Inventory. The lifeblood of many companies in the energy industry. For certain companies, it can also be a source of pain and frustration. The adage “it’s simple but not easy” is a common mantra in the inventory game.
On the face, energy inventory is a simple calculation of procured volumes at a specified price, recorded in the system (CTRM, ERP), and ultimately expressed in reports and statements. Inventory, however, becomes exponentially more complex when factoring in regulations, conversion (in a physical and financial COGS sense), title/custody, and location/movement.
Also complicating matters, inventory figures are used by many roles across the organization, making consistency essential. Internal variances can result in lost time, money, and a significant amount of effort to get things done correctly.
The good news is every company can achieve nonpareil inventory management. By applying an evaluative process across different aspects of inventory, both new and established organizations can identify inventory management inefficiencies and lay the groundwork for corrective action.
The evaluative process consists of the following steps:
- Know Your Universe
- Audit the Details
- Categorize and Prioritize Efforts
- Formalize an Inventory Management Program
1. Know your Universe
A solar system has an abundance of stars. We are intimately familiar with some (e.g., the Sun), know there are others, and are aware of even more. Inventory data and its users need to be categorized similarly. There will be users who depend on inventory as a central element of their role, groups who will use it to a limited degree, and others who may need the data infrequently or sporadically. Therefore, knowing who uses the data clarifies the universe layout.
Both established and new firms benefit from taking stock of their inventory universe. For an established company, knowing your universe allows decision-makers to understand the impact of potential change. For new organizations, knowing your universe gives you a head start as to who “needs to be at the table” as software considerations and business processes are developed.
2. Audit the Details
Next, the organization needs to take a measured step toward assessing the details surrounding inventory. The audit is useful because it uncovers the what and why of efforts.
What a company defines as ‘details’ varies; however, every organization will benefit from this exercise, as it identifies the what and how of data usage.
A holistic approach to auditing the details is evaluating the inventory data across your universe (people), your processes, and your current technology. Ensuring these aspects are addressed prevents overlooking key inventory-related activities within the organization.
Without undue burden, the details can be assessed by each functional area, and then shared. The sharing process can lead to the discovery of possible duplication of efforts, unnecessary tasks, or opportunities to leverage actions performed in other functional areas.
Uncovering inefficiencies through an audit
Established companies may fall into the trap of dusting off a series of business processes or desk procedures. It is important to carefully review that processes and procedures mirror the actual tasks performed. The distance between ‘what it’s supposed to be’ versus ‘what it is’ can uncover inefficiencies that are now accepted and status quo.
Established companies may depart from procedures by performing tasks outside of the commodity trading, transaction and risk management (CTRM) system. Common reasons for the departures include limited or no system functionality, and limited knowledge around maximizing capabilities of the system. Regardless of the reason, an audit can reveal opportunities for efficiency and error reduction.
New companies or entities lacking formalized processes and/or procedures can use the audit to plan a best practices approach to inventory. The exercise will stimulate developing procedures that truly benefit the inventory management process.
3. Categorize and Prioritize Efforts
After knowing your universe and auditing the details, areas of improvement should begin to emerge. Categorizing and prioritizing efforts is the final step in discovering what requires change, and the first step in how to establish healthy inventory management. Efforts in this context also mean pain points; it can be as fundamental as finding a resolution to a single but time-consuming process activity, or as complex as a cross-functional process overhaul and inventory module reconfiguration.
Like the previous steps, a standardized approach to the exercise yields more impactful information for the actions needed going forward. Leveraging the people/process vs. technology approach, management can evaluate pain points by function, as well as prioritize efforts accordingly.
For example, the results may reveal that the CTRM technology has a WACOG limitation or that the system may encounter a lengthy end-of-day due to processing activities related to a commodity not native to the system architecture. This may cause inefficiencies to risk, trading and accounting groups. Alternatively, the results may lead to the discovery that different personnel can perform certain process activities, alleviating a bottleneck.
Overall, with this exercise, decision-makers will gain a clear understanding of where the pain lies individually and business-wide. It also allows for candid discussion of what needs to be done and presents the measurables for building a scalable plan for constructing a best-in-class inventory management program.
4. Formalize an Inventory Management Program
If you have identified and prioritized your pain, your company is well on its way to either transforming or establishing a strong inventory management program. To complete the inventory management program, you need to define how you want your organization to operate and identify which innovative solutions will help transform and streamline your business.
Simply starting the evaluative process necessary to create an energy inventory management program can seem intimidating. Some organizations have trouble taking the first step. Veritas can assist your organization in planning and taking this first step. We have proven leadership dedicated to helping your organization establish your inventory management process to creating lasting impact.
At Veritas Total Solutions, we have experts in accounting practices especially as it relates to our Trading and Risk Advisory services. If you are interested in learning more about our specific capabilities, contact us to learn more or subscribe to our blog to stay connected!