October 30, 2019

3 Inventory Challenges That Cause Write-Offs

Author: Stockpile Reports

There are a few inventory challenges that are well-known for causing excessive write-offs.

First, ask yourself, do you know how much water weight is costing you? If not, you should. As fall weather has set in for most of our clients, stockpiles are naturally getting heavier due to increased moisture content. The fluctuation in your material bulk densities due to water, if not accounted for, will throw off your month-end financials. Despite investing in the best measurement solutions, you are converting volume measurements to weight, which inherently opens your financials up to inaccuracies and risks.

3 Real World Inventory Fluctuation Challenges

Stockpile Reports has spent the past six years meeting with clients gaining unique insights into factors that contribute to inventory fluctuations and inventory write-offs. We compiled a list of 3 challenges based on real-world experiences our clients face that lead to inventory discrepancies. We’ve identified measures you can take and processes you can put into place to minimize the risk of a costly month-end or year-end adjustment.

Stockpile Reports has spent the past six years meeting with clients gaining unique insights into factors that contribute to inventory fluctuations. We compiled a list of 3 challenges based on real-world experiences our clients face. These experiences lead to inventory discrepancies. We’ve identified measures you can take and processes you can put into place to minimize the risk of a costly month-end or year-end adjustment.

Conversion Rates Are Not Static

When is the last time you checked the unit weights of your materials? This is a factor used to convert stockpile volumes into tonnages, which is reported in pounds per cubic foot or tons per cubic yard. We ask this question to all of our new clients to ensure we establish the correct baseline inventory with the correct conversion factors.

Typically, our clients measure their unit weights quarterly or semi-annually to ensure their conversion factors are reflecting actual stockpile densities on the ground. As seasons change, stockpiles with more fines or sand may naturally hold more or less water weight. If these natural changes are not accounted for, you will start to see discrepancies between your chosen inventory measurement solutions and your perpetual inventory based on scale weight.

Tune Up Your Conversions

The first step to updating your conversions is to determine an update schedule. Most common schedules are either semi-annually or yearly. Next, we recommend following the ASTM C29 testing method to determine your bulk densities (unit weights). A survey of our clients reported that materials should be tested damp or wet rodded to match as close to condition on-site as possible. Adjust your inventory on hand to reflect your new unit weights.

Belt Scales Lose Calibration Over Time

Belt scales are a convenient way to track production output. Unfortunately, most scales rely on a physical wheel that measures RPMs of the belt and converts it to predicted tonnage output. Over time, the wheel wears down causing the scale to become incorrectly calibrated. The most common sign that a scale has loss calibration is when materials being produced from a single conveyor belt are having significant tonnage discrepancies from inventory measurements.

Check Belt Scales with the iPhone App

Stockpile Reports’ iPhone app is the perfect tool to check belt scales. Simply build a new pile. Stop building the pile after a few hours. Measure the conical pile with the iPhone app and compare the result against the belt scale. Many of our clients have found scales off up to 30%. A scale off by even 5% can have a major impact on your month-end inventory numbers when adjusting against your perpetual inventory. One caveat, new piles loaded fresh off the scales have a low compaction factor. You may need to convert the tonnage using a damp un-rodded unit weight factor.

Disappearing Material Due to Floor Loss and Spillage

No one likes to admit that some portion of piles is lost to the site floor. Even the best loader operator spills smalls amounts of material. Also, most sites are not built on concrete pads where material can be scraped cleanly off the ground. Many of our client report floor loss can add up to 10% of the pile, this is especially apparent with a rookie loader operator. The actual floor loss may be less in your situation, however, we recommend determining a percentage that makes sense. In our experience, fine aggregates and agricultural products such as bark mulch have the greatest amount of floor loss.

Determine Your Loss Percentage

Measuring floor loss and spillage is a bit more difficult than a density factor test or testing belt scales. The key here is to stage a moderate pile of a few thousand tons. Measure the finished pile with a drone and then track all sales from that specific pile. Assuming your densities are correct, the delta between the pre-sold pile and the combination of all the scale tickets from that pile will equal your loss factor. You may need to repeat this process with different materials to determine is coarse and fine materials have the same loss factor.

Develop a Measurement Frequency Plan to Minimize Risk

Natural variations in pile density, belt scale calibrations, and floor loss add up over time. These variations combined with other possible perpetual inventory errors, such as lost scale ticket entries, add up over time. Measuring inventory every semi-annually or yearly is not a good strategy to avoid painful adjustments to your inventory. No regional manager wants to have to explain why 5% of their assets are being written down from their P&L statements because of unforeseen errors.

More Frequent Measurements = Less Risk

Over time the variations in unit weights, improperly inputted scale tickets, and other perpetual inventory factors add up to a larger uncertainty of actual material in inventory. The best action to combat inventory write off risk is to measure more often and make smaller adjustments to true up your inventory. However, not every company or site needs require the same frequency of measurements.

Based on experience from our clients, sites with the highest rate of inventory turnover requires the greatest frequency of measurements. We recommend monthly measurements for most sites and twice monthly for high output sites in order to make mid-month adjustments. A few of our clients who experience peak turnover during a period of a few months opt for weekly measurements during the busy season and slow down to monthly the remainder of the year.

Stockpile Reports enables your company to measure your inventory more frequently, allowing you to be confident in your numbers. When you choose Stockpile Reports, we’ll give you the tools to ensure that your baseline inventory numbers are accurate, your scales and conversion rates are up to date, and your scales are calibrated. Avoid a major year-end write-down and improve your bottom line. Contact Stockpile Reports to get started.