Inventory Adjustment Options in Dynamics 365 for Finance & Operations

During a Dynamics 365 for Finance & Operations* implementation, when introducing the functionalities available in the system to the key – and end users, we usually can group these into two categories:

• Functionalities the users are familiar with as they have been doing them (in one format or other) in their previous system – such as sales orders, purchase orders, etc.
• Functionalities that offer a whole new concept to the users as they never had anything similar available for them in previous resource planning systems.

The Movement Journal

The movement journal in my experience definitely falls under the second category and it takes a while for users to get off the one-track mindset, that any inventory adjustments have to be a profit/loss. So what is the movement journal and why do we love it?

Dynamics 365 for Finance & Operations actually offers four distinct functionalities for adjusting inventory:

• Counting journals
• Adjustment journals
• Movement journals
• Bill of materials

Counting journals are used when the adjustment is the result of a cycle counting (or tag counting) process. Discrepancy is discovered during the count and by entering the counted quantity onto the counting journal, then posting it, the system automatically uses the profit/loss GL posting settings for the adjustment. However, the transaction reference will always be the counting process.

Adjustment journals are used when a profit/loss type adjustment is made and is automatically using the profit/loss GL posting profile. It is a discrepancy that does not have a known origin, or in other words is unexplained. An example would be when during a picking process, it is discovered that the physical quantity does not match the system quantity. Users are usually familiar with this concept, as pretty much any ERP system has a similar functionality.

Movement journals are used when inventory needs to be adjusted in or out but with a known and identifiable cause/reason. Examples would be; taking inventory to a trade show, customer samples, tasting events, etc.

Users could manually select the GL account the transaction will be posted against, or in other cases set up different movement journal names with pre-defined offset accounts. Access to these can be limited with the use of user groups set up on the journal name. This is important, as most often the resistance to use movement journals comes from the fear of users selecting wrong journal types/offset accounts because the group in charge of inventory adjustments is usually very different from those that have control over posting profiles.

For most companies, the movement journal is a brand new concept and the initial reaction is mistrust. But if configured and designed properly, it is a very powerful tool for a company to gain a better understanding of the origin of their inventory adjustment transactions.

Bill of materials journals are used when inventory is being transformed from one item to a different one but without added value. It does not strictly fall under the quantity adjustment requirement we are discussing in this blog post, so there will be no detailed information provided here. Please keep an eye out for an upcoming blog post about bill of material journals!

In my opinion, part of the reason why it might take awhile for users to get used to the different options and their purposes, is the unfortunate naming of the movement journal functionality. To say that a journal is movement, new(er) Dynamics 365 Finance & Operations users often associate automatically to physical movement of inventory BETWEEN dimensions – but in Dynamics 365 that is called a transfer. I personally would be much happier if Microsoft decided to rename this functionality to something else. However, I do acknowledge that it is difficult to find an appropriate name for it. I definitely have not come up with one yet, so if you do, please contact them and offer your assistance!

So to recap, the main difference between an adjustment and a movement would be that adjustments are unexplained discrepancies, while movements are adjustments with known reasons, often created at the time of the inventory being taken out or brought back. As opposed to adjustments which most often happen at time of recognition of discrepancy.

An example for an adjustment would be when the picker is instructed to pick a certain quantity because according to the system it is available, but it isn’t found during the counting process. Additional searches/physical counts are conducted on the spot and the missing quantity is determined to be a write-off with no known reason. Might have been unreported damage, theft, etc. But there is no way of knowing.

Examples for the movement journal would be $0 value customer samples, internally damaged goods, samples taken to trade shows and often brought back into inventory later, representative samples, tasting events, etc. A food industry related company I worked for supplied their own offices with their products and whenever they had to refill the office supply from inventory, they used a movement journal and selected an offset account dedicated for the purpose.

It is really important for the company to think through all the scenarios and for controllers and accountants to determine what they would like to track separately in the GL. The one requirement the use of the movement journal creates is that GL accounts are created for all scenarios.

Another question that comes up often with this new option is who should do it. It is easy to allow the warehouse to use the adjustment and the counting journals, as they use pre-set posting profiles and there is no risk of the user posting to the wrong account. But with the movement journal, controllers do become nervous about the idea of warehouse personnel manually selecting general ledgers. Yet it makes most sense for it to be a warehouse functionality as the action itself happens in the warehouse. If we record it on paper and transfer the information for someone to enter into the system, it could feel like a step backwards. Let alone the fact that we are also inching our way away from the idea of real-time inventory, which typically is one of the greatest benefits of a fully integrated ERP system. Not to mention the possibility of typos or other types of user errors along the way.

The two most common solutions I have seen are the following:

• The movement journal itself is created in the warehouse but security rights are taken away from warehouse personnel to post the journal. This is done by a supervisor or warehouse manager after checking the data. This is the most common solution as usually this is exactly how the other quantity adjustment type journals are used and it also fits in the general idea of what kind of licenses warehouse users should have. As far as making sure the warehouse personnel are able to pick the right GL and the supervisor/manager is only validating, sometimes the simplest solutions are best; a cheat sheet on the wall of the warehouse listing the situation with the GL account code/movement journal name usually does the trick. An additional option is the above mentioned user group restriction for particular journal names.
• Information is recorded on paper in the warehouse and transferred to the office to an inventory clerk to record in Dynamics 365 Finance & Operations. Explain the disadvantages above.

Please feel free to connect with us if you have any questions about Dynamics 365 for Finance & Operations.

* Most customers still call it Finance & Operations, but Microsoft now licenses it as 2 different apps: Dynamics 365 Finance and Dynamics 365 Supply Chain Management. Read more details on the new licensing.