April 22, 2024

Tracing Troubles: Forensic Specialists Expose Gaps in Inventory Management

By Mark Gauthier, CVA, CFE, Partner, Advisory Services & Shelby Gilmore, Supervisor, Advisory Services

Tracing Troubles: Forensic Specialists Expose Gaps in Inventory Management Valuation, Forensic & Litigation Services

All processes in a client’s inventory management system must work collaboratively and within an acceptable degree of accuracy. The reality is that they often don’t. In a recent engagement, our client asked us to employ forensic examination techniques to recreate what occurred when the accuracy of inventory levels and their valuation was questioned.

The client suspected they had suffered significant inventory losses but had no support. We assembled a team of forensic IT professionals working with financial investigators. Our team returned multiple findings to the client, including ERP inadequacies and failures, process challenges, internal and external financial statement presentation challenges, and cash recovery from unbilled sales. The client expects additional recovery from customers, litigation, and insurance sources.

Inventory management in food and beverage manufacturing (this client’s industry) is multifaceted, encompassing various stages such as procurement, production, storage, and distribution. From sourcing raw materials to producing finished goods, each stage of the production process requires control, oversight, and accurate inventory reporting.

In this and other engagements, we had to recreate and assess operational conduct for financial reporting validation and recovery through customer, litigation, or insurance sources. The inventory management analysis included the following:

Freshness and Quality

Timely inventory turnover is crucial to maintaining freshness and quality standards. Efficient inventory management ensures that perishable ingredients are used before expiration dates, minimizing waste and costs and preserving product quality.

Regulatory Compliance

Food and beverage manufacturers operate within a regulatory framework to ensure product safety and compliance with health standards. Proper inventory management facilitates traceability and accountability, enabling swift recalls if necessary and ensuring adherence to regulatory requirements.

Cost Control

Effective inventory management optimizes resource allocation, reducing the risk of overstocking or stockouts. Manufacturers can enhance profitability and maintain competitive pricing by minimizing excess inventory and associated carrying and production costs.

Demand Forecasting and Production Planning

Accurate inventory data is a foundation for demand forecasting and production planning. By analyzing historical sales data and market trends, manufacturers can anticipate demand fluctuations and adjust production schedules accordingly, optimizing resource utilization and minimizing stock shortages.

Supply Chain

In an industry with supply chain disruptions and volatility, adequate inventory management practices allow companies to effectively manage costs associated with their supply chain. Maintaining sufficient inventory can help mitigate uncertainties such as supplier delays, transportation bottlenecks, or sudden shifts in commodity prices.

Strategies for Effective Inventory Management

Each company is unique and, therefore, may have unique inventory management processes and systems. To effectively manage inventory, we often suggest companies implement the strategies discussed below:

Technology and Systems

Implementing advanced inventory management systems can streamline operations by automating tasks such as order processing, stock tracking, and replenishment. Integration with other systems, such as enterprise resource planning (“ERP”) software, enhances visibility across the supply chain and facilitates real-time decision-making by Company management.

Just-in-Time (“JIT”) Inventory

JIT inventory systems minimize inventory holding costs by synchronizing production with demand. By replenishing stock precisely when needed, manufacturers reduce excess inventory levels, minimize storage requirements, and enhance efficiency.

Batch and Lot Tracking

Implementing batch and lot tracking enables manufacturers to trace ingredients and finished products throughout production. This enhances traceability, facilitates compliance with regulatory requirements, and helps identify and isolate any issues or recalls.

Lean Manufacturing Principles

Lean manufacturing principles emphasize waste reduction and process optimization. By eliminating non-value-added activities and focusing on continuous improvement, manufacturers can streamline operations, reduce lead times, and enhance overall efficiency in inventory management.

Collaboration with Suppliers

Establishing collaborative partnerships with suppliers cultivates transparency and enables better coordination of inventory levels. By sharing demand forecasts and production schedules, manufacturers can mitigate supply chain risks, negotiate favorable terms, and ensure a steady flow of materials.

Required Periodic Inventory Process Assessments

Companies must implement regular, scheduled reviews of their inventory management system, ERP systems, and processes. The reviews should be conducted internally using resources that offer independence in their conduct or in conjunction with independent third parties (CPA/consulting firms) specializing in inventory management and holistic entity analysis.

Effective inventory management is essential for ensuring product quality, compliance, and profitability in food and beverage manufacturing. By implementing inventory management strategies and leveraging technology, manufacturers can optimize resource utilization, enhance resilience, and gain a competitive advantage.

It is very easy for a client, particularly a mature one, to get comfortable doing things the same way, over and over. Becoming complacent with existing inventory processes and their accompanying systems often leads to unacceptable levels of risk, litigation, organizational stress, and financial losses.


  • https://dclcorp.com/blog/inventory/inventory-management-food-and-beverage/