The Punched Card and the Electron in Inventory Control
By WILLIAM W. GERECKE In-Charge Accountant, San Francisco
Presented before the Industrial Materials Handling and Packaging Conference, Stanford University — March 1957
The term "tight money" has received considerable attention in the last twelve months and gives promise of staying with us. It has been used to explain the decline in home building, the reduction of plant expansion, and the suffering of small business. In its simplest sense, it reflects the competition
for capital, either borrowed or invested. Why not employ the same thought in evaluating the allocation of capital within a business?
Business is frequently composed of several units, locations, or divisions which are competing for the use of capital resources. Each unit has certain working-capital requirements which are reflected in its annual budget. To justify its budget each unit should be able to demonstrate ability to con-tribute to the profit of the business at a rate competitive with alternative uses of the capital. For example, if the sale of merchandise produces a return of only 4 per cent on capital invested in the activity, and if the same amount of capital invested in a good preferred stock yields 5 per cent, why accept the risks inherent in merchandising? Without the spur of competition for available resources, control becomes more academic than real. Budgetary control can exercise over-all control in the management of capital, but it must be carried out with special-purpose tools to be most effective. One of these tools should be inventory control.
THE REQUIREMENTS OF CONTROL
There are several basic requirements which inventory control must satisfy if it is to function as a part of the system of capital management. First, it must provide financial and physical accountability; that is, how much should be there, not just what is there. If the system is to maintain control, the tail cannot wag the dog, for management must be satisfied that its record-keeping process is reliable. It is in this area that the authority of the documents supporting inventory movement must be established. All receipts should be covered by receiving records, and all shipments by invoices. Production records should generally account for internal movement,
but in some instances additional documentation may be desirable to record transfers, and requisitions should account for self-consumption.