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Inventory control for a private equity portfolio company with a Mexican facility

Business issue

Our client, an investment adviser registered with the SEC, has an in-house restructuring and private equity staff providing clients with strategy, M&A, and operations services. Its portfolio company, an automotive parts manufacturer, has international operations.

By recommendation of our client, its manufacturing portfolio company engaged Riveron to determine why end-of-month inventory levels reported by the portfolio company’s Mexican factory consistently required drastic adjustments. Some months the plant reported large overages and other months the inventory was well short of expected levels.

Upper management feared inventory was being stolen, controls over inventory were sorely lacking, local accounting personnel were insufficient to the task, or all of the above contributed to the situation.

Riveron approach

As part of our thorough investigation and research, Riveron deployed two consultants to the factory. They methodically studied the inventory controls currently in place and investigated all plausible causes for the variances.

Based on the information gathered, Riveron came to the conclusion that a large portion of the variances was attributable to inaccurate bill of materials (BOM), the standard raw materials consumed in the production of each unit, was inaccurate most of the time. It was also discovered that production record keeping was inaccurate even though production figures were available. A disciplined approach to inventory receipts and shipping controls was missing due to items leaving the plant being seldom verified. Overall a comprehensive inventory system was missing. As a result of our findings, Riveron led an analysis of BOM data which led to more accurate tracking of inventory usage. Production personnel and their supervisors were re-trained, and controls were implemented that would monitor the accuracy of production reporting. Riveron also implemented a comprehensive set of inventory controls, requiring accountability and documentation. A thorough inventory control procedure was established that included regular monthly reconciliations of inventory and investigation of account variances.

Benefit to our client

Before our engagement commenced, this particular manufacturing plant consistently experienced at least a 20 percent inventory variance every month. Following the implementation of our recommendations, the factory has not had a monthly inventory variance in excess of three percent for more than a year, which is in line with the industry norm.