Ramlee Ibrahim & Associates

Someone with 25 years experience in operations management starts to believe he’s seen it all. He’s confident his fine-honed skills will solve any and all problems. Such was my state of mind when I accepted an engagement to help a company with its inventory management woes. Little did I know that it would require all my skills, and add several more to my war chest.

I was asked immediately if I would observe the physical inventory of the company’s plants in Thailand and write a critique of the inventory process. I agreed but I realized that this exercise would provide insights into problems that I soon would inherit. To my dismay, I was exposed to a classic lesson of how not to take physical inventory.

Upon arriving, I was surprised to see counting and production taking place in the same area. The activity level in all five plants was the same – people counting and people working. I inquired about cutoffs and was told there were none. I asked if the lines were being purged of work in progress to make counting of the line and finished goods (FG) easier. No, the line would be working through the week. I felt a burning sensation in the pit of my stomach.

The second day was even more traumatic. No one was in charge, and the seriousness of taking inventory was lost on everybody. I called my liaison and asked warily if I was witnessing the company’s acceptable standard for physical inventory. He confessed that, due to high turnover and low educational levels in the Thai plants, physical inventory always was a serious problem. Because it was really an accounting problem, my suggestion would be more than welcome, he said. I wasn’t reassured.

I could understand sloppy inventory under the control of manufacturing personnel anxious to return to their routine and blissfully ignorant of the value of inventory accuracy. But what kind of accountant are they hiring? A serious lack of internal control and discipline and a fearful lack of understanding of basic inventory management values were evident – at the main plant and the provincial plants. I observed many problems: bills of material were inaccurate; proper ticket control was lacking; some items weren’t counted; all documentation was in English, but only a few key people spoke it; hardware items were counted by hand; key personnel (quality control staff and engineers) were’nt available for inventory; the item master was incorrect; a beginning inventory run wasn’t available; FG were counted twice, once at the last operation and again in the FG warehouse; the materials in transit wasn’t accounted for; scrap was counted as good material; the cost file wasn’t updated; and no cutoffs were enforced. But the biggest problem was an attitude that physical inventory was something to placate the accountants.

To say the least, the situation was a total disaster. My report was factual, critical, and supported with strong suggestions and a plan. As soon as the report was distributed, the finger pointing began. The outside auditors did not buy off the inventory, so we had three months to plan and execute a first-class physical inventory.

I led the project and spent countless hours teaching the staff that physical inventory isa team effort and ownership is all encompassing. We had to change attitudes, train key personnel, and enforce a new internal control. Our goal was inventory record accuracy of 98.8 percent. I was truly motivated to help the company overcome a $25 million inventory problem and prove that inventory record accuracy of 98.8 percent was possible.

Could we pull it off? Check out this column soo for the exciting conclusion!