Interventions of Perpetual Inventory System and Stock Inventory

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Tyrone uses a perpetual inventory system, what this means is that he can track sold and stocked inventory for his parts such as ‘Universal Window Wiper Blades’ in real-time, anytime. Tyrone’s accounting system will update whenever a sale is made, inventory is used, or if new inventory has arrived. All this data is sent to one central hub that any authorized employee can access. Through the use of barcodes, POS systems, and a computer software, perpetual inventory makes it possible for him to know almost everything about his inventory at any time.

This system is the most appropriate for Massey Wholesale Auto Parts because it provides an up to date Cost of Goods Sold figure. Once Massey Wholesale Auto Parts business knows the COGS figure they can then complete an income statement at any time to calculate profit. Massey Wholesale Auto Parts can then easily monitor the profitability which is the major goal of any business.

Tyrone is wanting to improve his current system, but I would not recommend shifting to a periodic inventory system even though the set-up costs are low, or that there is minimal experience required, Perpetual is far better and has little to no error possibilities if done correctly and efficiently. He is currently using a perpetual inventory and there is room for improvement. It’s just that shifting to a whole new inventory system is not going to do him any favours. He just needs to refine a bit how he is using perpetual inventory system, and this will take his business to the next level.

I don’t quite see a pattern in his stock card with re-ordering points or a set re-order quantity. Tyrone or Suzy (Tyrone’s assistant) should have a re-order quantity which is how much auto parts he is ordering from his suppliers which should be consistent in all purchases. On 7th July Massey Wholesale Auto Parts purchased 35 whereas on 24th July Massey Wholesale Auto Parts purchased 30. This is not at all consistent. After 17 days Massey Wholesale Auto Parts purchases again but their total balance becomes 47 for Ultimate Window Wiper Blades as opposed to the first purchase where it was 39. This isn’t very consistent either. For Just-in-Time inventory management system everything is meant to be consistent, from a set re-order quantity to set re-ordering points. It is absolutely necessary for Tyrone to be consistent if he wants to take his business to the next level. Because of the inconsistent way he is running the inventory management system right now we can see that on 4th July the number of Universal Window Wiper Blades is below the minimum stock level, and on 24th July the inconsistent purchase has led to more Universal Window Wiper Blades than the maximum stock level. This could be disastrous e.g. a customer wants to purchase 5 Universal Window Wiper Blades after 4th July and before the purchase on 7th July, the business will be out of stock. And on 24th July the over stocking of Universal Window Wiper Blades could lead to him not having enough space for the other parts. Tyrone can, probably manage only 2 extra Universal Window Wiper Blades, but as time goes on with this inconsistent inventory management system, he will eventually stock way more and/or stock way less. If Tyrone wants to increase his market share in the West Auckland region by providing customers with all the parts they need, then he absolutely needs to be more consistent with his re-ordering points and re-order quantities. This will then take his business to the next level.

There are many advantages using a perpetual inventory system such as Proactive Monitoring of Inventory Turnover – as mentioned before perpetual inventory makes it possible for him to order more stock as soon as he gets low. He also practices just-in-time inventory, so this is especially helpful because he can order his auto parts at the desired amount, this way his auto parts won’t go beyond the maximum stock level or below the minimum stock level. He can also use the reordered quantity to compare to the physical count or stocktake of the quantity to determine whether auto parts such as Ultimate Window Wiper Blades have gone missing.

He can also manage multiple locations with ease, we haven’t been told if Tyrone has many branches, but we have been told that he wants to take his business to the next level. This means at some point in the future Tyrone would be looking into expanding and opening new branches. Having a Perpetual Inventory management system from the start means that it will be easier for him to open new branches because Perpetual inventory gathers all data into one centralized inventory management system – making it easy for him to operate multiple locations and stores while tracking the inventory for all of them. This will come in to be quite helpful and easy to do when opening new branches.

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There will be more Informed forecasting for Massey Wholesale Auto Parts’ Inventory System because Perpetual inventory can generate reports on buying patterns throughout the year. Tyrone can then quite easily see which models are losing popularity. This also allows him to forecast demand spikes and slow periods while optimizing his supply chain around the purchasing habits of his customers. No inventory management system is perfect, even Perpetual has disadvantages for his business: such as High start-up costs, Perpetual inventory management systems require a lot of equipment to be installed such as:

  • Barcodes
  • RFID codes
  • Scanners
  • Computer software
  • Etc.

This may seem irrelevant because he already runs a perpetual inventory system, but Tyrone wants to take his business to the next level so as mentioned before he will look into opening new branches. This will lead him to purchase this equipment and will result in higher start-up costs. Plus, all his employees will need to be trained to use the new equipment. Also, it is not unusual for one of the management systems to break and then he must repair them which will also cost a lot.
I recommend using management systems such as Barcodes and a computer software that can manage inventory using the weighted average method- which he uses. I don’t recommend using RFID because RFID tags are far more expensive than barcode labels; thus, they typically are used for higher value goods. RFID tags also have been known to have interference issues, especially when tags are used in environments with a lot of metal or liquids. It also costs a great deal to transition to RFID equipment, and your suppliers, customers, and transportation companies need to have the required equipment as well. Additionally, RFID tags carry more data than barcode labels, which means your system and servers can become bogged down with too much information.

Periodic Inventory is still very much necessary because even with perpetual inventory, he will still need to undertake some sort of manual stocktaking process simply to ensure his records are up-to-date and his inventory system is operating correctly. A computer software can get bugged which can lead to many problems such as the inventory not being managed properly, numbers not being entered correctly etc. This will be hard to detect if Tyrone doesn’t manually check. I recommend doing a rough check every week just to make sure things are running smoothly. Internal controls are also quite important, even if there is only him and Suzy he should manage internal controls for the betterment of his business and to take his business to the next level.

The purchase cycle is particularly vulnerable to fraudulent activities such as fictitious vendors and fraudulent billing practices. These things need to be carried out the way they are supposed to so Tyrone avoids internal fraud. This is will especially come in helpful when he is looking into opening new branches and hiring more employees. Purchase requisition gives him authority for all purchase orders. Purchase requisition is used to request auto parts and as soon as its approved, the purchase order is prepared and sent to the supplier. This way he can avoid ordering of unnecessary auto parts. His Supplier’s pricing is confirmed before ordering. This will prevent any overcharging on his invoice. This is essential if he wants to avoid any confusion and problems that can arise for his business. The worst-case scenario is that he does not do/overlooks this step will lead to him paying a lot more than he thought he was supposed to, and he might also end up losing a supplier. The purchase requisition/order are prenumbered, this avoids false ordering of auto parts. If Tyrone received two boxes of Universal Window Wiper Blades when he only ordered one, then he can prove with his numbered requisition order that he truly has only ordered one. All order books are kept safe and secure, this avoids unauthorised ordering. Purchase order reconciled with purchase requisition ensures correct ordering and that every purchase order matches up with its requisition, so everything is legitimate and that he was supplied with the correct auto parts. Matching of purchase order/packing slip/invoice to ensure the amount ordered is the same as the amount received and is the same as the amount charged. Not doing this or skipping this step can lead to him paying more or receiving more – which will be more than inconvenient.

Separation of duties is also very important. I am aware that there is only Tyrone and Suzy, but as Tyrone is wanting to take his business to the next level then this is essential when opening new branches. In the purchase order process the following tasks are undertaken by different people (roles could be combined): The purchase requisition is prepared and submitted for approval, the purchase requisition is then required to be approved, the purchase order is prepared, the packing slip is checked on delivery, next the invoice is matched with the quotation and purchase order then the payment is created in online banking and finally the payment is approved, and the supplier gets paid.

To encapsulate this succinctly staff placing order differs from staff receiving order - This avoids goods being ordered for personal use. Overlooking this means that staff can order auto parts for themselves and receive it for themselves and finding the culprit can get quite difficult. Staff authorising invoice differs from staff receiving goods - ensures amount of auto parts received is the same as the amount charged. Staff authorising payment is independent from Cash Payments Subsystem this prevents payments for auto parts being used for personal use. Tyrone should also do this himself as this will make sure that any payment made to a supplier is for the business. Staff updating Accounts Payable ledgers are independent of authorising/ordering/receiving/paying of auto parts - This prevents fraud. Also, the regular reconciliation of Accounts Payable Control and Schedule of Accounts Payable - independent check; This prevents errors in posting to ledgers.

One of the reasons why separation of duties is important is simply because staff can also make errors when too much work is placed upon them and this is natural as humans are error prone and with more pressure, errors are more likely to happen. Suzy (Tyrone’s assistant) does everything from ordering from suppliers to paying suppliers when Tyrone is not there. What Suzy does is way too much, and therefore it is not surprising that there was a purchase error on Tyrone’s inventory card and there was a shortage. I believe there could be internal fraud going on because Tyrone does leave a lot of duties to Suzy and Suzy could be responsible for the shortage. Inventory could shrink in other ways, so Suzy could be only partly involved if she is involved at all. If he does get more employees than just Suzy, and I believe he will as he wants to take his business to the next level, then Tyrone can improve his system by segregating the duties among them. One thing is for certain and that is that he should always keep the payment authorisation in his own hands. Keeping the power of payment authorisation in the bank allows him to control the finances and question Suzy for any payments that he has set up in online banking for Tyrone’s approval. This will definitely take his business to the next level. As you can see the stocktaking process is very important because it allows Massey Wholesale Auto Parts to track any missing items and maintain strong liquidity.

The stock shortage of 5 Universal Window Wiper Blades means that she has lost $128 in total value due to theft/stolen, and if you compare this to what revenue those 5 would have generated is $270. Which means she must sell a lot more auto parts to cover this loss. This will eventually affect his profit ratio and the cash flow. His profit will now start once he has recovered the loss incurred due to those 5 Universal Window Wiper Blades. Re-order points will also be affected because to gain back the 5 Universal Window Wiper Blades he lost he must order again to get back to that inventory count. This will all lead to him paying more and 5 Universal Window Wiper Blades might be one of the parts that are shipped monthly from overseas. He might need to wait for a whole month or two to get his stock levels for that auto part back to the required level. He does this normally for bulk ordering as this gives a better gross margin per auto part, but if he has to order because of theft then it can lead to bigger losses. This will also be an urgent order which the supplier could or could not provide. He needs to have measures in place like separation of duties etc especially in this type of business because big losses can occur.

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