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The Problem with Parts Inventory Adjustments

By Mercedes Hendricks, CPA

The Parts Management Report is full of great information…if you know how to read it!  The details that comprise the DMS’ parts inventory management report are extensive and, while difficult to navigate, can tell you a lot about how well the parts manager is controlling the inventory.

The parts pad is the perpetual parts inventory record.  The inventory management report provides a record of parts ordered, stocked, invoiced, sold, returned, and yes, adjusted.  Why would there be adjustments in the pad?  Often what happens is a parts manager or employee performs a bin check and notices a difference between the parts physically on hand and the pad count.  This difference is then manually adjusted to reflect the physical bin count.

Inventory adjustments may be done with perfectly good intentions.  The problem is that if these differences are not thoroughly investigated before being adjusted in the pad, even the best of intentions can create chaos later on.  Let’s consider a best case scenario, a bin count reflects one part more than what the pad shows.  A plus adjustment is entered to increase the pad count by one.  What if that part was a special order part for a customer that was put in the wrong place?  Without investigating, now this part appears as if it is available for the parts department to use when in fact it belongs to a customer.  The customer comes in to collect the part and either it has been used by the parts department, or, if not, now the pad is going to be off by the manual adjustment.

Another unintended consequence of these manual adjustments is that they may prevent parts from being ordered timely.  The DMS tracks bin volume and sales histories for part numbers.  Some parts are automatically ordered when the parts on hand gets to a certain level. If manual adjustments are being posted to the pad that are not reflective of true inventory, this can cause much needed parts to be ordered too late, or unnecessary parts ordered too soon.

Of course the worst case scenario is that manual adjustments are being entered to mask theft.  A person takes a part from the shop, minus adjusts the part in the system and no one is the wiser that a part has been stolen.

So what are the best practices regarding manual adjustments?  There are occasions when these are perfectly appropriate, however, we recommend having a policy in place where an investigation is done before an adjustment is posted, with proper approval from the parts manager.  As a way of monitoring these adjustments, it is best if the Controller reviews them and follows up with the parts manager periodically to understand the nature and ensure proper procedure was followed before the adjustment was made.

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