Accounting Best Practices, Fifth Edition

16–14. Eliminate the Warehouse

The source of many accounting-related transactions is the warehouse. This department records entries for the receipt, movement, and issuance of parts to and from stock. If any of these transactions are incorrect, the inventory quantities used to derive the cost of goods sold, as well as of on-hand inventory, will be incorrect. In addition, there is probably a fair amount of obsolete inventory somewhere in the warehouse, which the accounting staff must identify and cost out. These are major issues that can seriously impact the accuracy of the financial statements.

A very difficult solution is the complete elimination of the inventory, which in turns means the elimination of the warehouse. Several world-class companies have achieved this best practice by switching to just-in-time receiving and production, which allows them to bypass all parts storage. By doing so, a company can avoid all of the transactions needed to log something in and out of the warehouse, not to mention avoiding all the staffing, space, insurance, and inventory obsolescence and damage costs that go along with having a warehouse. From the perspective of the accounting staff, this is the ultimate best practice in inventory accounting, since there is no inventory to account for besides the relatively minor amounts in work-in-process.

Unfortunately, this is a goal that very few companies achieve, for a variety of reasons. First, just-in-time receiving and production are very difficult ...