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Inventory Best Practices
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leave them in the warehouse. Also, there must be a tracking system in place on
the shop floor, whereby someone can check part bins and quickly determine
which parts must be reordered. There are a variety of simple systems available
that accomplish this, such as painting a reorder fill line in each storage tray, or
using a two-bin system, where parts are reordered as soon as one bin is emptied.
A manual reorder system is necessary for shop supplies, since it is no longer in
the inventory database, where reordering can be done automatically, based on
recorded inventory levels. Also, some of the parts being pulled from the ware-
house may be listed in bills of material, which can be a problem if a company
uses back-flushing. In this instance, items will be automatically withdrawn from
the quantity shown in the computer system as soon as production is recorded, so
the system will show negative usage of items that are no longer there. One should
carefully consider and resolve all of these problems before moving parts out of
inventory and into floor stock.
Cost: Installation time:

16–13 SEGREGATE CUSTOMER-OWNED INVENTORY

A dangerous problem for many controllers is incorrectly valuing inventory too
high because customer-owned inventory is mixed into it. This problem is espe-
cially common in cases where customers frequently ship components to a com-
pany for inclusion in finished products. This situation arises when a customer has
the rights to a proprietary product component, prefers to do some finishing work
on selected components, or only wants a company to do final assembly work on
its products. When any of these situations arise, the receiving staff commonly
makes the mistake of recording receipts as company-owned stock and storing it
alongside all other inventory in the warehouse. As a result, the inventory can be
massively overvalued, leading to incorrectly reported profits.
The best way to eliminate this problem is to institute procedures and set up
segregated areas that allow one to promptly identify customer-owned products at
the receiving dock and shunt them immediately to the segregated area. By doing
so, one can be assured of having much more accurate inventory quantities and
costs. To implement this best practice, it is critical to require a purchase order on
all items arriving at the receiving dock. With this procedure in place, the receiv-
ing staff can quickly identify all receipts that the purchasing department has pre-
viously noted on a purchase order as being owned by a customer. With this infor-
mation in hand, the receiving staff can easily record the entry in the computer
system and then move the items to a separately marked-off area. This approach
results in the storage of item quantity information in the computer system so the
warehouse staff can easily find the parts, but at a zero cost, meaning the account-
ing staff does not make the mistake of increasing the amount of company-owned
inventory.