Analysis of Inventory Management in China Enterprises

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1 Analysis of Inventory Management in China Enterprises JIAO Jianling, LI Kefei School of Accounting, Hebei University of Economics and Business, China, Abstract: Inventory management has important influence on operating performance of the enterprises. Inventory management includes the processes of purchase, acceptance, storage, custody, and sales, which involves both technical approaches and also the management system and mechanism. This paper starts from the inventory management goals, theoretically analyzes the inventory management current status and existing problems of our country enterprises. The paper argues that there are problems such as inappropriate methods, no sound system and mechanism and so on existing in the inventory management of our country enterprises. In view of the above problems, this paper puts forward the corresponding countermeasures and the suggestions. Keywords: Inventory, Inventory management, Method, System Inventory refers to the finished goods or commodities which is for the purpose of selling the enterprises hold in the normal course of business production, or goods are still in production process for the selling purpose, or the in materials consumed in the production process, etc.. It reflects the enterprise liquidity. Inventory management is the management of the enterprise inventory, mainly including the information management of inventory and decision-making based on this information analysis, taking effective control of inventory management to achieve the ultimate goal, raising economic benefits. Inventory management includes the processes of purchase, acceptance, storage, custody, and sales, which involves both technical approaches and also the management system and mechanism. Inventory management technology methods include determining inventory purchase time, purchase quantity, maximum and minimum quantity of stock inventory, etc.. 1 Objectives of Inventory Management One reason for keeping stock is to insure the needs for production and sales, the other is from price considerations, price of retail tends to be high, while a discount price will be given to bulk purchasing. However, redundant inventory takes up more funds, and will increase fees, such as storage fees, insurance, maintenance, management charges expenses, wages and so on. So the objective of inventory management is to reach a balance between a variety of cost and inventory benefits. 2 The Current Status and Existing Problems of China s Enterprises Inventory Management Facing the occurrence of global financial crisis in 2008, the Chinese government has promulgated a series of policy to expand inside needs and ensure the economy growth. Impacted by the national macroeconomic policies, the sales of some industry enterprise product increases very fast, causing the industry enterprises have increased inventory, the auto industry is an obvious example. While with the recently exiting of the national preferential policies, a lot of enterprises remains a high volume of inventory stock. An inventory statistics in 2010 annual reports is taking for listed company, data shows that the total inventory balance of 2139 non-financial companies is 325,000,000 yuan at the end of 2010, while at the end of the first quarter of 2011 it is 355,000,000 yuan, rising 9.2% compared with Apparently, the enterprise high inventory will directly make corporate earnings expectation downgrade, and the turnover of capital turns slow. From the current status of the inventory management in China s enterprises, we argue that there are the 106

2 following problems existing. 2.1 Inappropriate Inventory Management Methods Are Used In China, although many companies have actively adopted variety of inventory management methods of the Western, but the situation of inventory overstock has not been significantly improved in many enterprises. The inventory sales forecast is not accurate enough in some of the business, and the business does not pay attention to the inventory purchase quantity and the storage quantity, they do not take physical count of inventory periodically, resulting in a lot of inventory backlog. Some of the entrprises do not have standardized classification of inventory, different companies have different inventories, and different inventories have different turnover characteristics, blindly following the classification criteria of other companies will result in the stock inventory mismanagement, leads to inventory supply and demand imbalance, causes huge losses to the enterprise. 2.2 The stock purchase plan, acceptance, storage, custody and sales management mechanism is not perfect Inventory purchases is the first inportant part of the process of enterprise inventory management, which determines the amount of corporate inventory, and also directly affects the subsequent production and business activities. The purchase plan is a more important part in the inventory purchases, but in many of our country s companies, inventory purchase plan is the weak section in the puechase process. Acceptance of the inventory is an important part before inventory storage in enterprises. In some enterprises, the inspection of acceptance of inventory is not enough, which cause losses to the enterprise. And inspection person and purchase person are often the same one, which is easily to increase the likelihood of malpractice. Some enterprises do not have the inventory classified according to the nature of the required, and they unify all the inventory management in the same way, which is not helpful to take key controls. Generally in the production site there are inventory remained after consuming each day, these remaining inventory are often neglected as they are stored in the different production sites, which will cause losses to the enterprise. Other inventories that have a expiration date will turn bad if the expiration date passed, which will also cause a loss. Finally, nobody is responsible for the requisitionof materials, materials stolen or unauthorized use by workers will result in the loss of business. In many enterprises, inventory requisition and return system is not generally set, and the step of inventory requisition has a weak internal control. Industrial product sales generally start from receiving customer orders, but the internal sales orders are relatively simple, and after receiving orders inventory delivery has a time range, which is not convenient for the enterprises internal management. 2.3 There are deficiencies in the internal control system In China, the problem of internal control over inventory stands out in many enterprises, which affects the economic efficiency of the enterprises, hinders the development of them. These problems include: The function of internal audit weakens. According to the survey, most companies internal audit department can not evaluate the financial information and the performance of administrative department properly. The settlement procedures and methods of cost are not reasonable. In some enterprises, after the material was sent out, there were no specialized personnel to keep the accounting records according to the receive and use of the inventory, and then reports it to the finance department; no appropriate method is used to calculate and carry over the cost of used and of sales of the inventory; and no proper cost accounting process and accounting treatment program is adopted to record the relevant accounting books. The level of the financial accounting is low. All along, The reason of the lack of business inventory accounting is related to the less attention and support from the administrative department of the enterprise. And also the administrative staff of the inventory accounting have low technical quality, most of the storekeepers are not well trained financial professionals, the job responsibilities beetween procurement, acceptance, payment and record are not very clear. All of the above problems will affect 107

3 the normal operation of the fund in the enterprise, the judgment of the proper use of the enterprise s resource, and the reliability of assets and earnings of the enterprise, which will directly or indirectly affect the Scientific nature of the enterprise s inventory management. 2.4 Accounting measurement of inventory isn't accurate enough "Enterprise Accounting Standards" states that at the end of accounting period inventory should be measured at the lower of cost or net realizable value. When determining the net realizable value of inventories, reliable evidence is required, and also the purpose of holding inventory, the impact of events after the balance sheet date and other factors are considered. Enterprises should be re-established the net realizable value of inventories at each accounting period. But most companies do not follow the lower of cost and net realizable value to accurately reflect the value of ending inventory. In addition to the above-mentioned personnel problems, there are also the following reasons. Firstly, companies intend to distrot the operating results, and the loss of pricedeclining in inventory is not truly reflected; the second is the management do not given enough attention at inventory, the allowance for loss of price- declining in inventory can be taken or not. Thirdly, the current market price of some inventories is hard to be determined, and the net realizable value could not be determined, which results in actually value of inventory stock cannot be accurately reflected. 3 The Countermeasures to Strengthen Enterprises Inventory Management 3.1 Using Appropriate Inventory Management Methods The inventory management methods generally include the following: ABC classification, CVA management method, fixed quantity order, economic quantities planning and so on. Enterprises need to combine their own inventory characteristics and the characteristics of different inventory management methods, choose the appropriate inventory management method ABC Classification It s impossible to give the same consideration and management of all kinds of inventory due to the limited resources. So the emphasis should be given on the management of important inventory, taking on different management and control according to the importance of inventory. Among all kinds of inventories, only a few of them has a large demand quantity, high costs in inventory storage management and large amount of liquid fund. However, many in general with small demand quantity takes less importance in management. So, inventory can be divided into A,B,C three types, and taken an classified management. The ABC classification standard is the amount of annual consumption goods. That is, the annual consumption quantity, multiplied by its price. Specifically, A type which has less variety, large value, taking on more money should be as an emphasis of inventory management, the economic quantity and the fixed quantities of the A type inventory should be determined scientifically, and the physical inspection should also be taken on regularly; B type inventories need the control of order time and quantity, do not need analysis and comparison regularly like A type inventories do; C type inventories are generally in large quantities and low value, and can be purchased centralized, the safety inventory stock levels can be appropriately increased, so that the procedures can be simplified, and ordering fees can be saved. The main advantage of the ABC method is that it can distinguish between primary and secondary, locate the emphsis, and effectively control the main varieties of the inventory and improve the control efficiency CVA Management Method Some enterprises found that, ABC classification is not satisfactory, because the C type inventories are often not taken seriously, but the lack of a C-type material will often cause the break of entire production chain, so some companies use Critical Value Analysis, which is abbreviated as CVA. The basic idea of the CVA is to divide the inventories into three to five categories based on the degree of the inventories critical value. 108

4 The first category, the highest priority, which is the critical material of operation, do not allow the run out of inventory stock. The second category, a higher priority, which is the primary materials business activities, and allow the occasional out of stock. The third category, medium priority, which is the relative important material, it allows a reasonable range out of stock. The fourth category, a lower priority, operations need to use these materials, but substitutability is high, allowing out of stock. In the use of CVA management method, people tend to set high-priority, as a result, high priority inventory has a large variety, which violates the primary classification standards of inventories of CVA management method, and leads to that no enough attention is paid to any category of inventories Fixed quantity Order method This approach is inventory management way that the inventory order is in fixed quantities to replenish storage when the amount of inventories stock falls down to a predetermined minimum. But when the demand fluctuates, both the orders and the arrival time is changing, it is complex to determine the order-point so it needs the safety stock. The advantage of this method is that the inventories quantities in the orders is economic quantities predetermined, which is very simple. The disadvantage is that the control over material reserves is not so strict. Generally it is applicable for those materials that do not have a large consumption amount, high value, long ordering time, while with fixed uses, and the total demand amount is relatively stable Economic quantities planning Economic quantities planning is a method that the business daily optimal holding quantities of inventories is calculated by using mathematical models based on the daily consuming amount of inventories and the related daily cost of capital. Economic quantities planning is based on a series of assumptions, and it assumes that the consideration is only given to the variable ordering costs and the variable storage cost of inventories and allowing the costs of out of stock. The purpose of economic quantities planning is to find the the order quantity under the condition that the total cost of inventories is the minimum. In general, this order quantity can make the ordering costs and variable cost of storage costs come to the lowest. Because of the scientificity and the rationality, economic quantities planning has been widely used in inventory management. 3.2 Establish a scientific and efficient inventory management system To implement scientific inventory management and improve the storage environment, the timeliness of inventory acceptance chenk should be ensured, cut down the checking time so that the quality issues of purchased materials can be identified and resolved in time. During the process of checking and accepting of inventories, the purchasing contracts, the product warranty letter, and the corresponding documents issued by transportation department need to be checked for their consistence. Furthermore, it is necessary to check whether the goods match the description in the above documents. If so, then fill out the goods receipt, so that it can be checked when shipping out the goods. The checking staff must have a high sense of responsibility, and have some basic knowledge of materials quality. Enterprises should establish a scientific and efficient inventory management system and constantly improve it with the development of business. Inventory daily control methods should use the principles of hierarchical accountability and coordination management. The department who is responsible for formulating the index systems should refer to historical data, considering the current actual situation, and break down the goal into every relevant departments for implementing. 3.3 Establish and improve the internal control system Establishing a sound and effective internal control system is an important aspect of strengthening corporate inventory management in China. Building a sound internal control system plays a key role in strengthening corporate inventory management. Enterprises should build and improve corporate governance structure in accordance with the requirements of "Accounting Law", "Company Law", enjoy the legal rights and fulfill the obligations, 109

5 and establish an internal inventory control system. Considering the production and management features of the enterprise itself, from strictly implementing procurement and sales system, standardized inventory purchasing, consumption and marketing process, building an information file of the suppliers and sellers in order to enhance the management of its reputation and qualification etc., the responsibilities of each functional department should be further clarified, and strictly implement the principle of separating incompatible positions to makes restriction function work in the internal control system. 3.4 Make use of advanced management mode to achieve effective management of stock capital To maintain a strong competitive advantage, the enterprise must improve the management mode to achieve effective management of stock capital, which requires the business to adopt advanced management mode, such as Enterprise Resource Planning System (ERP). ERP is an integrated information management system, which is mainly applied to manufacturing industries, and focus on the management of materials, funds and information. By implementing ERP, companies can use computer to achieve automatic management of capital, goods, personnel, information and other resources. ERP plays a very important role in implementing computer assisting enterprise management, building enterprise information system and automation system, improving working efficiency and strengthening the effectiveness of the rapid response capability. ERP system can realize the scientific and efficient centralized management of money, materials, production supply and sale, which can help to plug the loopholes as possible as it can, reduce inventory stock, which not only improves the utilization of funds, but also increases the capital earning ratio, so that put the inventory management forward a new level. 3.5 Improve the quality of related personnel, and make full use of inventory management theory to manage the stock Different types of stock require different management approaches and have different requirements. Based on the various types of inventory, enterprises should apply the related inventory management theory to classify the different stocks, so that the enterprise can achieve improvement of inventory efficiency, reduce inventory waste and solve the problem of occupying too much funds. Meanwhile, as the inventory management involves a lot of advanced theories and methods, so the relevant management personnel should continuously improve their professional ability and working skills. If necessary, implement periodic rotation of some important positions, and regularly check the implementation of inventory management system. Furthermore, build regular training for on-job staffs. 4 Conclusion Inventory management includes not only technical methods, but also management system and mechanism. To maintain exuberant competitive advantages and higher profitability, enterprises should pay more attention to inventory management. Focusing on improving the internal control system, the enterprises should adopt effective inventory management methods, and implement scientific inventory management ways, try to achieve a balance between inventory costs and profits so that to get the best match between them. As the basis for enterprises development and progress, inventory management is the assurance that the enterprises can enhance their position in such a highly competitive global market. We just hope that more and more enterprises can realize the importance of inventory management, and constantly establish a sound corporate inventory management system, so that inventory management can be a very important guarantee for the sound and orderly development of enterprises. References [1]. Xia Zhongze, Kang Yanjing, Analysis of the important role of inventory management business management. Money China,2(2008) (in Chinese) [2]. Wang Qi. On the inventory management of state-owned enterprises. Modern marketing,2011,30~ 110

6 31(in Chinese) [3]. Wang Qing. On the inventory management of state-owned enterprises. Finance and Economy, 2008, 182~183 (in Chinese) [4]. Zeng Jie. Discussion of the effective ways to enhance inventory management. Economic & Trade Update, (9)2007 (in Chinese) 111

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