Effect of Accounting Policies on Effectiveness of Inventory Management Strategies

Abstract

In the continuous battle to cut costs, firms focus on efficiency throughout the entire supply chain. Well-designed inventory management strategies are a crucial part of overall supply chain effectiveness. The days of large inventories is becoming a thing of the past. Unfortunately, companies using the Last In – First Out (LIFO) inventory accounting method may find that implementing inventory reduction best practices in the supply chain has some undesired results. This article includes a case study of a real-life industrial distributor who uses the Dollar Value LIFO accounting method. Using inventory stratification with data collected from 1978 to 2014, this study describes the potential burden experienced from reducing inventory levels when using LIFO and shows a path towards achieving the desired inventory management strategy. The impact on key financial metrics such as Cost of Goods Sold (COGS) and Gross Margins are shown. Existing and new companies can both learn from this company’s example when making inventory management decisions.