Question

As previously discussed in earlier modules, inventory is one of the most expensive assets an organization has. These assets must be managed properly throughout the supply chain. Most companies will use an ABC Analysis or Cycle Counting approach to validate what inventories are on hand. Use the Internet to research an organization that has experienced a major disruption in the last 10 years and address the following:

• Specifically, describe the disruption
• Describe the impact the disruption had on the organization and its inventory (financial, reputational, etc.)
• Describe the approach the organization took to validate the inventories on hand.
• Describe steps the organization took to overcome disruption’s impact
• Describe the steps/process organization implemented to minimize future disruptions

Answer 1

The entity was a distributor of an automobile brand in their region. The disruption that was faced by the entity was that they had a high amount of inventory with respect to the spare parts that was bought by them from the manufacturers and was not sold out. The manufacturing company was having a clearly written policy of not taking back this stock if they are not sold out. Even though the company’s policy was clear for the distributor they purchased the spare parts on a high amount without taking care of the amount they were actually losing with unsold and obsolete inventory.

This was continued for almost 25 years and they had a godson full of this unsold inventory. As the entity was run by a person name Clark Boyle who was not well verse with the inventory and its handling techniques, he never checked the same or verified. Later on Clarks son Steve Boyle took over the business and found something was not right. He thereby appointed an auditor for verifying the same and found out about the inventory.

The major impact that this had on their business was high closing inventory in the books which made them pay a higher amount of the tax. This was mainly because they were because these spare parts were not revalued. And this was not sold out or removed from inventory also. The purchase department was continuing to make such a purchase despite of having this much piled up obsolete inventory also.

The entity was following a LIFO (Last In First Out) method of inventory management and was selling off the latest models and spare parts. Now the auditor wanted permission to change the whole inventory handling system. Thus he wanted to adopt the ABC analysis technique. ABC analysis would help to categorize the inventory as A, B and C. A are the items with accurate records and firm control, while C is having good records and are tightly controlled and C are the minimal records and control based one.

This is because the C category inventory is less value. But A requires frequent evaluation. The auditor in the same manner categorized the spare parts on the basis of their value into ABC so as to consider their value and prominence for the entity.

This would help the entity to make the future purchase on the basis of the value and movement of the spare parts, this would minimize the stocking up of unwanted inventory items.

They should also take the necessary steps to sell off the unwanted piled up obsolete inventory of spare parts thereby reducing or eliminating the same from the financial records also.