The Problem – Inventory adjustments
Physical inventory results had wild swings, leading corporate management to have no confidence in financial controls. Even in those situations where the adjustments were minor, there was no confidence that it was not the result of luck or that the results would be repeated the next period.
The Solution – Statistical measures
Eliminated all the manual efforts of the accounting department to do estimates and adjustments and created the necessary processes and controls within the inventory system so that transactions would be handled at the source. This made those responsible for the transactions also accountable for the results. Once this was done, the perpetual inventories could be reconciled to the general ledger, providing cleaner data for analysis. Finally, statistical analysis was performed by part number of physical inventory results to perpetual counts, providing coefficients of correlation and standard errors which were used to assess the true degree of accuracy and control in an inventory and to set expectations for performance improvements.