Better Inventory Management Strategies to Improve Financial Reporting |

Better Inventory Management Strategies to Improve Financial Reporting

Better Inventory Management Strategies to Improve Financial Reporting

By Asael Sharabi, Technical Director, Emerson Automation Solutions

Inventory is one of the most important assets of an organization, and its effective management is increasingly recognized as a key component of financial health and profitability.

A consequence of this has seen CFOs and other senior executives and managers taking an active role in supply-chain and inventory decisions. This is recognition that suboptimal management in this area has a negative impact on an organization’s financial strength, customer satisfaction and competitive advantage—as well as on their ability to provide accurate financial reporting, forecasting, resource allocation and effective strategies. At its most basic level, an incorrect inventory balance causes errors in the calculation of cost of goods sold and, therefore, errors in calculating gross profit and net income.

However, many CFOs and others in sectors involving bulk solids—notably manufacturing and process industries—are seeking accounting accuracy with one hand tied behind their backs in situations where a lack of inventory ‘visibility’ can be taken quite literally.


Not a Level Playing Field

It is a statement of the obvious that accurate measurement of bulk solids is important for inventory control and financial management, however this can be a problem when using traditional measurement devices.

Take, for example, industries such as food and beverage, chemicals, mining or cement where raw materials including grain, sugar, salt and limestone are stored in large bins, silos or warehouses (Figure 1). Unlike liquids with relatively easy-to-measure level surface, the surface of solid materials is rarely flat, with peaks and troughs that change as the vessel is filled and emptied.

Also, traditional manual measurements using dipping tapes are time consuming, inaccurate and fail to provide the ready-to-use data needed to support best practice inventory management and regular financial reporting.

In addition, performing these types of measurements also creates safety concerns, as workers are often required to perform such duties in hazardous locations.

Automated solutions can help with some of these issues, but devices that measure the level at a single point within a vessel do not account for variations caused by peaks and troughs, making any these types of volume measurements inaccurate and unreliable. Typically, accuracy with this measurement technique is no better than ±10 - 15%. In a silo capable of holding 8,000 tons, for example, this adds up to a large amount of ‘invisible’ inventory.

Such unreliable measurements leave process operators with insufficient information for effective day-to-day decision making, and CFOs and other management personnel with faulty data for capacity forecasts, cost calculations and inventory reports.

Figure 1:  Solids stored in silos and other vessels often don’t settle evenly, making level measurement challenging.


Volume Is the Key Measurement

Where solids are involved, a dramatically undulating and varying surface makes measuring the level in a vessel as a whole less than useful. While the level at one location in the vessel might be 50%, directly beneath the filling point it could be 100%, so the vessel is effectively full. Conversely, above the emptying point the level could be 0%, so material cannot be removed and the vessel is effectively empty.

Average levels, therefore, can be anywhere between 0-100%, making it impossible to judge how much material is actually in the vessel. Instead of a level at one location, and maximum or minimum levels, the important measurement is the total volume of solids in the vessel.

New technologies can now replace traditional single point level measurements with continuous online volume measurement, and in addition offer visualisation of peaks and valleys within vessels.

These 3D solids scanners provide accurate and reliable results, even when measuring uneven or sloping surfaces in dusty conditions. Using acoustic measurement and 3D mapping technologies, these scanners measure level by transmitting a low frequency pulse, and then recording and mapping echoes from the surface. The low frequency beam penetrates dust and vapor to provide accurate results across a wide range of dry materials.

These accurate surface measurements generate a 3D visualisation of the actual allocation of product within any vessel for continuous display on remote computer screens (Figure 2).

Figure 2: 3D solids scanners can be used to create an accurate picture of the level of solids in a silo.


Safety Stock Management

To manage inventory uncertainty and avoid fall-out from supply chain problems, most companies carry safety stock.  Finding the right balance is essential as the amount of safety stock an organisation decides to carry can have a significant financial impact.

Too much safety stock increases inventory costs, and because storage times are extended, product can spoil or expire. On the other hand, too little can result in missed sales and disappointed customers, which can adversely affect a company’s long-term financial success.

Carrying inventory is expensive and safety stocks simply add to this burden, with costs including handling the inventory, obsolescence, deterioration and pilferage—as well as taxes, insurance and the cost of money. These costs can be as high as 50% of inventory value on-hand for bulk solid materials, while most organisations use 25% as a ballpark figure.

These higher costs are a direct result of the uncertainty generated by the inaccuracy of the level measurement of bulk solids. The highly accurate measurement data gives management the confidence to reduce safety stocks, and thereby costs, to a level to cope with any supply chain problems.


It All Adds Up

Matching the received data with known container dimensions allows an accurate calculation of product volume, enabling the immediate and accurate listing of inventory value for end-of-month accounting and quarterly financial reports.

In addition, accurate readings allow for an annual or rolling measurement of inventory, a key requirement to prevent over- or under-purchasing of products, while eliminating complications which can occur when accepting sales orders based on inaccurate inventory levels.

Efficient inventory management allows companies to have the right amount of stock in the right place at the right time, and ensures capital is not tied up unnecessarily. Replacing a level measurement device with a 3D solids scanner can immediately save between 8% - 13% of on-hand inventory cost. Based on an annual inventory carrying cost of between 25% and 52% of on-hand inventory, this translates into lot of money. A 3D solids scanner quickly pays for itself based on the reduction of annual carrying costs, typically within a year.

Being able to determine precisely what is in your bulk solids inventory is a vital and useful tool in ensuring accurate financial reporting. Using modern scanner technology to remove the guesswork is a practical and cost-effective measure that can deliver significant financial benefits to your company.

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