Tuesday, August 09, 2011

Inventory Control Add-ons for Core Accounting Systems

Possibly one of the most confusing aspects of creating an integrated accounting/manufacturing management system is about how inventory is kept. In larger, industrial-strength Enterprise Resource Planning (ERP) systems, there is usually a clear distinction between finished goods inventory (often referred to as “distribution inventory” or “sales inventory”) and the raw materials inventory. Indeed, ISO-9000 standards and other “best practices” dictate that the finished goods inventory and the raw materials inventory must be kept physically isolated and controlled separately. ERP systems respect this need for isolation.

It is likely that you have never heard of ISO-9000 – and have never given much thought to “best practices.” Consider yourself fortunate if you have in place some formal way to control inventory (a controlled stockroom). More than one of our clients, using a “take what you need” inventory control system, has wondered why their manufacturing operations seemed to be so horribly out of control. The answer is, obviously, “You must start by controlling your inventory.“
If I run into such a client, I stop the discussion right there. Deliver the dose of tough love: “Build a wall, build a fence, hire a stock clerk. Just do it – today!“

If you have an existing accounting system, there is a good chance that “Inventory Control” is listed among its many features. Of equally good chance is that the inventory control module of your accounting system deals only with the sales distribution side of the house, not the manufacturing side.
Many manufacturing companies make the mistake of trying to use their accounting system’s inventory module to help them control their raw materials inventory, work in process (WIP), and sub-assembly production. Only after typing in thousands of raw material part numbers and attempting to perform the most basic manufacturing processes do they discover how ill-equipped their software is to perform the required tasks.

Writing software to control a sales distribution inventory is relatively simple; while the software needed to effectively control the inventory needed for a multi-level product structure is quite complex. Accounting software vendors usually take the easy route and include a module which addresses sales distribution inventory. Rarely do they tackle the thorny job of manufacturing inventory control.
If you need a manufacturing inventory control system, don’t expect it (or a good one) to be included in your accounting system. Expect instead to spend significant time, effort, and money selecting a right-sized manufacturing add-on for your accounting system.

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