Background

A prominent listed public sector company engaged in paper manufacturing faced concerns post-COVID regarding stockpiling of essential raw materials like bagasse and coal. The company engaged our firm to conduct a special management audit to identify the root causes of the excessive stockpiles and suggest corrective measures.

Audit Approach

1. Preliminary Review:
   • A basic financial analysis of the company’s financial statements to understand overall performance and cost impacts related to inventory management.
   • Examination of stock statements to verify recorded stock quantities and their alignment with business needs.
2. Detailed Analysis:
   • Conducted a comparative analysis of quarterly stock positions for the audit period versus pre-COVID periods to identify unusual trends.
   • Investigated procurement patterns, stock turnover ratios, and alignment with production capacities.
3. Field Visits:
   • Visited production sites to understand physical inventory conditions and operational bottlenecks.
   • Interacted with department heads to assess decision-making processes and cross-departmental coordination.

Findings

1. Operational Silos:
   • Different divisions within the company operated independently with limited communication.
   • The procurement team, despite achieving its monthly targets, overstocked raw materials without considering reduced production levels during COVID.
2. Procurement Decisions:
   • Pandemic disruptions and subsequent supply chain uncertainties led to a reactive procurement strategy.
   • The Russia-Ukraine conflict further influenced procurement from alternative sources without strategic alignment to actual needs.
3. Demand and Production Mismatch:
   • With production capacity reduced due to COVID restrictions, excess procurement created significant inventory backlogs.
   • The mismatch was exacerbated by declining product demand during the pandemic.

Outcome

• Our findings highlighted the need for enhanced communication and integrated planning across departments.
• Recommendations included:
  • Implementing centralized inventory management and real-time monitoring systems.
  • Establishing a cross-functional committee for procurement and inventory alignment.
  • Developing a contingency procurement plan to balance supply chain challenges with production requirements.

Impact

The management acknowledged the gaps identified in operational processes and adopted the corrective measures suggested in our report. This resulted in:

• A reduction in stockholding costs.
• Improved synchronization between procurement and production departments.
• Strategic alignment of inventory levels with business demands.

This audit underlined the importance of integrated planning and responsive supply chain strategies in mitigating risks related to external shocks like pandemics and geopolitical conflicts.