Additional technology and management concepts can be built on top of the basic computerized billing system described in Section 5-2 to improve the speed of billing delivery. However, since there are so many different sys­tems in use, they are not described here as a single integrated system. In­stead, each one receives a separate description and set of associated controls.

• Enter invoices on supplier Web site. Some customers have created Web sites on which they require suppliers to manually enter invoices. Controls are:
  • Match confirmation sheet to invoice. When Web site entry is re­quired, the Web site typically creates a confirmation page showing what information was entered for the invoice. If available, print it, compare it to the invoice for accuracy, attach it to the invoice, and file both documents in the customer file.
  • Create activity checklist for customer. If few customers require Web entry, then create a customized checklist for each one, specifying how to enter an invoice in each site and requiring a sign-off by the person entering the invoice. This increases the likelihood that a cor­rect entry will be made.
  • Call the customer. If the customer’s Web site does not create a con­firmation page, then it may be necessary to call the customer and ask if the invoice has appeared in its computer system.

• Delivery person creates invoice. In situations where the amount deliv­ered is not finalized until the point of delivery, the person delivering the goods must create an invoice and hand it directly to the supplier. Controls are: Read the rest of this entry »

A number of policies can be used to bolster the system of controls for in­ventory. The 20 policies in this section are broken down into subcategories for receiving, record accuracy, valuation, and obsolescence. The next three policies help ensure that incoming inventory is properly inspected, recorded, and stored.

1. Incoming inventory shall be recorded after it has been received and in­spected. This policy ensures that the quantity and quality of incoming inventory has been verified prior to recording it in the inventory data­base, thereby avoiding later problems with having incorrect usable quantities on hand.
2. Goods received on consignment shall be identified and stored sepa­rately from company-owned inventory. This policy keeps a company from artificially inflating its inventory by the amount of incoming con­signment inventory, which would otherwise increase reported profits.
3. Consignment inventory shipped to reseller locations shall be clearly identified as such in both the shipping log and the inventory tracking system. This policy keeps a company from inflating its sales through the recognition of shipments sent to resellers that are actually still owned by the company.

The next six policies are useful for improving inventory record accu­racy by assigning responsibility for accuracy, mandating regular counts, re­quiring up-to-date record updates, and restricting access to both the inventory itself and the inventory database:

1. The materials manager is responsible for inventory accuracy. This pol­icy centralizes control over inventory accuracy, thereby increasing the odds of it being kept at a high level.
2. A complete physical inventory count shall be conducted at the end of each reporting period. This policy ensures that an accurate record of the inventory is used as the basis for a cost of goods sold calculation. However, it is considered counterproductive if an effective cycle count­ing system is already in place. Read the rest of this entry »

A just-in-time system is comprised of a number of manufacturing tech­niques whose central goal is to produce only to specific customer orders, and in the shortest possible period of time. The next techniques are some of the ones used to reach this goal.

• Frequent supplier deliveries directly to production
• Reliance on fewer suppliers
• Material movements initiated by a kanban authorization from the downstream workstation
• Constant reduction of lot sizes, lead times, and equipment setup times
• Minimization of machine setup times

These manufacturing techniques are sometimes coupled with payments to suppliers that are based solely on the content of their components in fin­ished goods produced by the company rather than by supplier invoices.

Given the small number of in-process controls required by a JIT system, no controls flowchart is provided. All of the next controls should be consid­ered primary ones necessary to the ongoing functioning of a JIT system.

• Certify the quality and delivery reliability of suppliers. A common JIT technique is to allow suppliers to deliver directly to the production fa­cility without any receiving function, so a critical control is to precer­tify the quality and delivery reliability of suppliers. Read the rest of this entry »

Additional technology and management concepts can be built on top of the basic computerized perpetual inventory tracking system described in the last section to improve the overall level of efficiency while also reducing the amount of manual transaction processing. However, since so many dif­ferent systems are in use, they are not described here as a single integrated system. Instead, each one receives a separate description and set of associ­ated controls. The systems are described next.

• Bar code scanners. Under this approach, the warehouse staff creates a bar-coded part number for each item as it enters the warehouse and at­taches the bar code to the item. It also creates preset barcode labels for each warehouse location and posts them at each location. Anyone mov­ing stock then scans the part number bar code and the bar code for the location to which it is being shifted and manually enters a quantity and transaction code to complete the transaction. This information typically is entered on a portable scanner that can be placed in a cradle to upload batched information to the central computer system or used in real time with a built-in radio to transmit and receive transaction information. Related controls are described next.
• Print part description on bar code labels. A major risk with a bar-coded scanning system is that the bar code label contains an incor­rect part number, which will then be scanned multiple times as the item to which it is attached moves through the warehouse. To make it easier to detect incorrect bar codes, always include the item de­scription on the bar code label, which should print out just below the bar code.
• Laminate warehouse location tags. The bar-coded tag identifying each bin location in the warehouse can be subject to a great deal of abrasion from forklifts and other materials-handling equipment, re­sulting in damaged bar codes that cannot be scanned. To avoid the risk of having the warehouse staff manually input the location in­formation (with the attendant higher risk of data entry error) into their bar code scanners, laminate all location tags to increase their durability. Read the rest of this entry »

Perhaps the single most important control over the amount and location of inventory on hand is the use of a perpetual inventory system. Under this ap­proach, inventory records are updated constantly with purchases arriving from suppliers, sales to customers, picked items being sent to the produc­tion area, and so on. In its simplest form, no computers are used, and in­ventory updates are maintained in a card catalog. The materials handling staff is not allowed to record transactions directly in the card file (in order to segregate the handling and recording functions), instead completing prenumbered move tickets that are then entered in the card file by a ware­house clerk. The controls in this section are geared toward information storage in a card file; the controls in the next section are designed for a more advanced perpetual system involving a computer database.

Exhibit 1 Obsolete Inventory Review Procedure

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There is inevitably a certain amount of inventory that will not be used, due to excessive purchasing of raw materials beyond a company’s needs, customers not buying certain items, or assembly requirements no longer calling for par­ticular parts. The most common approach is inattention: letting obsolete in­ventory pile up until external auditors force the company to devalue and dispose of it, resulting in large and unexpected losses. A proper obsolete in­ventory recognition system with accompanying controls results in a much more organized approach.

The primary risks associated with obsolete inventory are that the in­ventory will not be promptly recognized as obsolete, that inventory will be improperly designated as obsolete, that dispositioned inventory will be ac­cidentally reordered, and that disposition of such items will be for substan­tially less money than originally estimated. The next controls deal with these risks.

• Regularly complete an obsolete inventory review. The best way to en­sure that obsolescence is recognized promptly is to conduct a regularly scheduled obsolescence review of the entire inventory, typically using an obsolescence report such as the one shown in Exhibit 4.11, which lists items for which there appear to be excessive quantities on hand. This review should be conducted by the Materials Review Board (MRB), which is comprised of representatives from the warehouse, purchasing, sales, and production scheduling departments (thereby en­suring a broad range of opinions regarding the need to eliminate some­thing from stock). Read the rest of this entry »

The default approach to handling goods in transit is that they are not the company’s property prior to arriving at the receiving dock or after leaving via the shipping dock. However, this is not always correct, since shipping terms can specify that the company is responsible for the goods for all or some portion of their in-transit interval. If so, there is a risk of damage to inventory owned by the company for which many companies provide no controls at all. The next primary controls will assist in mitigating risk in this area.

• Specify standard shipment terms on purchase orders. It is in the inter­ests of the company to include standard shipment terms on its purchase orders that shift the responsibility for in-transit inventory to the sup­plier or third-party delivery service. Any variation from the standard terms should require special approval by the purchasing manager as well as notification of the corporate insurance staff, who may need to arrange special insurance coverage for the delivery.
• Mandate a review of shipment terms required by customers. It is en­tirely possible that customer purchasing departments will attempt to shift shipment responsibility to the company, so the order entry staff should be required to review the shipment terms listed on incoming customer orders and to notify the corporate insurance staff of any spe­cial terms. Read the rest of this entry »

This section describes controls for only the most basic inventory manage­ment system, where there is no perpetual inventory tracking system in place, no computerization of the inventory database, and no formal planning sys­tem, such as manufacturing resources planning (MRP II) or just-in-time (JIT).

When there is no perpetual inventory tracking system in place, the key control tasks of the warehouse staff fall into four categories:

1. Guard the gates. The warehouse staff must ensure that access to in­ventory is restricted, in order to reduce theft and unauthorized use of inventory. This also means that warehouse staff must accept only prop­erly requisitioned inventory and must conduct a standard receiving re­view before accepting any inventory.
2. Orderly storage. All on-hand inventories must be properly organized, so it can be easily accessed, counted, and requisitioned.
3. Accurate picking. The production department depends on the ware­house for accurate picking of all items needed for the production process, as is also the case for picking of finished goods for delivery to customers.
4. Timely and accurate requisitioning. When there is no computer system or perpetual card file to indicate when inventory levels are too low, the warehouse staff must use visual reordering systems and frequent in­ventory inspections to produce timely requisitions for additional stock.

Exhibit 1 expands on the general control categories just noted. In the general category of “guarding the gates,” controls include rejecting unau­thorized deliveries as well as inspecting, identifying, and recording all re­ceipts. The orderly storage goal entails the segregation of customer-owned inventory and the assignment of inventory to specific locations. To achieve the accurate picking goal calls for the use of a source document for picking, while the requisitioning target requires the use of prenumbered requisitions and document matching. A number of supplemental controls also bolster the control targets. Read the rest of this entry »

This section describes controls over the acquisition of inventory where there is no computerization of the process.

The basic acquisition process centers on the purchase order authoriza­tion, as shown in Exhibit 1. The warehouse issues a prenumbered purchase requisition when inventory levels run low, which is the primary authoriza­tion for the creation of a multipart purchase order. One copy of the purchase order goes back to the warehouse, where it is compared to a copy of the purchase requisition to verify completeness; another copy goes to the sup­plier, while a third copy goes to the accounts payable department for even­tual matching to the supplier invoice. A fourth copy is sent to the receiving department, where it is used to accept incoming deliveries, while a fifth copy is retained in the purchasing department. In short, various copies of the pur­chase order drive orders to suppliers, receiving, and payment. Read the rest of this entry »

A number of policies are related to the order entry, credit, and shipment areas can assist in the enforcement of controls. The next list itemizes four order entry policies that are intended to avoid fraudulent orders, ensure proper pricing, and avoid the acceptance of special customer terms. There are also three policies related to credit management, the most important of which is the overall corporate credit policy. The credit policy covers a great deal of territory, from the overall mission of the credit department to the collection methodology to be used and the standard terms of sale to be offered to customers. The intent of having such a policy is to provide some structure to what can be a chaotic process. Finally, there is a policy restrict­ing the company from shipping any order that has not been released by the credit department. The policies follow.

1. Customer existence must be verified for all orders exceeding $___ from new customers. This policy is intended to root out any customers who have been fraudulently set up as shell companies with the intent of taking delivery of goods from the company with no intention of pay­ing. The order threshold is built into the policy in order to avoid spend­ing more money to investigate customer existence than the company will earn as profit from the transaction.
2. All prices on manually received customer orders shall be reconciled prior to order processing. This policy is designed to spot discrepancies between the prices at which customers order goods and the official company price. Customers must give their approval to revised prices (if any) before the company will process the order; otherwise, there is a significant risk of a dispute with customers that will likely delay payment.
3. Extended rights of return shall not be allowed. This policy limits the ability of the sales staff to engage in “channel stuffing,” since it cannot offer special rights of return to customers in exchange for early sales. The policy keeps a company from gyrating between large swings in sales caused by channel stuffing.
4. Special sale discounts shall not be allowed without senior management approval. This policy prevents large bursts in sales caused by special price discounts that can stuff a company’s distribution channels, caus­ing rapid sales declines in subsequent periods.
5. Credit policy. The corporate credit policy follows. Read the rest of this entry »