Organization’s policies, procedures and practices may include:

 Inventory management

Inventory management refers to the process of ordering, storing and using a company's
inventory. This includes the management of raw materials, components and finished products, as
well as warehousing and processing such items.

A company's inventory is one of its most valuable assets. In retail, manufacturing, food service
and other inventory-intensive sectors, a company's inputs and finished products are the core of its
business. A shortage of inventory when and where it's needed can be extremely detrimental.

At the same time, inventory can be thought of as a liability (if not in an accounting sense). A
large inventory carries the risk of spoilage, theft, damage or shifts in demand. Inventory must be
insured, and if it is not sold in time it may have to be disposed of at clearance prices—or simply
destroyed.

For these reasons, inventory management is important for businesses of any size. Knowing when
to restock inventory, what amounts to purchase or produce, what price to pay—as well as when
to sell and at what price—can easily become complex decisions. 

Inventory Management Methods

Depending on the type of business or product being analyzed, a company will use various
inventory management methods. Some of these management methods include just-in-time (JIT)
manufacturing, materials requirement planning (MRP), economic order quantity (EOQ),
and days sales of inventory (DSI).

1. Just-in-Time Management
Just-in-time (JIT) manufacturing originated in Japan in the 1960s and 1970s. Toyota Motor (TM)
contributed the most to its development. The method allows companies to save significant
amounts of money and reduce waste by keeping only the inventory they need to produce and sell
products. This approach reduces storage and insurance costs, as well as the cost of liquidating or
discarding excess inventory.

JIT inventory management can be risky. If demand unexpectedly spikes, the manufacturer may
not be able to source the inventory it needs to meet that demand, damaging its reputation with
customers and driving business toward competitors. Even the smallest delays can be
problematic; if a key input does not arrive "just in time," a bottleneck can result.
 2. Materials Requirement Planning
The materials requirement planning (MRP) inventory management method is sales-forecast
dependent, meaning that manufacturers must have accurate sales records to enable accurate
planning of inventory needs and to communicate those needs with materials suppliers in a timely
manner. For example, a ski manufacturer using an MRP inventory system might ensure that
materials such as plastic, fiberglass, wood, and aluminum are in stock based on forecasted
orders. Inability to accurately forecast sales and plan inventory acquisitions results in a
manufacturer's inability to fulfill orders.

3. Economic Order Quantity

The economic order quantity (EOQ) model is used in inventory management by calculating the
number of units a company should add to its inventory with each batch order to reduce the total
costs of its inventory while assuming constant consumer demand. The costs of inventory in the
model include holding and setup costs.

The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a
company does not have to make orders too frequently and there is not an excess of inventory
sitting on hand. It assumes that there is a trade-off between inventory holding costs and inventory
setup costs, and total inventory costs are minimized when both setup costs and holding costs are
minimized.

4. Days Sales of Inventory

Days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company
takes to turn its inventory, including goods that are a work in progress, into sales.

DSI is also known as the average age of inventory; days inventory outstanding (DIO), days in inventory
(DII), days sales in inventory or days inventory and is interpreted in multiple ways. Indicating the
liquidity of the inventory, the figure represents how many days a company’s current stock of inventory
will last. Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the inventory,
though the average DSI varies from one industry to another.

5. Qualitative Analysis of Inventory

There are other methods to analyze inventory. If a company frequently switches its method of
inventory accounting without reasonable justification, it is likely its management is trying to
paint a brighter picture of its business than what is true. The SEC requires public companies to
disclose LIFO reserve that can make inventories under LIFO costing comparable to FIFO
costing.
Frequent inventory write-offs can indicate a company's issues with selling its finished goods or
inventory obsolescence. This can also raise red flags with a company's ability to stay competitive
and manufacture products that appeal to consumers going forward.

 Preparation of reconciliation reports

Inventory reconciliation is the process of comparing physical inventory counts with records
of inventory on hand. This is an important process as it helps reduce stock discrepancies and
understand why there are discrepancies in the first place. 

Accurate and timely inventory reconciliations should happen often to ensure that all inventories
are accounted for. 

To reconcile inventory, compare the inventory counts in the company's records to the actual
amounts on the warehouse shelves, figure out why there are differences between the two
amounts, and adjust the records to reflect this analysis. Inventory reconciliation is an important
part of cycle counting, since the warehouse staff uses it to continually update the accuracy of its
inventory records. Inventory record accuracy is needed to ensure that replacement items are
ordered in a timely manner, that inventory is properly valued, and that parts are available for sale
or production when needed. Inventory reconciliation is also needed to ensure that the actual and
recorded inventory amounts are the same at the end of the year, so that there will be no issues
when the inventory is audited.

Inventory reconciliation is not as simple as adjusting the book balance to match the physical
count. There may be other reasons why there is a difference between the two numbers that
cannot be corrected with such an adjustment. In particular, you should consider following any or
all of these steps:

Recount the inventory. Someone may have incorrectly counted the inventory. If so, have a
different person count it again (since the first counter could make the same counting mistake a
second time). Further, if the physical count appears to be significantly lower than the book
balance, it is possible that there are more inventories in a second location - so look around for a
second cache of it. Recounting is the most likely reason for a variance, so consider this step first.

Match the units of measure. Are the units of measure used for the count and the book balance the
same? One might be in individual units (known as "eaches"), while the other might be in dozens,
or boxes, or pounds, or kilograms. If you have already conducted a recount and there is still a
difference that is orders of magnitude apart, it is likely that the units of measure are the problem.

Verify the part number. It is possible that you are misreading the part number of the item on the
shelf, or guessing at its identification because there is no part number at all. If so, get a second
opinion from an experienced warehouse staff person, or compare the item to the descriptions in
the item master records. Another option is to look for some other item for which there is a unit
count variance in the opposite direction - that could be the part number you are looking for.

Look for missing paperwork. This is a large source of inventory reconciliation issues. The unit
count in the inventory records may be incorrect because a transaction has occurred, but no one
has yet logged it. This is a massive issue for cycle counters, who may have to root around for un
entered paperwork of this sort before they feel comfortable in making an adjustment to the
inventory records. Other examples of this problem are receipts that have not yet been entered (so
the inventory record is too low) or issuances from the warehouse to the production area that have
not been entered (so the inventory record is too high).

Examine scrap. Scrap can arise anywhere in a company (especially production), and the staff
may easily overlook its proper recordation in the inventory records. If you see a modest variance
where the inventory records are always just a small amount higher than the physical count, this is
a likely cause.

Investigate possible customer ownership. If you have no record of an inventory item at all in the
accounting records, there may be a good reason for it, which is that the company does not own it
- a customer does. This is especially common when the company remodels or enhances products
for its customers.

Investigate possible supplier ownership. To follow up on the last item, it is also possible that you
have items in stock that are on consignment from a supplier, and which are therefore owned by
the supplier. This is most common in a retail environment and unlikely anywhere else.

Investigate back flushing records. If your company uses back flushing to alter inventory records
(where you relieve inventory based on the number of finished goods produced), then the bill of
materials and the finished goods production numbers had better both be in excellent condition, or
the reconciliation process will be painful. Back flushing is not recommended unless your
manufacturing record keeping is superb.

Accept the variance. If all forms of investigation fail, then you really have no choice but to alter
the inventory record to match the physical count. It is possible that some other error will
eventually be found that explains the discrepancy, but for now you cannot leave a variance; when
in doubt, the physical count is correct.

What is an Inventory Reconciliation Report?

A report that documents the results of a physical inventory count and lists all of the adjustments that
need to be made to this figure to obtain the Inventory figure in the company's accounts.

An inventory reconciliation report provides a comparison between the written inventory records of the
business and the actual physical stock held in storage. To the extent that these figures do not match, the
report can help to identify the source of the error.
If the source of the discrepancy cannot be found, the written inventory records should then be amended
to reflect the actual inventory level and the appropriate accounting entries made.

 stock take
Stock taking is the counting of on-hand inventory. This means identifying every item on hand,
counting it and summarizing these quantities by item. There may also be a verification step,
where the count results are compared to the inventory unit counts in a company's computer
system. Stock taking is a common requirement of a periodic inventory system, and may also be
required as part of a company's annual audit. In short, stock taking results in a summary-level
document that contains a list of the quantities on hand for every inventory item as of a specific
point in time. The procedural steps required to do so are:

1. Select and train the counting teams in regard to how to conduct counts and fill out the
associated paperwork.
2. Establish a cutoff time, after which no further inventory in the receiving area is allowed
in the warehouse, and no items are shipped out. It is helpful if there is no production,
receiving, or shipping activity on the day of the count.
3. Assign counting responsibility areas in the warehouse to each count team.
4. Distribute a prenumbered sequence of count tags to each team, and log in the number
ranges distributed.
5. In each count team, one person identifies and counts inventory while another person fills
out the count tag. The original tag is taped to the inventory, and the team retains a backup
copy.
6. When each team is done counting, they turn in the count tags. The count tag
administrator checks to see if any tags are missing, which may require an additional
search to find the tags. They are usually still attached to the tags that were taped to the
inventory.
7. The count tag clerk summarizes the count tags into a spreadsheet, which is used to create
summary totals for each inventory item. An alternative is to enter the information into a
database, which does a better job of aggregating summary totals.
8. The cost accountant compares the resulting information to the unit balances maintained in
the company's perpetual inventory system (assuming that it has one). If there are large
 variances from the existing database, a count team goes back to the warehouse to verify
the original counts.

This is a highly labor-intensive process and may require a significant amount of down-time
within the warehouse, so companies generally try to avoid stock taking to the greatest extent
possible.

Cycle Counting

A more frequent form of stock taking is called cycle counting, which is completed every day. If a
company uses cycle counting, the warehouse staff counts the inventory in a small portion of the
warehouse and matches its count information against the records in the computer system. If there
are errors, the warehouse staff corrects them, and also investigates the underlying reasons why
the errors occurred. An active cycle counting program will at least improve the accuracy level of
the inventory records, and may even make it unnecessary to conduct a month-end physical
inventory count.

Ad hoc reporting, also known as one-time ad hoc reports, helps its users to answer critical
business questions immediately by creating an autonomous report, without the need to wait for
standard analysis with the help of real-time data and dynamic dashboards.

Ad hoc reports may include:

 inventory turnover analysis

 total purchases and inventory usage for a period