Obsolete inventory, in certain companies can be a big proportion of the whole inventory. Therefore, there is no reason to neglect it. Inventory control system should be designed to take care of the obsolete inventory as well. Ideally, the control system should at least: (1) detection of existing obsolete inventory; (2) prevent inventory from becoming obsolete; (3) rapidly dispose of obsolete inventory before its value drops to minimal levels; and (4) recognize obsolescence reserves in appropriately manner.
The following controls address these issues:
Review inventory for obsolete items – There is no way [nor systems] to fully prevent obsolete inventory, some inventory will not be used and will become obsolete however. To detect it, periodically print a report listing which inventory items have not been used recently. You can also use a report comparing the amount of inventory on hand to annual historical usage of each item.
Do Disposition regularly – In most companies, obsolete inventory sits in the warehouse for long periods and makes its disposal value drops and the company loses the opportunity to recover some of its obsolescence loss. To avoid this issue, an authorized people or team should determine how to dispose of various items regularly.
Include obsolete inventory in the monthly closing procedure – It should require the custodian to evaluate the sufficiency of the obsolescence reserve. Schedule it a few days before the actual month-end close to make sure it is done.
Scrap Inventory Control
Many production processes generate a considerable amount of scrap, which requires controls over it:
Track supplier quality levels – Scrap is frequently caused by parts being shipped by a supplier that do not meet company quality levels. To prevent this from happening, create and notify suppliers with minimum quality standards, supplier certification. An ongoing tracking of their quality performance is definitely required to keep it is applied consistently.
Use computer tracking for items with a short shelf life – Record the receipt date of each item in the computer system and mark this information on individual units or cases, so the computer system can direct pickers to the locations where the oldest items are stored.
Track rework status – There may items are set aside for rework. If enough time passes, items set aside for rework may be reclassified as scrap, eliminating their value. Assign rework a high priority and track its status with a status report that is reviewed frequently.
Require transaction forms for scrap and rework transactions – Some amount of materials and associated direct labor can be lost through the scrapping of production. To make sure the inventory records remain accurate, the manufacturing staff should be well trained in the use of transaction forms that record these actions.
Connect with scrap haulers – Scrap has value, and there are scrap haulers will pay for it, for sure. This is a particularly easy area in which to lose money, because an employee can arrange for scrap disposal through a scrap hauler who is willing to pay cash, and then pocket the funds. To prevent this from happening, check scrap haulers near by company area if there is any scrap sold from the company.
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