Inventory Variances (#186)
/In this podcast episode, we discuss the nature of inventory variances. Key points made are noted below.
It can be incredibly hard and very product-specific to figure out a way to count certain types of inventory, and the result may still only be a guesstimate. The cost-benefit of using perhaps dozens of measurement systems to measure different types of inventory may not be very high. You could spend a lot of money to obtain more accurate information about your inventory, but is it worth the cost?
Use Multiple Measurement Techniques
Divide the inventory into clusters and adopt a different measurement technique that is specific to each cluster. Each of these clusters has different unique characteristics. By using clustering, you can reduce the number of measurement systems.
For example, for fertilizer that is stored loose, transfer it into drums or some large bin that has a measurement marker on the side. Then count the inventory by adding up the number of drums or bins, and using the measurement markers to get a rough idea of partial container quantities.
As another example, shift liquids into standardized containers that have monitors on the dispenser valves.
Another option is to weigh smaller containers to judge the amount of their contents.
An option when dispensing alcoholic beverages is to create a preprinted measurement marker label that you can stick on the back of a bottle, showing the increments for each bottle size.
Expect Some Variances
These measurements are not precise, so the related inventory variance may move within a standard range for each of the inventory clusters. For example, fertilizer will compact over time, so the volume may decline by a certain amount per month. This natural amount of shrinkage will probably be quite obvious over time. So, monitor the shrinkage percentage on a trend line and then set a variance investigation threshold based on the historical percentage.
A problem with this approach is that you’re assuming the historical rate of inventory shrinkage is normal. But, if someone has been stealing inventory all along, then that rate of theft is now included within the threshold level, so it will never be spotted. To get around this problem, consult with someone who has a good knowledge of the standard shrinkage rates for these types of inventory.