Expenditure Process: Overview
This case study is based on a company named Platinum Manufacturing Group. The company does business of electrical goods that are manufactured from raw materials in the company’s factory itself. The scale of the company is significantly large and hence, in order to fulfill the operational and business demands of the company, a huge amount of electrical goods are being manufactured everyday that in turn requires handling and use of large volumes of raw materials. It is evident that if such large volumes of raw materials are not handled in a systematic manner, the company will soon lose track of the amount of raw materials in the inventory and will start to encounter financial losses as well as negative impacts on the business. Hence, the company has set up a particular system framework for the handling of raw materials like receiving the materials from the vendor after purchase, storing the materials in the inventory, extraction of certain quantity of raw materials from the inventory, make payments to the vendors and others. Based on the system, the storeroom staffs have to follow a particular sequence of specific activities regarding the movement of raw materials to and from the inventory. In spite of a specific system being in place, there are a number of risks and issues identified that can have some negative impact on the company’s business if not addressed quickly.
While the main focus of this report is the control weakness existing within the system, the report identifies the risks that might have negative impact on the business of the company.
In the existing structure in the company, the expenditure process is mainly required for the purchase of raw materials required for the manufacturing processes. For handling the purchase and expenditure process, a purchasing team has been deployed who take care of all the payments after the goods are delivered by the supplier. When the supplier delivers the raw materials to the storeroom staffs, an invoice is also sent to the purchasing team. The team reviews the invoice and makes the payments within the due date specified by the supplier. The invoices are then filed and the packing slips and purchase orders are reconciled at month end. This overall system has its own faults that arise due to lack of control measures and hence, the issues are to be identified and addressed.
Figure 1: Data Flow Diagram
Data Flow Diagram
(Source: Created by Author)
Various system aspects that include the control weaknesses and suggested IT developments that will be able to solve the control weaknesses are discussed in the following table.
|
Internal Control Weakness |
Impact of the weakness |
Control to mitigate the weakness |
Latest IT developments |
|
The main control weakness that can be identified in the current operational structure is that there is no direct coordination between the storeroom staff and the purchasing team. As a result, there are often errors in the number of items delivered and the payments made to the vendor (Ji, Lu & Qu, 2015). The vendor can also get the chance to cheat the company by listing different amounts of products to the storeroom staff and the purchasing team. |
The main impact in the weakness is that the company often has to spend additional amounts for the supplies they received. For instance, let the company needs to order 25 pieces of raw materials. Accordingly, the purchasing team places order for 25 pieces. However, while delivery, the supplier provides only 20 pieces of materials to the storeroom staff and prepares their invoice showing 20 pieces only. The storeroom staffs count 20 pieces and store them in the inventory. On the other hand, the purchasing team is provided with another invoice showing 25 pieces of materials for which, they make payments. As a result, the company has to pay for 5 pieces of materials extra. |
The main control that can be implemented to mitigate weakness is to develop a suitable communication system between the storeroom department and the purchasing team (Evans et al., 2015). It is clearly identified that there is a lack of coordination between the two teams and hence, the issues are occurring at a continuous basis. Once a suitable communication system is developed along with the assistance of information system for keeping track of purchases, the highlighted issue can be easily solved and addressed. |
Recently Information Technology has progress a lot in terms of new developments that can be utilized by users and organizations. Information systems are now sufficiently developed to provide the organizations implement a wide range of features like online inventory system, inventory tracker and others that help to establish certain framework changes within the organization’s operational strategies. In addition to keeping track of the raw materials received and the amount paid, the information system can also be used to determine whether the errors are occurring on accident or on a continuous basis. Based on the reports, the company can change the vendor if necessary. |
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One major internal control weakness related to the process is that the invoices used by the seller and stored by the purchasing team are all paper documents and the orders are placed through phone calls. Paper documents and invoices can easily be tampered, lost or destroyed and hence, these are not reliable versions of purchase documentations. In addition, paper documents also take up huge amount of physical space and for analyzing the documents, manual labor is required that consumes huge amount of time. |
There are several impacts of this weakness that are listed as follows (Benaroch & Chernobai 2015). Paper documents can be easily tampered by anyone. Paper documents can be easily destroyed, thus some invoices can be destroyed or lost. Paper documents like invoices are stored in files. This not only takes up space but also when there are multiple numbers of files, it becomes a very time consuming effort to find out one particular piece of document. With the use of paper documents, the records of purchases need to kept entered into the database manually one by one, which is also very much time consuming and error prone. |
The main control that can be identified for this case is the use of online documents for the entire purchase process replacing the paper document system. This will not only speed up the process but also provide the organization with certain benefits. The suggested process includes ordering the materials online directly to the seller, filling up online form by the seller regarding the supply of requested materials, online update by the storeroom staffs upon receiving the materials from the seller, verification of the delivered items by the purchasing team, generation of online invoice, making online payments and others. |
A cloud based ERP system is an effective solution to this particular control weakness. This ERP system will help the company to develop a better and more effective operational framework and business strategy regarding the handling of purchases. The ERP system will also help to integrate all the processes into one common system. |
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The final control weakness determined in the system is the lack of sufficient communication between the departments during the entire purchasing and material delivery process. The departments work on their own and report to the management separately. |
There are a number of various impacts of this particular control weakness of the system. These impacts are the summaries of the previous impacts described and effectively involve lack of coordination between teams, receiving inappropriate amount of materials from the supplier but paying for more, no tracking system for new and old orders as well as the inventory and others. |
The initial suggested control measure that needs to be taken is to develop an effective and communication system so that the different departments will be able to communicate with each other during their needs and maintain continuity in the operations. |
Implementation of communication devices like telephone, online chatting system and others can be done such that a personnel from one department can communicate with one from another stakeholder group. |
Conclusion
This report mainly discusses about the control weaknesses that are existing within the current operational structure for purchasing and management of raw materials. The current process involves ordering of raw materials by the purchasing team, delivery of the materials to the storeroom staff and finalizing payments for the materials by the purchasing team. Although each of the processes has its own systematic framework, they are not really connected with each other resulting in some serious gaps in communication as well as operations. Moreover, the departments are controlled by different personnel who are not used to communication between each other during the operations. As a result of this, several issues are starting to appear with more to possibly arise if not addressed on urgent basis. The issues that have been identified are resulting in financial losses for the company as well as slowing down the overall operational processes that include purchase, handling and movement of raw materials to and from the inventory. Hence, the recommended solution involves the implementation of modern information technology solutions that will not only link up the separately working departments but also make the overall system much more efficient and faster.
References
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