Page 12 - OCS Workbook - Day 2 Suggested Solutions (May 2018)

CIMA MAY 2018 – OPERATIONAL CASE STUDY

I do agree with the concerns raised at your meeting that a more formal approach should be taken
to our inventory management. For our company, I would suggest the continuous inventory
system is used. Nowadays, mainly due to efficient computers, this system is becoming a lot more
popular for businesses than the periodic inventory system.

We are part of the way to making this management system a reality in terms of us already using
an electronic point of sales (EPOS) system to provide up to date information on sales and
inventory in each store. However, to make this work any changes to inventory need to be
recorded – for example if any items are damaged and rejected during the production process. We
should take the opportunity to monitor our raw materials inventory more closely.
It will provide us with the ability to run reports that can immediately identify inventory items that
are running low which will prevent being out-of-stock and losing customers because of it. A
continuous system will compare the inventory balance in the system with the year-end count and
will allow us to investigate any discrepancies perhaps due to shrinkage, theft or even count errors.
Another advantage is that it should give us a more accurate set of financial statements
throughout the year. This is especially important if certain ratios need to be maintained for banks
or other lenders.
Also, as the inventory levels are always correct, the inventory turnover ratio can be calculated
correctly. This prevents a build-up of inventory that is not selling that can be costly to the
business.
Continuous inventory systems can still be vulnerable to errors due to overstatements (phantom
inventory) or understatements (missing inventory) that can occur as a result of theft, breakage,
scanning errors or untracked inventory movements, leading to systematic errors in
replenishment.

System maintenance
This is the repair, correction or further enhancement of systems once it is in operation and can
take several forms:
Corrective maintenance

This relates to the need to correct technical difficulties that have arisen in the operation of the
system. These include virus infection, hardware failure and file corruption.

Adaptive maintenance
This relates to the need to make changes to the system in order to reflect the changing needs of
the organisation over time. Such changes are inevitable given the changing nature of the business
environment.
Perfective (preventative) maintenance

This relates to general upgrades to both hardware and software in order to maximise the overall
speed and functionality of the system e.g. installing the latest version of the application.

68 KAPLAN PUBLISHING