Inventory Adjustment Options in Dynamics 365 for Finance & Operations (Video)

TRANSCRIPT

Katalin: Good morning, everybody. Welcome to the Inventory Adjustment Options in D365 for Finance and Operations webinar. My name is Kat Kegel-Kundra, and I’m a senior business solution analyst with the AX/D365 finance and operations team here at Encore Business Solutions. And we are going to be talking about the different inventory adjustment options in the system today.

And I would like to start by saying that the subject of inventory adjustment options might seem a little basic, in fact, probably a little too basic to be talking about it in a setting like this one. But the reason I feel very passionate about bringing this subject to you is that over the years, I have seen numerous companies on either D365 for finance and operations or any of the previous versions of this system, who simply used adjustment journals and only adjustment journals to do any adjustments to their inventory. Which of course isn’t a best solution, but we need to know that it is a very simplified solution. And as such, it limits the ability to report on your data in a manner that would provide useful information for you. It seems to me that the other options that are available are either simply not explored at all during the implementation phase, or if they are explored, they are not necessarily presented properly.

And because most legacy systems that customers come from do not have different options for the different adjustment scenarios, users who are not presented these options properly by us, consultants, they don’t necessarily see the advantages of implementing several options to replace the one option. And then as a result, they simply decide to go ahead with what is familiar, which is the one option-only, which is a simple inventory adjustment. Okay?

So we are going to explore the other three options in Dynamics 365 today. That being said, I also need to note that this particular discussion is not aimed at the costing side of inventory adjustment, which is a complete other subject, and we could talk about that for quite in length, but we are not going to today. What we are going to talk about today is the four different inventory journals in Dynamics 365 F&O. And also keep in mind that all four options are available in previous versions of the system as well. I can tell you that they are available as far going back as 4.0. I’m not sure if they have available before that because that’s where I started my AX career. But realistically, there shouldn’t really be many companies out there operating on any older versions than that.

So we are going to be talking about the four options that are available to adjust your inventory. And all four of them have a different purpose to them. You would use them for different reasons. And as such, every single one of them are useful tools, and they provide you with the opportunity to analyze and improve your business if you utilize them properly. These four options are the inventory adjustment journal that I have mentioned before, the inventory movement journal, the bill of material journal, and the counting journal, okay?

So I would like to start by saying that during an ERP implementation, when we are introducing the functionalities that are available in the system that we are implementing to key users and subject matter experts. I usually like to group these functionalities into two very distinct categories. One would be the functionalities that the feature users are familiar with as they have been using them or doing these actions in one format or another in a previous system. And if I needed to use a couple examples, then it would be sales orders or purchase orders. These are functionalities that, in some shape or form, are present in any kind of ERP system, right? And then, the other big category would be the functionalities that offer a whole new concept to the users, something that they never had anything similar to available for them in any of the previous resource planning systems that they used.

So I’m going to follow this logic today in my presentation, and we are going to split these four journals in to two categories. So we are going to look at first the two that are functionalities that probably are familiar for the users. And these would be the inventory adjustment journal and the counting journal. These are both functionalities that they likely have used in some way in the past. And then we are going to be talking about the two that present a relatively new concept most of the time, and these are the movement journal and the BOM journal, okay?

So that being said, let’s start with the counting journals. So counting journals are used when the adjustment is the result of a counting process, and that could be a cycle counter at that content, depending on which one you’re doing, you would be using the right counting journal in AX or D365 F&O. But what we have to remember is that in scenarios when we’re using, or when we are supposed to be using, the counting journal, the discrepancy is always discovered during a count process. And by entering the counted quantity into the counting journal and then posting it, the system will automatically post the discrepancy both as a quantitative adjustment to our inventory, and also, it is going to post value adjustment into our GL.

And the important thing to remember is that the GL posting is going to go against a profit-loss-type GL offset account, and that’s what it’s going to be considered. It is going to be a profit or a loss type of adjustment. And the main reason for that is because the discrepancy that we discover is unexplained. And that’s important to remember.

When we are doing a counting process, when we’re performing a count process, and we discover that we have more or we have less of certain products than what we are expecting, very rarely are we able to go back and find out the reason why the discrepancy is there. At that point, we usually just consider that an unexplained discrepancy. And because the discrepancy is unexplained, it is a fair assumption that it is a profit or a loss, and simply that, a profit or a loss, okay? What we have to remember is that whenever an adjustment like that happens, the transaction reference on our inventory transaction will always be a counting journal. So that will always tell us on how did we discover this discrepancy, okay?

So the main points to remember here is that the situation to use the counting journal in is a count process. That could either be a planned count process or a count process that’s triggered by a certain situation happening on the floor. Then it’s important to remember that whatever discrepancy we discover is usually unexplained, and that as a result of that, the system will automatically post against a profit-loss-type GL offset account that we have set up previously when we configure the system. And we do not have the ability to change that, okay? So that was the counting journals very briefly.

And now we’re gonna move on to the other concept that users are usually familiar with, and that is the inventory adjustment journal. So the adjustment journals are used when a profit-loss-type adjustment is made and is automatically, again, posted against a profit-loss-type GL offset account, okay? The adjustment is also not part of a counting process, because then we would be using the counting journal. What we need to understand that if the right scenario to use the adjustment journal in this system is when the discrepancy does not have a known origin, or in other words, is unexplained, also, like I mentioned, not discovered during the count process.

So let me give you a real-life scenario here to explain. Say, during the picking process, the picker discovers that the physical quantity that is available on the floor does not match what the system requires him to pick. There’s less. There’s not enough for him to pick. He or she goes around, does a physical search of the area to make sure that the product isn’t misplaced, then goes to the warehouse administrator who conducted a quick transaction reviewing the system to make sure that the missing quantity is not a result of a wrongly-processed transaction that they can correct on the spot. And then when they discover that they are not finding the origin of this discrepancy, an actual inventory adjustment becomes necessary. So that being said, it is in fact a loss or a profit from that perspective.

Users are usually familiar with this concept, because as I mentioned, pretty much any ERP system will have something similar to it. The one very important thing here to note that adjustments of this type from a process auditor’s perspective, will always, always reflect negatively on our company. While the word profit here in the profit loss might seem positive at first, because the word profit we usually associate with something positive, right, but let’s remember that in this case it’s an unexplained profit, right?

It is understood, of course, that certain amount of unexplained inventory discrepancy goes along with the nature of any kind of business, all kind of businesses, right? But the higher these numbers are, the higher the values of these transactions posted against these accounts are, the more we can draw the conclusion that your control over your inventory is not necessarily as tight as it could or should be. So in this case, even if we have a profit, and that’s a high amount, that’s great. We just made some profit from somewhere. But at the same time, that is the result of not knowing and not understanding what’s going on regarding our inventory, right?

And even if you forget the auditor’s perspective and look at it from our own, simply using the adjustment journals, what it also doesn’t do is it doesn’t give us much information about the whys. And if there are business scenarios where we do understand the whys, simply putting them in the system through one and only one option will make us not have a record of the why. And years down the road, we won’t remember what exactly happened on the road. So that takes away the ability of being able to report on it and then potentially discover where we have to improve in our business.

So following these thoughts that I just explained, we arrive to the next inventory adjustment option in this system. And I need to mention, and that is the movement, the inventory movement journal, I need to mention that I think that this is one of those functions that is in the system that does not nearly get the fame that it deserves. That’s just my personal opinion. But I’m going to go ahead and estimate that out of the implementations I’m familiar with, not necessarily I have been actively involved in, but familiar with, which, going back 12 years of doing AX consulting, it’s a fair amount of implementations, probably less than 30% of them use the functionality, this particular functionality, the add all, okay? So that’s a pretty staggering number. And once we discuss the details, and I will give you a clear picture of what the movement journal offers, I really hope that you will be just as astonished at this number as I am, okay?

So we have further to do. Let’s jump into what does the movement journal offer for us. So movement journals are used when inventory needs to be adjusted, but what’s very important is that it needs to be adjusted with a known and identifiable reason, okay? What does that mean? What kind of examples can I give you to explain that?

Several of them would be trade shows, customer samples, tasting events. And we can go on and on depending on the actual business that we’re talking, or the industry, that we’re talking about. But I’m going to give you, or try to give you, some real-life examples to show you how certain companies I work with benefited from the movement journal, okay?

So one of the clients I worked with in the past was a coffee manufacturing company. And if you love coffee as much as I do, then you obviously understand that one of the big perks of working with a coffee manufacturer is having the ability to drink good coffee on the job. And of course, and they understood that, too. So they regularly stock their staff room with their own coffee that they made, and that was taken off of their inventory. So while this was an inventory adjustment in nature, of course, coffee disappeared from the inventory, right, so it has to be adjusted some way, this is not something that they wanted to be considered as a loss, because it wasn’t. This was a deduction of inventory with a very clearly understood and known purpose. And it was something that they factored in. It was a conscious decision that a certain amount of inventory would be used for this purpose. And they did not want this to reflect as an inventory control issue for their company. So for this particular business scenario, the movement Journal was great.

Now I can almost hear all of you saying, “Okay, so I would probably just create a dummy customer and just sell this product to this dummy customer.” And I have heard that as an option, but the problem is that in this system, that inflates the number of transactions that you have to do. Because we all know that once you put it on a sales order, then you have to post the packing slip to deduct it from your inventory, and then it sees there’s an open transaction. So you’d really have to pull that transaction through to have the ability to properly close your inventory, to properly cause your month, to properly close your financial year. So you will also have to issue an invoice to this dummy customer, and then you will have to accept payment against this. And yes, you can do that all with zero cost, but at the same time, you still create a lot of manual work, you still create a lot of dummy transactions that don’t need to be in your system, and it’s not a clear solution. So once we look at the movement Journal, you will see how much simpler this is.

Before we move on to that, let me just give you one more example, which is a completely different situation or scenario but also incredibly interesting, in my opinion. So I was working with a client who was trading grains and was also manufacturing all kinds of products for the food industry, proteins, that kind of stuff from these grains. And in their case, every time they moved their inventory, unloading from the trucks, loading into silos, emptying silos, etc., they were always losing a very small amount of inventory. Spills, you know, whatever have you, and also birds, by the way, which is incredibly interesting, or was for me, because I’ve learned that birds like to eat, and when they find these grains, they eat them, and that eventually amounts to an inventory adjustment, just for those of you who consider this interesting.

So anyhow, this was obviously inventory loss. But this wasn’t a lot that they wanted to consider an actual loss. This was an inventory adjustment of a kind that was factored into their business. It was part of the nature of their business. They did not have any kind of control over this. This could not have been changed. So again, these losses are factored into their operations, right? They were expected shrinkage of their inventory levels. But again, they did not want this to reflect as an inventory control issue, okay? So then again the movement journal came in and saved the day. And to the best of my knowledge, they have been happily using the movement journals for years by now.

So the concept of the movement journal is actually very, very similar…similar manner. The only difference between an adjustment journal and a movement journal is, movement journal, the user has the ability to select, to manually select the offset account that the transaction will be posted against, okay? With the adjustment journal, you don’t have that option. It will automatically get posted against the profit-loss of silicon that you have set up in your posting profiles when you configure it in your system, okay? Also, I need to mention that different journal names can have their own pre-defined offset accounts associated to them, but I will touch base on that a little later.

So that also means that very likely this new concept of the movement journals comes for most companies with the necessity to create new offset accounts, right, to be reflecting the purpose of these different inventory adjustments. And I’m going back to the two examples I gave you, obviously, the coffee manufacturing company had an offset account for staff consumption or stocking the staff room. I’m not exactly sure what naming they use. But they knew that whatever posted against that offset account was an inventory adjustment of staff room type, right? And the other client created an offset account for these calculated inventory losses during the operation, all right?

So at the end of the day, I need to mention that the movement journal and the use of the movement journal will allow us to look at our financial reports and be able to tell how much inventory was used to, for example, stock the staff room, and how much of our inventory adjustments were actual losses and were written off as a result of potential inventory control issues. It is very useful information for us to know, because that is what we base our business improvements on, right? If we don’t know where we need to improve, it’s very difficult to improve.

So on the screen, now you are seeing an example of the movement journal lines form, and you can see that you’re entering all the same information what you would be entering on an inventory adjustment journal: the posting date, the item number, the inventory, dimensions, as far as, you know, the site, warehouse bin location if applicable, and then any kind of product dimensions if you’re using them. Then you’re entering the quantity. Cost price works the same way it would work on adjustment accounting journals. And then there is the field for the offset account that you are able to select.

Now of course the other question, and that’s why I was showing you the screen, because I can hear the financially-minded people in the audience saying, “So are you saying that my user who’s going to do inventory adjustment is going to have control over selecting varied posts?” Yes, that is exactly what I’m saying. And that brings up the next question, which is usually who should have access to creating these journals. It is easy for a lot of warehouse to use the adjustment and the counting journals, right, because they use preset posting profiles. And as such, there is not really any risk of the user posting to the wrong accounts. But with the movement journal, controllers very often do become nervous about the idea of warehouse personnel manually selecting ledger accounts, and understandably so.

Yet from an operations perspective, it still makes more sense, the most sense, for it to be a warehouse functionality, because the action itself is discovered and it happens in the warehouse. So if you don’t give the warehouse personnel the ability to create movement journals, then we are forcing them to recording on paper, transfer that information to someone to enter into the system, and that really could feel like a step backwards, right? There is all the potential for error that comes in in that process. And also, let’s not forget the fact that if we did that, then we would start inching our way away from the idea of real-time inventory, which is one of the things that us working with the system take the biggest pride in, that the system allows you to have real-time information about your inventory.

So the two common solutions that I have seen utilized to resolve the who should use the system are usually either option one, where the movement journal itself is creating in the warehouse. So we’re allowing the people who encounter the problem to record the problem straight into the system, but security rights have taken away from the warehouse personnel to post the journal. So this will be done by a supervisor or a warehouse manager, who would check all the data, or an inventory control personnel, after checking all the data entered and verifying that the offset account is the correct one. This is the most common solution. This is exactly how all the other quantity adjustment type journals were designed to be used in the system, right? But it also does not allow the warehouse personnel to select the wrong offset account.

As far as making sure that they are able to pick the right GL, and the supervisor or the manager is only validating, sometimes the simplest solutions are the best. And, you know what, and that is a cheat sheet on the wall of the warehouse explaining the different scenarios and explaining what a GL account to use for each. And I have seen this utilized very successfully with companies. And then of course, option number two is the one that I have already mentioned, which is that we don’t allow the various personnel to have access to the functionality at all, and we are willing to take that step backward in the operation side of things in order to gain the information that the movement journal is able to provide for us.

One more thing that I need to mention that could potentially help with this decision is that when we are creating the journal names, because if you have worked with journals in AX or D365 for F&O, then you know that before you start using any kind of journals in the system, you have to create the different journal names that are applicable for that journal type. And it’s the same thing for the movement journal. You do have to create different journal names.

And then the idea would be that we can set up different movement journal names for each and every one of the scenarios that we would like to utilize movement journals for. And then for each and every one of these, as you can see on the screen, this is the journal name creation form. And for the particular movement journal for stocking the staffroom with coffee, we could preselect the offset account, and that will then automatically default onto the journal line when the user is creating lines into a movement journal that is using this journal name. Now I do need to mention that the user does have the ability to change it manually once we defaulted there, but it does take away quite a bit of the risk when they are not the ones who manually have to enter or select the account.

The other thing to mention, if you’re looking at the red arrow pointing at the “Private for user group” field is that we can limit the availability of journal names for a particular accounting user groups, okay? So we can create different user groups and let only that user group use the particular journal names that have the different offset accounts. So using the first example of the staff room, you may create a user group for only those people that we want to create these types of movement journals. And then when they are creating a new movement journal header and open up the journal name drop-down, only those journal names will show up for them that are available for whatever user group their user belongs to, okay?

And to close the introduction of the movement journals, I also need to mention another very important purpose or use of them. And I’m sure that those of you who are live on any versions of the system, even if you’re not actively using the movement journals, I am going to hazard a guess that there is at least one posted movement journal in your system. Because one of the very widespread uses of the movement journal is the opening inventory balance upload.

So when you’re cutting over from your…when you’re doing your cut over of the data, you’re cutting over from your legacy system, you would be likely creating an offset account in the new system for cutover purposes from bringing in your inventory for a system migration, right? And so if you think about it, the movement journal is the easiest way to utilize that offset account. You are doing an inventory adjustment that hits your inventory account, and then on the other side, it hits your specific offset created for system migration, okay?

So based on what we just talked about, I really hope that you like the functionality. I really hope that I raised some interest for the functionality. But I cannot move on without mentioning the very unfortunate naming convention of the movement journal. To say that it is a journal for movement, users often associate to actual physical movement, right, between potential inventory dimensions, like between warehouses, between bin locations. But that in this system is called a transfer.

Yes, I personally would be much more satisfied if Microsoft decided to rename this functionality, but I do need to acknowledge that it is very difficult to find the right name for it, an appropriate name for it, because transfer, we are already using adjustment, we are already using. So I have not come up with a better naming than movement journals yet, but if any of you in the audience do, then please contact Microsoft and please offer your help to them, offer your assistance, and let’s hope that we get a naming for it that’s a little less confusing.

And we have one more inventory adjustment option in this system to talk about, which is called the bill of materials journal. The problem we are seeing is that because the naming of this functionality includes BOMs, bill of materials, a lot of industries that are not manufacturing, especially discrete manufacturing industries, they don’t necessarily even want to explore the functionality, because they draw the assumption that if…

Melissa: It sounds like we’re having audio problems with Kat. Hi, Kat.

Katalin: I’m so sorry about that.

Melissa: That’s okay. I think you’re back now.

Katalin: Yeah, I’m sorry. I just got a message saying that I had issues in my audio connection, but it says that it’s being restored. Can you hear me now?

Melissa: Okay, we can hear you fine.

Katalin: Can you hear me now?

Melissa: Yes.

Katalin: Okay. I’m sorry about that. I should have probably mentioned, I’m so sorry I forgot to mention that I’ve been dealing with the internet problems lately. So while I’m doing this webinar, I’m keeping everything I can cross, so that my internet isn’t cutting out for the next half an hour. So apologize for any technical issues that come up. And please just bear with me and let me know if there’s anything any disruptions.

So back to the bill of material journals, I’m going to just start this section all over to make sure that none of the information is missing. So I was saying how I often see that companies that are not in the discrete manufacturing space don’t even have interest in exploring the bill of materials journal because they make the assumption that anything that includes BOMs, or bill of materials, is strictly related to discrete manufacturing, which this particular functionality isn’t.

This is used for when inventory is being transformed from one item number to a different one, but very importantly, without added value, okay? So, yes, it can be considered a very simplified production order when we grab Item number 1 and we make Item number 2 out of it without decreasing or increasing its inventory value. As such, it does not strictly fall under the quantity adjustment options in the system, but it’s definitely useful for eliminating unnecessary inventory adjustments. And that’s why I like to talk about it as an inventory adjustment option.

So let me just give you a couple…again, I think the easiest thing to do is to give you a couple real-life examples of how we can use or where we can use the bill of material journals. I have worked with several companies who occasionally swap the inventory from one item to the other. Because certain items were interchangeable, right? If they don’t have inventory of one, they simply used the other. Of course, for most scenarios, for most customers, they had their preferences. But if the need was there, they had the ability to swap them.

However, they needed to have the item number that was originally required on inventory to be able to deduct that from inventory and to ship that against the sales order, consume that into a production order. So to achieve that in most legacy systems, companies would do a negative inventory adjustment for the item they were swapping from and then do a positive inventory adjustment with the same inventory value for the item that they were swapping to, okay? Results? Satisfactory. Inventory gone, inventory appears, cost value is correct. And I’m not arguing that point.

However, we now have two transactions in the system that, go back to earlier in this presentation, that reflect inventory control issues. You have very limited options on reporting on these transactions separately and very clearly seeing when was this not me losing some of that products and then later finding some of that other product because I don’t know what I’m doing in the warehouse but rather it was a swap, right? And also looking at the data later…Oh, sorry, I was just explaining. So also the cost part of it is under manual control, right? You just have to trust the user to make sure that the cost value data of deducting that inventory, of the product they are swapping from, is going to be used as the cost value when they are adjusting in the product that they are swapping for. So there’s a lot of potential for human errors that can have an impact on your costing, right? So that’s one of the very common business scenario is for the BOM journals.

And then the other one is, if your company sells kits of any kind, but you also sell the component as individual products of these kits…and I need to mention that only is it relevant for the situation if your kits don’t include any additional assembly value added to them, but they are simply the sum up cost value of the component, right? So the same concept applies, right, if you only have the components on stock, but you get an order for the kit, and the kit has an item number that’s what’s on your sales order, so somehow you need to make those components disappear from your inventory and the kit appear on your inventory. And the BOM journal works fantastically for this scenario as well, okay?

The advantages that it gives is that it gives a transaction origin type, BOM journal, and that allows for reporting on these transactions completely separately from inventory adjustments. So you will always know that these adjustments in and out were not inventory control issues. And it also controls the costing automatically of these updates. And it always makes sure that the value of the negative lines that you are adding into the positive line equal, okay? So there’s no room for human error on that. So that’s the BOM journal.

The reason why we call it BOM journal, and that’s what I need to mention, is because you have the ability to manually create these lines and manually say, “I am deducting this, this, this, and this to make this,” but it also works beautifully with bill of materials. So you have the ability under the Functions button on the top to select Create from BOM, and then using the latest business scenario, which was the kit, if you set up the kit as a bill of material in your system, you can simply say, “Explode the BOM here, and create the lines for me.” So create the first line, that is the kit, that is the product that the BOM is to create, and then explode the BOM lines there for me, okay? And then you just modify the quantities, and then we will know exactly how many of each of the components you will need to deduct to create three, four kits. All right. So that’s the bill of materials.

And I have talked to you about all the four inventory adjustment options and the different business scenarios, when they would be useful, that I aimed to talk about today. So if you have any questions, please let me know, and let’s discuss them.

Melissa: That’s great. Thanks, Katalin. We’ve got the questions pane, so anyone can type some questions in there. I don’t see anyone right now. Or you could raise your hand, and I can unmute you. Okay, I’ve got one here. What does the BOM line mean in the BOM journal? The BOM line.

Katalin: Oh, very good question, actually. So there are two different types of lines in the BOM journal. One is what we call the BOM line, and that’s the one where the checkbox is marked. And then there’s the non-BOM-type line where the checkbox isn’t marked. And if you look at the two lines on the screenshot that I have up on the screen, you see that the BOM-type line is the negative one and the non-BOM-type line is the positive one. So the BOM-type line is going to always be a deduction, and the non-BOM-type line is going to be the positive quantity that you’re adjusting in. So that checkbox is the one that differentiates better it is the type of line that I’m adding onto my inventory, or it is the type of line that I’m deducting.

Now why do we need this? It would be a very logical question if you just looked at the example I have on the screen, right, it’s a one-to-one, right? But there is no such limitation for the BOM journal. So what I usually recommend that you create one BOM journal per one positive adjustment and then just put whatever negative lines for that one adjustment you want to do. That’s not a system limitation. You are able to create one BOM journal and put in five different products that you’re going to create, swap two, and then create 20 different negative lines. But in that case, you need to select the lot ID to make sure you pair them up. So the system will know which negative goes into which positive.

So if you look at the business scenario, it will know what components go into which kit, so to say. And for that to work properly, that’s how we have the differentiation or the distinction of BOM-type line and non-BOM-type line. And if you are like me, then even after 12 years of using this function, you still forget which one stands for which, because I do every single time. I know there’s two, I know what they stand for, but I always forget which exactly is the BOM line and which is the non-BOM line. But the system is very smart and guides you through it. Because when you create the first line, you will see that when you create a journal line wherever in the system, the quantity will be automatically one on that line. And the system will be smart. So if you create a BOM-type line, it will give you a minus one. And if you create a non-BOM-type line, it will give you a plus one. So it will always let you know which one stands for which, and it will not let you change that. So if you tried adding a negative value to a non-BOM-type line, when you’re saving that line, an error message would come up and tell you that that’s not the right combination, okay? I hope I answered the question.

Melissa: Great, thanks. Just checking. I don’t see any other questions. I don’t think anyone is raising their hand. I’m having technical difficulties here as well. My mouse… No, I don’t see any other questions. So I think we’re…

Katalin: So if there is no other questions, then please just take a last look at the presentation, because you might remember that you wanted to ask something later. And if you do, please don’t hesitate to contact us, or contact me directly, and I would be more than happy to answer those questions at any given time.

Melissa: Okay, thanks, Katalin.

Katalin: Thank you very much.

Melissa: Okay, everyone have a good day. Bye now.