers were right in that the finance executive was unfamiliar with the company’s items in that he didn’t consider the nature of the items he wanted physically counted. The company’s metal products were not trinkets; they consisted of heavy merchandise in which most needed to be lifted via forklifts or cranes.
Operations managers, however, share in the fault for the fact that the warehouse was a disorganised mess, and that they did not satisfactorily cooperate with the finance executive by making available people to assist the physical count team.
The silver lining from the physical count failure is that it laid bare glaring gaps in the metals manufacturer’s management of inventories.
Items were mixed up. Some were not identifiable. And for those that were identified, many didn’t exist in the records. Some didn’t have matching item codes or weren’t listed as items at all.
Managers also learned that they had plenty of idle stock, as in significant quantities of work-in-process and finished product.
The metals manufacturer’s owners hired a new operations executive in which she initiated a sale of most of the company’s idle inventories. Within months, she was able to salvage cashflow from the selling which helped prop the company’s finances.
As inventories were reduced, the company’s operations management team was able to get a better handle of inventories which contributed a more accurate picture of the firm’s working capital.
Physical counts are not simple tasks that can be done quickly. They require preparation and planning. Teamwork is essential in that departments such as finance & accounting and operations need to work together to ensure the success of a physical count.
Physical counts not only bring about more accuracy to inventory data. They also expose how well inventories are managed.
When people physically count inventories, they learn the value of the items they have stewardship over. They unmask issues and identify problems which need to be solved for better business results.
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