Which variances to investigate first: ranking by value
In a variance list of hundreds of lines, high-value items come first. Building a priority table by value, quantity and how often the item recurs.
The count is over and you hold a variance list of 280 lines. If the list is sorted by item code, a 2,000-piece button difference sits at the top, and dozens of lines further down is a fabric difference worth hundreds of dollars. It is not possible to give every line the same care; the first place to look is the items of high value. This article shows how to build a simple priority table from value, rate and recurrence.
Why sorting by quantity misleads
Different units cannot be added up or ranked in one column: 2,000 buttons, 300 metres of fabric and 1 sofa set are not the same size of problem. Quantity makes sense only when comparing two counts of the same item. The common yardstick across items is value: absolute difference × unit cost. Shortages and surpluses are first converted to absolute values; if you rank by signed value, the large shortages sink to the bottom of the list.
Example: a priority table of six lines
An illustrative variance list with assumed unit costs, sorted by value:
- poplin fabric: −300 m × 2.40 USD = 720 USD;
- Roma sofa set: −1 set × 420 USD = 420 USD;
- ceramic 60×60 grey: −36 cartons × 9 USD = 324 USD;
- silk fabric: −12 m × 18 USD = 216 USD;
- zips: +500 pieces × 0.15 USD = 75 USD;
- buttons: −2,000 pieces × 0.02 USD = 40 USD.
The total absolute value is 720 + 420 + 324 + 216 + 75 + 40 = 1,795 USD. The first three lines come to 1,464 USD, about 82 per cent of the total (1,464 ÷ 1,795 = 0.816). Sorted by quantity, buttons would come first; sorted by value, they come last. This ranking also decides which three lines the team starts with on day one; all figures are examples.
Rate and recurrence: the second and third criteria
Value alone is not enough; a small amount can be the sign of a serious process problem.
- Rate: the difference ÷ the recorded quantity. The poplin difference is 6 per cent of 5,000 metres (300 ÷ 5,000). Silk is only 80 metres in the record, and 12 ÷ 80 gives 15 per cent; the amount is small, but the rate calls for a separate look.
- Recurrence: if the same item showed a difference in the same direction at the previous count, a one-off error becomes less likely. Suppose the zips also showed a surplus last time; that is why the 75 USD difference moves up.
A written threshold and three priority levels
Write the thresholds before the count. An example layout:
- Level one (immediately): the difference is above 300 USD, or the item showed a difference in the same direction at two counts in a row.
- Level two (this month): the difference is between 100 and 300 USD, or the rate is above 10 per cent.
- Level three (monitor): the remaining lines; a bulk review is enough.
In the example, poplin, the sofa set and ceramics fall into level one (720, 420 and 324 USD, all above 300), and the zips stay in level one because of recurrence. Silk lands in level two on both 216 USD and 15 per cent, and buttons drop to level three. Attach an owner and a deadline to each level: level one within three working days with the warehouse manager and the accountant, level two by month end, and level three is raised if the item appears again at the next count. Thresholds differ from business to business; what matters is that they are written before the count, not after.
Common mistakes
- calculating at selling price instead of cost, so the amount looks larger because profit is mixed into the difference;
- netting shortages against surpluses before ranking;
- recounting every line before ranking anything;
- leaving the remaining lines without a cause; even level three items should carry a "cause" column.
In short
However long the variance list is, most of the value sits in a few lines, and ranking lets you spend time in the right place. In its head-office summary StockSystem gives the largest variances, their weight in value and the recommended actions on one page.