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Special> China International Fair For Investment & Trade> Beijing Review Exclusive> Legal-Ease
UPDATED: May 21, 2008 NO. 21 MAY 22, 2008
Controlling Stock and Other Inventory Issues

Inventory control is one of the most important business processes during the operation of a trading or manufacturing company as it relates to purchases, sales and logistic activities. In order to have clear inventory management, a company should not only focus on logistic management but also on sales and purchase management. Commonly, we think of the warehouse as the most important component of inventory management and the accounting department is responsible for the inventory management. However, inventory control is not only the responsibility of the accounting department and the warehouse, but also the responsibility of the entire organization. Actually, there are many departments involved in the inventory control process, such as sales, purchasing, production, logistics and accounting. All these departments must work together in order to achieve effective inventory controls.

Common inventory control problems

Most inventory control problems are due to improperly defined control processes and activities; inventory control activities that are not standardized; and vague or ill-defined departmental authority and responsibility. As operation activities are decided and controlled by individuals making independent decisions rather than by pre-set procedures, and with each department following their own set of rules, obstacle to communication and information sharing can quickly spring up. As a result, the efficiency and effectiveness of the whole process are extremely low because the communication between departments is different (e.g. different data standards, formats, etc.). This can also lead to the information flow through departments breaking down.

Improper delegation of authority and responsibility among departments can result in departments without proper authorization to secure the inventory control activities. For example, the warehouse is responsible to secure the inventory and create a clear inventory record. But if the sales department or production department is too powerful, it could influence the activities of the warehouse by sending raw materials directly to production lines without proper confirmation from the warehouse or finished goods could be delivered directly from the production line without informing the warehouse, which could create large problems for inventory management.

This kind of poor inventory management makes it very difficult to collect complete inventory information from departments as well as match or trace information among departments as there is no unified working standard among departments to secure the quality of the information. This could also lead to problems following up documentation between departments as key documents such as reconciliation report of goods received and goods delivered or sales invoice requests would not be available.

In most cases, the balance and movement of inventory may not be secured because the physical inventory flow is not sufficient to support the information flow, or cannot match each other.

Specific inventory control problems

A company has no perpetual inventory record and secures their inventory balance according to monthly stock take.

In this case, the reasonableness of raw material consumption or the cost of goods delivered cannot be verified and all inventory loss is absorbed into the cost. Please note that this method is acceptable in some special industries such as the food distribution industry and etc.

An inventory balance cannot be relied on because there is no timely stock take procedure and it is poor.

Poor stock takes might be the result of a company not planning well for the stock take or lacking quality employees to perform the job. The inventory balance itself could also be bad or incomplete.

Multiple departments cannot confirm volume of inventory.

Sometimes even when the volume of the inventory can be confirmed according to the warehouse record or the stock take result, the warehouse inventory record may still not match accounting records. This is because inventory movement made by the warehouse may reflect the physical inventory volumes but not have inventory values to support the accounting balance, and at the same time the accounting staff may book the inventory value by invoices received instead of the physical inventory flow.

Inventory receipts might not be verified because purchase orders, goods receive notes and purchase invoices might not match.

This can happen when purchasing, the warehouse or the accounting department does not have the whole image of the purchase cycle. For example: the warehouse receives the goods but does not reconcile the invoices; payable reconciliation results from purchasing may be correct, but this could be only the confirmation on the current month's transactions in order to make payment but not the current month's physical goods receipts in the warehouse. The invoices in accounting will reflect how many goods were purchased but will not match the summary of the current month's goods receive notes.

Inventory out might not be verified.

This happens when invoices in accounting are not issued precisely according to the each delivery note or there is a time difference between invoice issuance and goods delivery which lead to cut-off problems.


Good inventory process procedures are essential to any trading or manufacturing company. Making sure that all departments are working and communicating properly together will not only increase efficiency, but also help avoid bigger problems down the road. Evaluating and maintaining good inventory controls requires experience and knowledge, and good audit practice will be able to assist in this.

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