Inventory Control for Private Equity Portfolio Company with Mexican Facility

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Business Issue:

On the recommendation of Riveron’s private equity client, its manufacturing portfolio company engaged us to determine why end-of-month inventory levels reported by the portfolio company’s Mexican factory consistently required drastic adjustments. During some months, the plant reported large overages, and in other months, the inventory was well short of expected levels. Upper management feared inventory was being stolen, controls over inventory were sorely lacking, and local accounting personnel were insufficient to the task. All of the above concerns contributed to the complexity of the situation.

Riveron Approach:

As part of our thorough investigation and research, we deployed two consultants to the factory. They methodically studied the inventory controls currently in place and investigated all plausible causes for the variances.

Based on the information gathered, we came to the conclusion that a large portion of the variances was attributable to inaccurate bill of materials (BOM), as the standard unit of raw materials consumed in the production process was inaccurate most of the time. It was also discovered that production record keeping was inaccurate, even though production figures were available. A disciplined approach to inventory receipts and shipping controls was missing, due to a lack of regular verification for items leaving the plant. We led an analysis of BOM data, which led to more accurate tracking of inventory usage. Production personnel and their supervisors were re-trained, and controls were implemented that would monitor the accuracy of production reporting. We also implemented a comprehensive set of inventory controls, including regular monthly reconciliations of inventory and investigation of account variances.

Benefit to Our Client:

Before our engagement commenced, this particular manufacturing plant consistently experienced at least a 20 percent inventory variance every month. Following the implementation of our recommendations, the factory has not had a monthly inventory variance in excess of three percent for more than a year, which is in line with the industry norm.

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