Friday, September 5, 2014

Inventory Management

One area that doesn't get a lot of attention in Government contracting discussions is the issue of effective inventory control. Inventory control is a significant management challenge at all companies, not just Government contractors, but at Government contractors in particular, the Government often ends up paying for inefficient inventory control - especially at contractors with significant cost-reimbursable effort. That is why sometimes, contract auditors will poke around and review contractors' inventory management policies, procedures, and practices. Ineffective inventory management results in too much inventory on-hand and where the carrying cost of inventory is significant, can represent a drain on company profits. Where the excess inventory becomes Government property (as in the case where purchases are made under cost reimbursable contracts), cost to the Government are increased.

There are a number of policies and procedures that a contractor can effect to help ensure effective inventory management. Most of these apply to non-Government contractors as well.

  1. Test for indications of overbuying. Overbuying ties up funds in excess inventories. Excess inventories require investment of funds and do not contribute directly to current programs, projects, or deliverables.
  2. When establishing inventory requirements, consider whether frequent change orders have the potential of obsoleting items. Obsolete items are often worthless.
  3. Establish a program for standardization of component parts as a means of reducing the need for separate buying for individual contracts/projects/deliverables.
  4. Examine the causes for items that become excess and obsolete. Examine the causes for items in short supply and adjust inventory purchases accordingly.
  5. Determine whether there are effective procedures for evaluating repairability of production rejects. 
  6. Determine whether there are effective procedures for disposing scrap. Are classification procedures adequate to determine what is usable, salvageable, or scrap? Are competitive bids secured for the sale of scrap?

Contractors do not want to lose money by tying up funds in excess inventory or by purchasing too much inventory that may become obsolete. The Government does not want to pay for it either.

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