Podcast Accounting Best Practices_10 pptx

By taking this approach, one can not only be the source of ideas,but also assist in carrying them out in an indirect manner.Though control reviews are still necessary to some extent in a

focus on valuable improvement recommendations, the internal auditor creates anentirely different image within the corporation of being a helpful knowledgeworker who can make local managers look like stars This is a particularly impor-tant change in focus if the internal auditor can either make additional recommen-dations in regard to implementation steps for process improvements or bring thelocal manager in contact with the in-house expert who has already completed animplementation By taking this approach, one can not only be the source of ideas,but also assist in carrying them out in an indirect manner.

Though control reviews are still necessary to some extent in all organizations,taking this different view of the position can result in business unit managers beggingthe internal audit manager for more staff time to assist them with a variety of tasks

15–4 Track Audit Results through Business

Unit Surveys

Though auditors must sometimes issue adverse opinions about the state ofprocess controls at a corporate business unit, this does not lead to long-lasting orfriendly relations with those business units, which has ramifications in terms ofcooperation from the business units when follow-up audits are conducted at alater date

Some of these adversarial circumstances can be avoided through the use ofbusiness unit surveys in which the unit managers are given the opportunity toreview audit performance in terms of their perceived relevance, value of recom-mendations made, accuracy of audit findings, and so on If a survey results inexcessively poor scores, the internal audit manager can meet with the unit man-ager to gain clarification about the issues, which may result in steps to improveauditing goals, processes, or staffing By continually obtaining survey results andacting upon them, the internal audit department can align its mission more closelywith that of the business units, resulting in greater value to the business units.This approach can also be used as an ancillary rating measure for internal auditstaff performance, as well as a method for determining which unit managers need

to be dealt with more carefully during upcoming audits

The results of these surveys should be stored and tracked on a trend line forseveral years to gain some idea of the perceived level of performance by thedepartment The survey database can also be sorted by audit team, business unit,and type of audit program conducted, to see if issues continually arise in any ofthese three areas that require corrective action

15–5 Train Business Unit Staff on

The internal auditor can mitigate this problem by setting aside time at the end

of each audit to personally provide the necessary level of training This will requireextra time, so some padding must be added to the audit time budget to allow fortraining Also, it is most helpful for the internal audit department to have a set oftraining guides on major topical areas prepared in advance, and readily accessible

by all auditors for use These guides should cover processes and controls in allmajor areas that are common to multiple business units, such as inventory transac-tions, order fulfillment, the purchasing process, and travel expense reporting.Though this best practice will require more auditor time than is usually the case, ithelps to reduce the number of control problems that will be found during subse-quent audits, and so saves audit time in the long run It is also seen as a major bene-fit provided by the internal audit staff to the rest of the company

15–6 Train New Business Unit Managers on Control Issues

When new managers are assigned to a business unit, the last thing they want tosee is an internal auditor walking in the door to conduct a review Their experi-ence is likely to be the uncovering of some shortfall in the control systems, result-ing in a black mark against them while they are still struggling to learn the details

of their jobs In anticipation of this result, a new manager is likely to stonewall aninternal auditor in hopes of avoiding any negative findings

A more positive approach is for a senior-level internal auditor to meet witheach new manager as part of the initial job training and spend a great deal of timediscussing the control systems over which the manager now has responsibility Thisdiscussion should include a hands-on review of each process step where controlpoints are used, as well as conversations about the need for these controls, how toensure that they are being followed, and indicators of control failures The internalauditor can even point out other possible improvements in the manager’s systems

By taking this approach, the internal auditor will be seen as a strong advisor tonew managers, and one with whom a long-standing and friendly relationship can

15–6 Train New Business Unit Managers on Control Issues 357

be forged that will assist in the conduct of future audits This approach pletely contravenes the more adversarial situation that typically arises between anew manager and an internal auditor.

15–7 Avoid Overauditing of Internal Audits

Many internal audits involve the repetitive review of the same topical areas, ifonly because these areas are perceived to have the highest degree of financial risk

to a company, and so are worthy of constant review When internal audits arerepeated on a regular basis, the managers of these audits will usually pull out thework papers from the last audit that was conducted on the same area, and simplycopy out the same auditing requirements This can result in overauditing, becausethe internal audit manager never questions why each of the tasks needs to becompleted a second time Many of the audit procedures noted in the work papersmay have been intended to be one-time reviews to investigate perceived problemsthat have since been overcome with new control systems, rendering the originalaudit steps no longer valid Given this constant tendency to copy previous audits,

a nonessential audit step may have been repeated dozens of times, simply on thegrounds that if it was done before, it should be done again

A better approach is to conduct a brief, formal review of the upcoming nal audit with the internal audit team assigned to do the work This group shouldreview the results of the last internal audit, pore over the control chart (if any) forthe area to be reviewed, and come up with a new audit plan for every engage-ment By doing so, the team avoids the mindless repetition of early audit stepsthat are no longer valid, and concentrates on the key issues that will result in themost valuable audit results Also, by including the entire audit team in this review,

inter-a compinter-any will find thinter-at there is much better buy-in to, inter-and understinter-anding of, thework being done, which may both increase employee efficiency and reduce long-term turnover in the internal audit staff

15–8 Complete All Internal Audit Work Papers in the Field

The objective of an internal audit is to complete a report that describes any controlissues found However, one would think that, from the perspective of the internalaudit team, the objective would be to move on to the next internal audit as quickly aspossible There is a preference among internal auditors to continually meet theupcoming schedule to work on the next audit, rather than to complete the one currently being conducted This results in a long trail of incomplete audits thatrequires constant badgering by senior management to complete, frequently requiring

weekend work by the internal audit teams To avoid this problem, the standard cedure for all internal audits should be that the work papers be fully completed in thefield before an internal audit team is allowed back to the main office or to proceed tothe next audit Work paper completion should include the clearing of all points thatarose during the audit, as well as producing the draft report If this results in delays

pro-in the completion of subsequent pro-internal audits, then fpro-ine—it will also yield muchmore rapid completion of the final audit reports, which was the objective when theaudits were scheduled This point can be made to the audit teams more convincingly

by issuing a small bonus for all the internal audits that are wrapped up in the field

15–9 Create a Control Standards Manual

Auditors are trained to have a good idea of which control standards should beattached to a business process However, the managers who supervise thoseprocesses typically have no idea of which controls are involved This can result ininadvertent changes to processes by managers who are simply trying to devisemore efficient systems, which in turn results in adverse findings by auditors whenthey conduct reviews

A reasonable solution is to create a control standards manual for use byprocess managers The manual should note the internal control objectives to bemet for each business process, as well as the specific procedures used to meetthose objectives The manual can also note how different control points supporteach other, and what happens when specific controls are removed from the process.The manual can include flowcharts of the processes, noting each control point, aswell as forms used in the process Any reports arising from a process should benoted, describing what information managers should review that can bolster thecontrol objectives Clearly, this can be an exceedingly dry document (except tointernal auditors!), so an audit staff person should walk managers through themanual to highlight its key points Also, whenever an audit team arrives for anytype of review, they should always bring with them the latest version of thecontrol standards manual, making a point of highlighting key changes to it Only

by this constant emphasis on the importance of the manual will managers takethe time to review and understand it

15–10 Create an On-Line Internal Audit Library

An internal audit team will go on most audit engagements without a great deal ofcompany expertise to back them up If they encounter an unusual problem in thefield, they have no one to turn to for advice Similarly, if they encounter a control

15–10 Create an On-Line Internal Audit Library 359

problem, they have no way of knowing if it is an isolated issue or if it has beenuncovered in other places within the company These problems can be reduced bysetting up an on-line internal audit library that contains records from previous com-pleted audits, as well as who worked on them and how they can be accessed Fur-ther, the library can hold updates on all of the most recent accounting standards, aswell as cross-indexed data on problems or unusual audit scenarios encountered dur-ing other company audits By accessing this information, audit teams can save agreat deal of research time that would otherwise be spent combing through thecompany directory or the paper-based audit files to find the same information.Setting up such a system requires each internal audit manager to create anelectronic summary-level report on each audit as it is completed, which is thenforwarded to the company webmaster for inclusion in the library Also, account-ing standards can be easily obtained from various CD-based products for posting

on the on-line library Be sure to obtain an accounting standards product that tains an index search capability, so that users can easily search for items of partic-ular interest

15–11 Create and Disseminate Information from a

Best Practices Database

A large company will have many internal auditors combing through its processes

in many locations and possibly on multiple continents These auditors will build astore of knowledge about best practices that is based only on what they have seen,and which they will likely recommend to other business units as they travel through-out the company on various audit projects Though this will result in the spread ofbest practices through a company over time, it is a very inefficient way to do so—knowledge will only be applicable if an auditor happens to be assigned to anotherbusiness unit whose processes could benefit from that person’s specific knowl-edge, and it will be lost when an internal auditor retires or leaves employment

A much better way to spread the use of best practices is to store the tion in a central database It should be entered into the database as soon as anaudit is completed; it can also be validated in terms of its effectiveness by specif-ically reviewing its results during a repeat audit at a later date Auditors can also

informa-be given bonuses or recognition awards for any informa-best practices they uncover andstore in the database, which will have them enthusiastically rooting through busi-ness units to uncover new best practices

Spreading information about these best practices can take several forms Themost passive approach is to simply have it available in the database, but this approachrequires auditors to actively review the database in their limited spare time A betterapproach is to push the information into the field through the use of newsletters and e-mails to the audit staff A particularly effective approach is to e-mail best practice

information directly to those business unit managers who are most likely to usethem; by doing so, the managers are more likely to contact the internal auditdepartment with requests for assistance in installing the recommended best prac-tices The driving force behind the success of best practices dissemination is theuse of someone who regularly reviews the best practices database for “hot” top-ics, and who also spends time matching best practice possibilities with variousbusiness units In a small company, this work should be done by the internal auditmanager, though a larger company may choose to assign the task to a full-timesenior audit position to ensure that the company gains the most benefit from itsbest practices database.

15–12 Outsource the Internal Audit Function

Some organizations have their internal audit function report to the controller orchief financial officer In these situations, the manager of the accounting functionhas the additional burden of selecting auditing targets, planning for audit teams toreview them, managing the teams, and acting on their findings For a larger orga-nization, this management work can be a considerable additional burden, for theremay be many auditors

Though it is not possible to completely eliminate all management of the nal audit function, a controller or chief financial officer can outsource the function,which removes selected management tasks For example, giving all internal auditwork to an outside supplier keeps a manager from having to plan each audit orreview the teams as they conduct their work It still requires a manager to selectaudit targets and act on the results of the audits, but at least some activities havebeen eliminated Using an outside auditor carries with it the additional advantage ofreduced travel time to outlying company locations, since an audit firm with manylocations can assign local staff to each company facility Further, outside auditorsare not paid if they are not working on company-specific projects, nor does a com-pany have to pay for their ongoing training These advantages have pushed a num-ber of companies into the arms of outside auditors

inter-However, there are problems with this best practice that have raised some ire

in the ranks of internal auditors One issue is that many companies use their nal auditing departments to groom new managers for senior-level positions This

inter-is an excellent approach, for not only does it give auditors a wide-ranging view ofcompany operations, but it also allows the managers of functions being audited tosee them and to provide feedback to the human resources department regardingthe wisdom of promoting them to more senior positions Another problem is thatoutside auditors will sometimes assign junior staff personnel to internal audits,which allows them to charge less per hour However, these junior personnel fre-quently have less experience than the internal auditors, and no experience with

15–12 Outsource the Internal Audit Function 361

specific details of company operations, making them doubly inefficient quently, one must carefully weigh the advantages and disadvantages of thisapproach before handing over the internal audit department to a supplier.

15–13 Schedule Some Internal Audits

on a Just-in-Time Basis

A very common management practice is to create a schedule of all internal audits to

be performed for the upcoming year This allows the audit manager to arrange formeetings with local managers well in advance, as well as to determine the logistics

of shifting auditors around the world to various company locations It is also a mon measurement tool, whereby the audit manager commits to completing a certainnumber of audits; subsequently, finishing all work listed on the annual schedule isused as the baseline measure of success Unfortunately, blocking out the entire auditstaff’s time for a year in advance also leaves no room for audits that are requested onshort notice, which typically occurs when a control emergency arises Addressingthese needs calls for a substantial reshuffling of the audit schedule

com-A fine alternative is to schedule only a portion of the internal audit team’s time,perhaps two-thirds, leaving the remaining time slots open By doing so, any short-term work requests can be dealt with promptly Not only does this give companymanagers the impression that the internal audit department is more responsive totheir needs, but it also eliminates the need for sudden schedule changes The onlyproblem with this approach is that one can no longer determine the success of theinternal audit department based on its ability to complete a planned set of audits

15–14 Schedule Internal Audits Based on Risk

The scheduling of various areas within a company for internal audits is usually anarcane process, involving pressure from the audit committee to have a few “pet”areas investigated; during the process some department managers demand reviews

of other areas, while others put forth considerable effort to avoid them, on thegrounds that they take up too much staff time The internal audit manager is caught

in the midst of this maelstrom, trying to please everyone while still schedulingaudits for those areas in which he or she has a feeling that some problems maylurk A simple way to revise this scheduling process is to base all audits on theconcept of risk to the company

To schedule based on risk, a company must devise a ranking for risk levels,with number one being any potential control problem that could place the com-

15–15 Use Workflow Software for Internal Audits 363

pany in grave financial danger, while lower levels of risk can be assigned a lessercategory Then the internal audit manager assigns a risk ranking to each requestedaudit, while also conducting a review of other control areas to see if there areother areas of risk that are not currently being addressed The upshot of this process

is a clear ranking of audit reviews that is highly defensible and that will focus thebulk of company audit attention on those few key control processes that are at themost risk of causing financial trouble

The main issue to be aware of is that the internal audit committee should mally approve of this scheduling process, so the internal audit manager can usethat committee’s support when telling other company managers that their requestedaudits will not occur quite so quickly as they would like

15–15 Use Workflow Software for Internal Audits

Larger companies with many internal auditors face the following challenge: Theyhave a difficult time controlling the activities of their auditors, rarely have a goodknowledge of prior audits already completed, require extra travel time to return tocompany locations to clear hanging audit issues, and cannot readily see if thesame auditing problems are cropping up in multiple parts of the company Theseproblems result in significant inefficiencies in work efforts

One can resolve these problems by installing workflow software that hasbeen tailored to the particular needs of the internal auditing environment Forexample, workflow software contains forms and templates that are commonlyused in most audits, allowing the staff to save time that would otherwise be spentcreating work papers from scratch In addition, information entered directly intothe workflow database through these on-line forms can be reviewed from a cen-tral location by audit managers, thereby reducing the amount of time spent travel-

ing to remote company locations Further, this information is then available to all

auditors, anywhere in the company, for immediate review

If audit documents must be approved by multiple people, the software cansend an electronic version of the documents to each person in turn, and wait foreach one’s approval before being sent to the next person in the approval process

It can also inform each approver of the date by which approval must be obtained.The system can also keep track of when each document was made, by whom, andwhen it was subsequently reviewed and approved Reviewers can also createreview notes that are attached to the electronic audit documents and that must becleared by the audit team before the work papers will receive final approval.Workflow software can also maintain a database of previous audit work at eachcompany location, as well as the results of that work, so that subsequent audit teamscan review the prior work to see what efforts can be avoided in the future Of partic-ular importance is a risk assessment by prior audit teams, so one can immediately

see where the bulk of new audit work should be directed The system can also beused to summarize audit issues across all business units, thereby giving audit man-agers visibility into broader risk issues that must be addressed on a continuing basis.The initial cost of audit workflow software exceeds $100,000 (depending onthe configuration and number of seat licenses) and requires significant customiza-tion and installation time An example of this software is RSM McGladrey’s

Auditor Assistant, which can be viewed at www.auditorassistant.com.

15–16 Fill Internal Audit Positions from Operations on a

Rotating Basis

The problem with auditing the operations of a large company is the extremelyhigh level of procedural complexity that must be understood in order to locatecontrol problems When internal auditors are hired from outside the company,they face a steep learning curve with these systems, possibly requiring well over

a year to become conversant with even a limited subset of a company’s systems.This not only represents an inadequate use of expensive staff, but also creates therisk that control breaches may go unobserved until new internal audit staff com-plete their understanding of corporate systems

A possible solution is to fill internal audit positions from the operations sions on a rotating basis This approach ensures a high level of operational knowl-edge by auditors, so that a much higher level of audit effectiveness can be achieved

divi-at once By rotdivi-ating in new staff on a regular basis, the internal audit manager isassured of having auditors with the most current knowledge of company systems.Conversely, these employees will require training in internal audit procedures,though it typically requires less time to achieve a reasonable level of competency.There is also a risk that auditors rotated in from the ranks of the operations staffwill be less inclined to bring up control problems involving the divisions fromwhich they were hired This risk can be reduced by creating a cooperative auditenvironment with the managers of audited divisions, as well as by pairing theseaudit staff with senior-level internal auditors who have fewer divisional affiliations

On the whole, bringing in even a few auditors from the operations side of thebusiness can inject a considerable level of added expertise into the internal auditdepartment

15–17 Add Specialists to Audit Teams

A typical internal auditor has received training in a standard set of auditing tions that apply to the activities encountered in the majority of audits However,

func-specialized processes will be scheduled for audits from time to time for which theinternal audit staff has received no training This may arise when a business processhas been specially modified or enhanced at one or a few company locations, andthe internal audit staff is unfamiliar with the modifications or their impact on con-trols These audits can be difficult, since the internal auditor must spend time learn-ing the new or revised process and determining any resulting changes to thecontrol environment.

A better approach is to invite specialists to an audit to deal with theseprocesses A good person to invite is someone who has personally been involved inthe implementation of a particular system at a different location, and who, there-fore, is an expert on the process under review This person is particularly useful ifthe intent of the audit is to recommend the implementation of the system in whichthe person is an expert, since he or she can offer valuable implementation tips to thelocal management team in regard to installing the system Once the audit is over,the audit team disbands, with the specialist returning to his or her business unit.This person may be used again at a later date, or the internal auditors can learnenough from the specialist to take that person’s place on subsequent audits

15–18 Assign an Auditor to Be a Relationship Manager with

Each Business Unit

The internal audit department rarely has visibility into the work of individualbusiness units The unit managers typically revise their own systems on an ongo-ing basis in order to streamline processes, and never think to check with the inter-nal audit staff for advice on these changes Also, the internal audit department hasaccess to a wealth of information about how other business units structure theirprocesses, but rarely has an opportunity to relay this information to business unitmanagers, resulting in many lost opportunities for improvements

Both of these issues can be avoided by assigning a senior internal auditor tothe role of relationship manager with the manager of each business unit This per-son is responsible for communicating regularly with an assigned manager, notonly to impart improvement information but also to find out which activities atthe business unit should involve the participation of the internal audit staff Forexample, if a business unit is considering programming a new accounts payablesystem, the relationship manager can ask that an auditor be assigned to the designteam to ensure that appropriate controls are built into the system This approach

is also an excellent means for improving relations between the internal auditdepartment and the rest of the company

15–18 Assign an Auditor to Be a Relationship Manager 365

15–19 Assign Internal Auditors to System Development Teams

When a company’s systems development staff creates a new business system,either the accounting staff or the external auditors find control problems after thefact that require either significant programming changes or major modifications toother systems that must now be relied upon as secondary controls that offset theproblems found Some of these problems are so severe that entire systems must bescrapped or entirely reworked The worst case is when a control weakness is spot-ted by someone who exploits it to fraudulently part a company from its assets.Many of these control problems can be eliminated by making an internalaudit person an integral part of a systems design team By regularly reviewing theconceptual and detailed designs of new systems, internal auditors can spot poten-tial control problems before any significant programming time has been spent onthem This not only achieves a higher level of control in new systems, but alsoavoids the time that would otherwise be spent on correctional changes to systems

at a later date Proper use of this best practice requires the involvement of tors with significant systems design and controls knowledge

15–20 Create an Auditor Skills Matrix

Not all auditors are created equal Some have a considerable degree of training inspecific types of computer systems, others have great operational experience,while still others come from the more classical “school” of external audit firms;furthermore, some have garnered experience with particular types of business units

or processes over the years Unfortunately, these differing skill bases are times ignored when assigning auditors to specific audits, resulting in mismatches

some-of skills and required work This in turn can result in incomplete audits or oneswhose results are not sufficiently specific, detailed, or helpful to the recipient

A solution is the creation of an auditor skills matrix In its simplest form, this

is just a collection of auditor resumes that is regularly updated after each audit.However, such a collection is not easily searched for specific skill types, and so isonly useful when there are very few internal auditors on staff A much betterapproach is to itemize these skills in a database that is easily searched based onkey words This allows an audit manager to punch the key requirements of anupcoming audit into the database and instantly receive back a list of those auditorsmost qualified to complete the work The key issue with a skills database is that itrequires constant updating, since auditor skills are constantly improving throughtraining and new audits Consequently, someone must be assigned the task ofupdating skills information on a regular basis, preferably after the completion ofeach audit and after auditors have completed scheduled tasks If this updatingchore is assigned to the auditors themselves, then their annual reviews should

include a discussion of the updates they have loaded into the database, therebyhighlighting the importance of this task.

15–21 Use Excel for Continuous Auditing

Instead of waiting for an infrequent internal audit to investigate a variety of riskareas, consider a regularly scheduled investigation using Excel and datadownloaded from the accounting system Excel downloads are a staple of mostaccounting software, usually resulting in either preformatted spreadsheets orcomma-delimited text that can be easily converted into a spreadsheet Once inspreadsheet format, consider making the following tests:

• Transactions during odd hours For all types of transactions, sort the

spread-sheet based on time and date to see if anyone is accessing the system outside

of regular working hours, and investigate any transactions made during thosetimes

• Same data entry person for the same supplier For payables transactions, sort

the spreadsheet by supplier name and then by the user ID of the person ing transactions If the same person always enters payables for the same sup-plier, this could be a shell company owned by the data entry person

enter-• Subthreshold transactions For payables transactions, sort in declining order

by invoice totals, and investigate payments for which dollar amounts are justbelow the corporate approval threshold Chances are good that some involvesplit payments to avoid detailed analysis by an authorized approver

• Late customer orders with no purchase order For billing transactions, first sort

on overdue customer invoices, then sort the resulting subset on billings withoutcustomer purchase order numbers, and then sort this even smaller subset onorders exceeding the credit approval threshold The result may be a small num-ber of orders that were improperly routed around the credit department.These are only a few suggestions for possible tests A more company-specificapproach is to periodically analyze potential risks in relation to the existing con-trol structure and see which high-risk items are most suitable for investigationwith spreadsheet analysis

Total Impact of Best Practices on the Internal Auditing Function

Many of the best practices discussed in this chapter are noted in Exhibit 15.2,where best practices are clustered into those occurring prior to the commencement

Exhibit 15.2 Impact of Best Practices on the Internal Auditing Function

of an audit and those occurring during or after it Best practices related to staffing,workflow management, or audit staffing are not included.

In the exhibit, it is evident that a considerable amount of work can be pleted in advance, to determine the need for control assessments, as well as toprovide audit teams with as much information as possible about their prospective

com-audits A great many changes are advocated during the audit, such as giving

con-trols and self-audit training to the staff and managers of business units, and ing process improvement recommendations to unit managers Subsequent to theaudit, the tracking of audit survey results can be used to revise the planning andstaffing for future audits

issu-Summary

The primary intent of this chapter was to recommend a shift in focus for the nal audit department, from a detailed reviewer of business processes to an enabler

inter-of process improvements This change requires a significant attitudinal adjustment

by the internal audit manager, who is may be wedded to the traditional concept ofindependent control reviews that tend to create adversarial or, at least, cool relationswith company managers If the recommendations made here seem to be too much of

a stretch for the internal audit manager, then try just one best practice—the businessunit survey—which may reveal that the rest of the company gives a lower value tothe internal audit department than its manager supposes, and which may then sparkfurther changes

Chapter 16

This chapter describes a variety of best practices that are focused on improvingthe accuracy of the existing inventory, improving inventory transactions, andreducing a company’s investment in inventory Though these improvements mostdirectly assist other departments, such as the production, warehouse, and pur-chasing employees, the accounting staff is deeply interested as well The reason

is that the accuracy of the financial statements is largely driven by the accuracy ofthe inventory—if it is off by even a few percent, the variance flows through thecost of goods sold, resulting in a considerable amount of inaccuracy in reportedprofits Even better, if the inventory investment can be reduced, the risk of incor-rectly counting or valuing the inventory is also reduced

The best practices shown in this chapter are different from those listed where in this book, in that the controller must obtain the approval and active partic-ipation of the warehouse, purchasing, and engineering managers for most of them.Without their help, such best practices as improving the bills of material, movinginventory to floor stock, and segregating customer-owned inventory will not beaccomplished

else-The remainder of this chapter consists of a review of implementation issuesfor inventory best practices, followed by a detailed discussion of each one, andends with notes on the impact of best practices on the inventory function

Implementation Issues for Inventory Best Practices

This section describes the levels of implementation difficulty for each of the bestpractices detailed in this chapter Each one is noted in Exhibit 16.1, alongside alisting of the relative level of implementation cost and duration Most of thesebest practices are not simple ones to install because they involve one or moreother departments, usually warehousing, purchasing, and engineering Wheneveranother manager is brought into the implementation process, the chances of suc-cess drop rapidly, since this additional person must be convinced of the efficacy

of the change

370

1 Selected best practices in this chapter are adapted with permission from Steven M.

Bragg, Inventory Best Practices (Wiley, 2004).

A few of the best practices noted here rarely succeed at all, though world-classcompanies have installed them—these are the elimination of the warehouse and thereceiving function, which can only be accomplished through a time-consumingprocess of inventory elimination and supplier qualification However, for those com-panies that are well along in accomplishing these tasks, the best practices should beconsidered, given the resulting reduction in costs and accounting transactions.Most of the other best practices are relatively inexpensive to install, since theygenerally involve changes to procedures, which have no attendant expense A fewbest practices require the installation of fencing or different bin systems, but eventhese expenses are not considerable, unless the warehouse in question is a verylarge one The remainder of this chapter separately discusses each of the bestpractices shown in Exhibit 16.1.

16–1 Audit Bills of Material

Some companies use back-flushing as the means of recording changes to inventory.Under this methodology, inventory is taken from the warehouse without any associ-ated picking transactions put into the computer Then, when production is com-pleted, the total amount of production by item is entered into the computer, and thesoftware automatically removes the associated inventory amounts from the ware-house records, using bills of material as the basis for doing so Though this is a sim-ple method for keeping warehouse paperwork to a minimum, an incorrect bill ofmaterial will quickly alter the on-hand inventory balances to such an extent thatinventory accuracy will plummet In addition, the accounting department uses thebills of material to determine the cost of any finished goods; an inaccurate bill willalso impact the accuracy of this costing Thus, the accuracy of a company’s bills ofmaterial impact not only the records for inventory quantities, but also their cost.The solution that keeps bill of material errors to a minimum is an ongoingaudit of them This practice keeps inventory quantities from becoming too inac-curate in a back-flushing environment, while making the costing of finished goodsmore precise To do so, a person who is knowledgeable about the contents of bills

of material must be assigned to a regular review of them Any problems must becorrected at once To be the most effective, it is best to concentrate the efforts ofthe reviewer on those bills that are used the most or that are expected to be included

in upcoming production runs By focusing on those bills receiving the most usage,

a company can be sure of maintaining a high degree of bill accuracy for the bulk

of its products

The only implementation difficulty is that it requires the cooperation of theengineering manager, who must assign a staff person to the reviewing process.This assistance is critical, since engineers are the ones with the best knowledge ofbills of material

Exhibit 16.1 Summary of Inventory Best Practices

Bill of Material Accuracy

16–1 Audit bills of material

16–2 Conduct a configuration audit

16–3 Modify the bills of material based on

actual scrap levels 16–4 Review inventory returned to the warehouse

16–5 Modify the bills of material for temporary

substitutions 16–6 Use bills of material to find inventory

made obsolete by product withdrawals

Efficiency Issues

16–7 Compare open purchase orders to current

requirements 16–8 Reject unplanned receipts

16–9 Obtain advance shipping notices for

inbound deliveries 16–10 Eliminate the receiving function

16–11 Use standard containers to move, store,

and count inventory 16–12 Use different storage systems based on

cubic transactional volume 16–13 Optimize inventory storage through

periodic location changes 16–14 Eliminate the warehouse

Inventory Accuracy

16–15 Audit all inventory transactions

16–16 Compare recorded inventory activity to

on-hand inventories 16–17 Eliminate the physical count process

16–18 Cycle count based on usage frequency

16–19 Lock down the warehouse area

16–20 Move inventory to floor stock

16–21 Segregate customer-owned inventory

16–22 Streamline the physical count process