Or Take The Figure The Accountants Work Out?
Cost Of Sales
Simple right? How much does your organisation spend on stock. It’s more or less the cost of your stock related to the bill of material for the item in question. Isn’t it?
Specifically stock for direct resale or component stock that’s part of your manufacturing process. The question is, do you really know much do you spend on it?
I’m going to make a prediction here. Almost two thirds of those reading this who are responsible for their organizations inventory will not know the real answer to this. At best they will have an accountants version of this figure.
First, let’s sort out one definition. We are actually talking about the cost of inventory, specifically component or raw material inventory for sell-through or to be part of the manufacturing process.
We aren’t talking about the cost of business sundries such as stationery supplies, catering, janitorial equipment and any of the other myriad items required to make most businesses run smoothly, we are just talking about manufacturing cost of raw materials.
An accountant may look at a company that runs a typical perpetually calculated FIFO system (first in first out) and ask that inventory is calculated like so.
At point of sale (when the invoice is raised) a dual transaction is carried out. Crediting the company with the value of the sale and debiting the stock that was used to create the product
For accounting purposes this works it’s the standard way of measuring the cost of sales. For measuring stock levels it can have some flaws.
It relies on a very well maintained B.O.M (bill of materials) being kept for each item. It requires that sundry items directly used in manufacture are drawn down also, perhaps on a pro-rata basis.
The problem isn’t that accountants do this. The problem is that this figure, often simplified and sanitized, and if this is the one fed back directly into your companies inventory control system, in my experience it is often not good enough.
Examples of innacuracy could include items such as disposable templates used during assembly, one-off use testing equipment certain cleaning materials (most would come under business sundries, but there are examples of exotic, specific, manufacturing process critical substances used here). Even paint or powder coat seems often missed from the cost of sales and, for ease of accounting purposes, pushed into a sundry or draw-down category of raw material, relying on periodic and manual counting of stock levels rather than being integrated properly into a process.
Surely these never amount to much? Isn’t a ready reckon system good enough for these items?
I can see why the thought of having these slightly harder to quantify items out of your digital system is appealing. The task of measuring how much powder coat for example is needed to cover every item that needs it is thought to be time consuming. There is an assumption that measuring it is an imprecise task.
Both of these assumptions are, for the most part, incorrect.
As an aside, usage of cleaning items, powder coating and other fluids and sundries have been shown to be as predictable, once measured, as almost any other item in the average inventory system.
I have walked into companys who use periodic manual “ready reckon” methods for all sorts of manufacturing critical items, companies that have expensive and otherwise well run ERP and inventory control systems, and the management team use just these justifications.
So here’s a few facts – with citation, that might make you change your mind.
General Motors prior to 1999 reported that over 50% of all their line stoppages and slow downs were as a result of issues with coating, cleaning and sundry items.
In 2000 GM changed their inventory control methods to accurately calculate manufacture, loss and “failed in operation” (FOI) use of these items and reduced line downtime by almost 60% as a direct result. Here’s some of the detail of that.
Working with direct to line suppliers (whose profit levels, not to mention trust, relied on accounting for the usage of sundry items, nuts, bolts, wire etc.) Bosch in Worcester, over time, managed to measure a far more accurate level of loss during the manufacturing process and then implement both a best practice initiative on the shop floor to reduce loss, and a more accurate bill of materials which reflected the true level of component use per SKU manufactured. In turn this reduced manufacturing down-time by almost 20% as well as reducing costs as best practice was rolled out.
Here’s a question you might be asking yourself right now.
Why should I, as an inventory professional do this when my accounts department seems to already have it covered?
Her’s an answer for you.
When was the last time you saw the company accountant brought to book for a line side shortage or for a large manufacturing overstock?
If your experience is anything like mine, the answer would be “never”.
Don’t always use accounting principles to control manufacturing methods.
Those book-keeping guys have little interest and no responsibility for your stock availability levels, just the overall stock value and cost of sales.
As an inventory professionals stock availability is your job. Take ownership.