The next seven policies improve the accuracy of the inventory valua­tion by enforcing regular updates to key costing databases, restricting ac­cess to that data, and promptly identifying such costs as lower of cost or market determinations, obsolescence, and scrap.

1. Changes in production processes shall be immediately reflected in labor routings. This policy ensures that the costs assigned to products through labor routings accurately reflect the actual production process, equipment usage, and production staffing.
2. Changes in product components shall be immediately reflected in the associated bills of material. This policy ensures that the costs assigned to a product through a bill of materials accurately reflects the current product configuration as designed by the engineering staff.
3. Standard cost records shall be updated at least annually. This policy ensures that standard costs used in inventory valuations do not stray too far from actual costs.
4. Only designated personnel shall have access to the labor routing and bill of materials databases. This policy ensures that untrained employ­ees are kept away from the critical computer files needed to value in­ventory quantities.
5. Lower of cost or market calculations shall be conducted at least an­nually. This policy ensures that excessively high inventory costs are stripped out of the inventory before they can become an excessively large proportion of it. This policy may be modified to require more fre­quent reviews, based on the variability of market rates for various in­ventory items.
6. Formal inventory obsolescence reviews shall be conducted at least an­nually. This policy requires an inventory review team to scan the inven­tory periodically for obsolete items, which not only removes the cost of such items from stock, but also gives management a chance to profitably dispose of older inventory items before they become worthless.
7. Management shall actively seek out, identify, and dispose of scrap as soon as possible. This policy requires the production team to remove scrap from the manufacturing process immediately, thereby keeping it from being recorded in the inventory records and artificially inflating profits.

Inventory obsolescence is caused in part by the purchase of excessive inventory quantities and change-over to new product configurations before using up available supplies. The next three policies address these issues.

1. Purchasing quantities shall be based on specific production require­ments. The purchasing staff sometimes may feel tempted to buy a large quantity of some item at a bargain price, even though the amount pur­chased may represent sufficient inventory for an excessively long period of time. This policy requires the purchasing staff to make acqui­sitions based only on specific purchasing requirements.
2. Minimum order quantities shall be used when cost-effective. This pol­icy requires the purchasing staff to acquire goods from suppliers who sell in the smallest possible minimum order quantities. By doing so, there is less inventory on hand and therefore less risk that some of the inventory will become obsolete.
3. Engineering change orders shall be phased in to reduce inventory ob­solescence. This policy forces the engineering staff to consider the amount of on-hand inventory when determining the date when an en­gineering change order is to take effect, thereby reducing the amount of inventory that may be rendered obsolete by the change order.

[tags]policies, purchasing quantities[/tags]

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