Question

In: Accounting

O’Brien Corporation is a midsize, privately owned, industrial instrument manufacturer supplying precision equipment to manufacturers in...

O’Brien Corporation is a midsize, privately owned, industrial instrument manufacturer supplying precision equipment to manufacturers in the Midwest. The corporation is 10 years old and uses an integrated ERP system. The administrative offices are located in a downtown building and the production, shipping, and receiving departments are housed in a renovated warehouse a few blocks away.

What are the threats that may face production operations and what could be the possible controls for those threats? [3 points]

Customers place orders on the company’s website, by fax, or by telephone. All sales are on credit, FOB destination. During the past year sales have increased dramatically, but 15% of credit sales have had to written off as uncollectible, including several large online orders to first-time customers who denied ordering or receiving the merchandise.

Customer orders are picked and sent to the warehouse, where they are placed near the loading dock in alphabetical sequence by customer name. The loading dock is used both for outgoing shipments to customers and to receive incoming deliveries. There are ten to twenty incoming deliveries every day, from a variety of sources.

The increased volume of sales has resulted in a number of errors in which customers were sent the wrong items. There have also been some delays in shipping because items that supposedly were in stock could not be found in the warehouse. Although a perpetual inventory is maintained, there has not been a physical count of inventory for two years. When an item is missing, the warehouse staff writes the information down in log book. Once a week, the warehouse staff uses the log book to update the inventory records.

The system is configured to prepare the sales invoice only after shipping employees enter the actual quantities sent to a customer, thereby ensuring that customers are billed only for items actually sent and not for anything on back order.

Question: What are the threats that may face production operations and what could be the possible controls for those threats?

plz no handwriting or pic

Solutions

Expert Solution

Threats:

  1. Orders received through various source (website / fax / telephone). Orders received through Fax / telephone tends to be missed out erroneously.
  2. 100% credit sales – it is observed that 15% of credit sales are written-off annually which predominately constitutes first-time customers.
  3. Wrong usage of Loading Dock – Outgoing shipments and incoming deliveries are handled at the same dock and it may lead to mixing up of orders.
  4. Delay in shipping products due to misplace of products in the warehouse – this will lead to not meeting delivery deadline and will lead to customer dissatisfaction and creative negative image about the company.
  5. Regular physical count is not carried out – this will enable the employees to play around / steal the stock knowing that the stock count is not carried at all.
  6. Usage of Log Book to record missing items and weekly updation of the same in the inventory books – chances of tampering with the log book / misplacing it and hence the inventory record will not show accurate balances.

Controls:

  1. There should be only single source for accepting orders viz through Website as it enables proper tracking and monitoring and acts as a documentary evidence.
  2. New Policy – NO credit sales to first-time customers. Sales only on Cash basis. This will help in reduction of written-off cases.
  3. Loading Dock should be only used for handling outgoing shipments. Separate dock should be used for receiving incoming deliveries.
  4. Proper record should be maintained in the ERP about the place where the products are stored in the warehouse (product tagging) as this will lead to easy retrieval of product and timely shipment to customer.
  5. Periodic stock count (weekly/fortnightly/monthly) has to be carried out so at to have control on stock-in hand.
  6. Every day, at the end of business hours, the warehouse in-charge should update the missing stocks in the ERP so as to enable real time monitoring of stock and ensuring accurate reporting.

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