Taking Physical Inventory While Working Remotely – A Unique Challenge in Manufacturing

Mark Boheim, Associate Director Internal Audit and Financial Advisory
Andy Flach, Associate Director Industrial Products Sector Lead

Amid the crisis of the COVID-19 global pandemic, organizations are scrambling to convert activities traditionally performed in person to remote-friendly processes. Historically, taking physical inventory of an organization’s assets is primarily an in-person and manual process. Thus, the need to avoid physical contact during a pandemic is presenting unique challenges for manufacturing organizations that manage significant volumes of inventory across multiple locations or geographies.

Why is this important? Inventory is the core of any manufacturing organization’s business. Management needs to know, for operational purposes, how much inventory there is at any given time. In addition, certain inventory balances may require specific audit or compliance procedures to be substantiated. The ability to complete physical inventory counts without having the same physical presence as in the past has become one of the newest challenges within the industry.

In this new environment in which they are operating, companies with physical inventory need to consider how they can effectively and efficiently adapt their current processes to successfully complete inventory counts.

Understand Existing Inventory Procedures

To understand how physical inventory counts can occur in the COVID-19 era, companies first must understand how physical inventory has been performed historically.

  • Who are the key individuals within the operations or warehouse management teams who can offer insights around specific hurdles, considerations and other important information?
  • What types of information should be further documented in the stock-taking procedures?
  • Are there legacy inventory accounting issues or audit findings that may indicate historical physical inventory challenges or areas of difficulty that should be considered when transitioning to the new strategy?

By surveying various stakeholders across the enterprise, companies will increase the chances of developing a more holistic transition strategy from physical to remote inventory taking that is both effective and builds on approved and proven processes that are already in place.

Reassess the Risks Related to Inventory

As with any major change or business disruption, businesses around the globe are reevaluating risk assessment conclusions across the board, including inventory considerations. Companies may find that certain planning decisions have shifted since initial planning, whether related to locations that are considered significant or inventoried goods that may have specific considerations. As an example, companies with consigned inventory are having to adapt their reliance on third-party controls as variation in locality, governmental oversight and safety protocols are impacting the ability to confirm inventory at off-site, non-company-owned locations. As a result, many organizations are finding the need to increase the planned usage of confirmation procedures or to make the accrual and estimate calculations and review more robust.

Understand What’s Changing and How to Adapt

After understanding their current process, it is critical for organizations to understand areas of potential disruption and change. Most significantly, we are seeing facilities decrease the number of individuals allowed within warehouses at a given time. Therefore, sending individuals to complete counts in pairs, which historically has been a common practice, will not be possible for many companies. Whether you send one person at a time or have a second person “tag along” virtually, it is one of many of the decisions that companies need to consider.

Others are finding that completing a count may not be physically possible at certain locations due to complete location shutdowns or lack of available and appropriately skilled resources. Alternative procedures, such as accounting rollforward and rollback activities, should be considered to gain comfort around inventory balances as of a period end.

Define the New Inventory Strategy

Any successful plan starts with a strong strategy. When developing a plan to respond to this new environment, organizations should consider the following which may influence their approach:

  • Criteria – What criteria will need to be followed and what steps should be included in the updated process to meet the same requirements as taking in-person inventory? For example, can one individual take inventory in person while others, for control purposes, monitor the inventory process remotely via on-site cameras or a body cam worn by the person on site?
  • Documentation – Every phase of the strategy and the process of taking physical inventory should be documented thoroughly and at the most specific level possible. As physical count team coordinators may not be available on demand, these strategy and operating procedures will be highly leveraged by field personnel to address challenges experienced while performing the counts.
  • Use of technology – Ifthe company is able to utilize technology such as body cameras to allow for a “virtual counter” to be present with a physical counter, human or robotic, to perform the counts, additional validation will be needed of count performance through the confirmation of the date and time the count was performed. GPS location data may also need to be retained.
  • Training – Bringing counters and supporting staff up to speed on the changed process is critical to successful completion of the count. Companies should consider creating a roles and responsibilities matrix for the count that is supported by specific training and process documentation for the counters and virtual command center team. Holding pre-trainings and confirmation of understanding sessions, before the counts, can also lead to a more efficient day of count experience.
  • Virtual Command Center – Ensure the proper support is available during the count (i.e., engineers, production support, accounting, audit, etc.) to facilitate resolution of various hiccups that may occur during the count.

Consult Early With Decision-Makers Relying on Inventory Data

Throughout the development and finalization of their approach, organizations should engage key stakeholders within the business, internally and externally, to understand the various results and outcomes that are required from the count procedures for all parties. Further, engaging the internal audit and external auditor, early and often, will support the business in thinking through alternative procedures and various acceptable workarounds in environments where counts are challenging, and may provide historical insights to past counts. These conversations should be used to help guide the planned procedures and expected ultimate deliverables.

Plan for the Future

Thinking beyond the next few months, similar circumstances may present themselves in subsequent reporting periods for a year or more. Implementing a strategy now can allow inventory teams to practice and perfect what may become the “new normal” of physical inventory observations.

While some have said that we may never again return to the “normal” we all knew prior to 2020, the “new normal” should be viewed as an opportunity and as a sign of progress with regard to how employees work and inventories are managed.

Protiviti Senior Manager Farrah Malik contributed to this content.

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