Managing your company’s inventory is a crucial factor for its effective work. It allows companies to keep proper stocks and process orders quickly without any additional expenses for your business. Unfortunately, controlling the company’s inventory is quite difficult when the amount of stock stored in the system differs from the real stock amount. Such mismatches are called inventory discrepancies.
There are various causes of inventory discrepancies: people’s mistakes, wrong data recording, stealing, damaged products, late updating of stock amounts, etc. As a result, the inventory management system might show you that there are 500 pieces of a product, while you have 470 pieces in reality.
Thus, inventory discrepancies can cause some unpleasant consequences for your company, such as unexpected out-of-stock situations, late order processing, additional expenses, and disappointed clients. To prevent such problems, businesses need to use some inventory management strategies.
This blog will help you learn about common reasons of inventory discrepancies, ways of their detection and correction, as well as prevention techniques.
What Are Inventory Discrepancies?
Inventory discrepancies pertain to the discrepancies existing between the number of units of stock recorded by an inventory management system and the actual physical stock held in a warehouse.
In theory, the two numbers should be the same. However, there may be a discrepancy when goods are received, stored, moved, picked, packed, or shipped in the absence of necessary documentation.
Suppose a firm has 200 units of a particular item in the record and 180 units of the same in its warehouse. In that case, there exists an inventory discrepancy of 20 units of the stock.
The two types of inventory discrepancies are as follows:
- Negative inventory discrepancy: The physical stock is less than the number of units recorded in the system.
- Positive inventory discrepancy: The physical stock is more than the number of units recorded in the system.
Why Is It an Issue When a Company Has Inventory Discrepancy?
Inventory discrepancy could become a problem to the business in various spheres of its operation, such as management of the warehouse or accounting of funds. The following issues may arise.
Increased Cost of Operations
If the inventory data is inaccurate, then extra effort needs to be applied by the warehouse staff. The company may face several stock counts, investigation of missing items, updating records, and making replenishment orders.
Such actions are time-consuming and raise the cost of labor, as well as lower the efficiency of operations.
Stockout and Overstocking
When there are more items on the record than in reality, then the company agrees to receive orders on unavailable items. As a result, there will be stockouts and cancellations.
On the other hand, when there is less stock according to the system, then the company will buy extra products, thus experiencing overstocking.
Poor Customer Experience
The customer expects accurate details about product availability and delivery within specified time frames. Accepting orders for products that are out of stock will result in order cancellation, refunds, and delays for the customers.
Such occurrences will make the customers lose trust and have a negative impact on the reputation of the business.
Inaccurate Financial Reporting
Inventory is an essential component of the total assets of the business. If the physical inventory does not coincide with the records of the business, the company will record erroneous inventory figures.
10 Most Frequent Reasons Behind Inventory Discrepancies
There are various ways through which inventory discrepancies can arise. Knowing their reasons helps in identifying the issues and taking actions.
1. Mistakes While Manually Counting the Inventory
In manual counting of the inventory, employees have to count the products themselves physically. In this process, there can be some mistakes made in terms of omission of items, double counting of items, or incorrect input of the quantities.
For instance, during the counting process, the employees may incorrectly input the amount to be 120 units rather than 102 units.
Using standard counting methods, use of bar code scanner, and proper training of the employees can help prevent these errors.
2. Incorrect Data Input
Another common reason behind the occurrence of inventory discrepancies is the data input mistake. This happens because of the fact that the employees may put wrong data regarding quantity of product, SKU, and other details.
For instance, if 150 units are received by the company, but the employees enter only 105 units.
- Receiving Errors and Supply Shortage
Discrepancies arise when the quantity of purchased items does not match with the number of items actually received in the order.
Sometimes suppliers may send less quantity, wrong items, or damaged items in the shipment.
For instance, if a company purchases 200 items but gets 180, then recording 200 in the stock records will result in an incorrect stock balance.
Companies should ensure that the delivery is compared with purchase orders before adjusting inventory records.
- Thefts and Inventory Shrinkage
Thefts are one of the reasons for inventory shrinkage. Products could be stolen by employees, unauthorized persons, or during transport.
When products are taken away without any recording, the inventory system will show the previous quantity of products.
Companies can avoid such problems through use of security cameras, limited warehouse access, frequent auditing of stock, and proper inventory records.
- Damaged, Missing, and Expired Products
There could be damaged, missing, or expired products due to storing, moving, and shipping process. Failing to remove such products from the available inventory records will make the inventory system to show incorrect inventory.
For example, if 10 out of 100 units become damaged but remain listed as available, the recorded inventory will be inaccurate.
Regular product inspections and separate records for damaged or expired goods can prevent this issue.
- Wrong Picking and Packing
In case employees make wrong picking and packing of the products and quantities during the order processing, picking and packing mistakes take place.
If a customer orders two products but due to mistake of an employee, three products are shipped, the system will register two units, thus, the amount of products registered will exceed the true quantity.
Barcode scanning, picking list and order verification will help to avoid these mistakes.
- Lack of Proper Recording of Inventory Transfer
Businesses having several warehouses often transfer products between them but discrepancies can appear in case the product transfers are not properly recorded.
For instance, if 50 units are transferred from Warehouse A to Warehouse B but are not accounted for in the receiving warehouse, then inventory will be incorrectly registered.
It is necessary for companies to make proper record of inventory transfer.
- Delay of Inventory Update
The inventory should be updated upon the receipt of products, sales, transferring, return and shipment of them.
Nevertheless, companies which perform the updating manually may have discrepancies between the physical movement and inventory register.
It is necessary to use the real time inventory tracking system.
- Errors Due to Barcode Scanning
Barcodes facilitate the work of employees and help them track down the movement of inventory. In case of using the wrong barcodes, duplication of scanned data, poor condition of barcodes and errors in software, discrepancies will occur.
It is essential to have good control over scanning devices, product codes and system integration.
- Bad Warehousing and Poor Stock Placement
Bad organisation of the warehouse leads to the difficulty of finding and counting the products by employees.
If there is a similar stock and they are placed near each other, employees will be able to mistake some of them or miss them during the inventory process.
How to Identify Inventory Discrepancies
Early identification of discrepancies enables companies to avoid allowing minor stock discrepancies from growing into serious problems. Below are five ways through which companies can detect discrepancies.
Comparison Between Stock on Hand and System Information
Companies can conduct physical counts and compare the quantities with information in the inventory management system. In case the quantity of products shown by the system is 250 but there are only 235, then there is a discrepancy of 15 units.
Comparison between Purchase Orders and Deliveries
Comparing purchase orders against the number of goods delivered enables a company to detect cases where products have not been delivered, excessive quantities delivered, wrong products delivered, and damaged products.
Comparison of Order Processing Records
Companies need to audit picking, packing, and shipping records in order to detect whether the right products in the required quantities have been processed.
Inventory Adjustment Logs
Companies need to review the logs of inventory adjustments in order to know when the quantities have been adjusted, reasons for adjustments, and those who approved the adjustments.
Monitor any Unusual Fluctuations in Stocks
Monitor any unexpected increases or decreases in stocks without any transactions of purchases, sales or stock transfer. It will help the business in identifying any usual inventory problems.
How to Fix Inventory Discrepancies
When any difference occurs, the business should try to find out the cause of difference and correct its record. The following steps of inventory reconciliation can be helpful in doing so.
Step 1: Recount the Inventory Items
Recount the products that had differences. Try to appoint another staff member to verify the number of items counted.
Step 2: Review the Recent Transactions of Inventory
Review the recent transactions of purchases, sales, return, stock transfer and dispatched of the inventory to identify any missing transaction or error in transactions.
Step 3: Find out the Reason for Difference
Try to find out why the difference has happened, because of counting errors, stealing, damaged goods, wrong entry of transactions in the inventory record or other reasons.
Step 4: Correct the Records of the Inventory
After finding out the reason, the record of inventory needs to be updated.
Step 5: Record Changes and Assign Responsibility
Keep track of the original quantity, adjusted quantity, justification for the change, date, and employee assigned responsibility for the approval. This will increase accountability and facilitate auditing in the future.
Step 6: Assess the Impact of Corrective Actions
Carry out follow up inventory counts and analyse the inventory records to find out whether the corrective actions have led to an improvement in the accuracy of inventory data.
Eight Strategies to Avoid Inventory Discrepancies
The avoidance of inventory discrepancies is dependent on continuous monitoring and proper organization within the warehouse. These eight strategies can be followed by business organizations to prevent inventory discrepancies:
- Carrying out Regular Stock Counts: Conduct inventory counts on a regular basis and compare the quantity of the goods as recorded against the physical quantity. Cycle counting is a very effective practice where smaller quantities of inventory are counted periodically without disturbing the normal operations of the business.
- Use of Barcode Scanning: Employ barcodes to scan the inventory whenever there is receipt of goods, picking, packing, and dispatch.
- Organising Warehouse Stock: Set apart locations for different types of goods. Label shelves, racks, and storage bins properly so that goods can be easily located and counted.
- Training of Warehouse Staff: Give training regularly to your staff regarding counting of stock, handling of goods, scanning of bar codes, and inventory management procedures.
- Proper Receiving and Dispatch Process: Check the incoming goods with respect to purchase orders and the outgoing goods prior to their dispatch to make sure that the quantity is right.
- Monitoring of Inventory Loss: Record the amount of loss due to theft, damage, expiry, and human errors. Take precautions to avoid losses in stock.
- Inventory Tracking Software: Adopt an automated system for tracking stock, which will record the movements in the stock in real-time and will monitor the stock.
This will help business organisations minimise their mistakes and errors.
How Does Inventory Management Software Enhance Accuracy of Inventories
Manually managing inventories becomes quite difficult for organizations as they grow and receive more orders. The automation of stock control and inventory movements through the use of inventory management software makes things easy.
This is how it does it:
- Automatic Updates on Stock: Automatic updates regarding stocks each time products are bought, sold, moved within the organization or dispatched.
- Inventory Tracking Automation: Visibility in inventory levels at various locations in the warehouses.
- Barcode/SKU Management: Enables employees to know the products easily and minimize errors.
- Automatic Alerts on Stocks: Automatic alerts about low stocks of goods to help the company avoid stockouts.
- Easier Inventory Reconciliation: It helps in comparing the actual stock levels and the records in the inventory management software.
- Better Visibility in Multiple Warehouses: Ability to track stocks in multiple locations of the business.
- Stock Reports: It offers useful reports on stock movements, variation and availability of stocks in the warehouse.
Five Inventory Accuracy Metrics to Monitor
The following are some of the inventory management performance indicators that companies need to track in order to determine whether they manage their inventory effectively.
- Inventory accuracy rate
It measures how close the inventory records are to actual inventory.
Its formula is:
Inventory accuracy rate = (Correctly recorded items / total items counted) x 100
If 950 of the 1,000 items are correct in the record, then the inventory accuracy rate is 95%.
- Inventory shrinkage rate
This measures the loss in inventory resulting from pilferage, spoilage, and errors in inventory management.
Its formula is:
Shrinkage rate = (Recorded stock value – Actual stock value) / Recorded stock value x 100
- Stockout rate
It measures the frequency of being out of stock whenever an order request is made.
Its formula is:
Stockout rate = (Number of stockout events / Total demand events) x 100
- Inventory Turnover Ratio
Indicates the rate at which a company turns its inventory into sales within a particular period of time.
Formula:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Value
It enables companies to evaluate the efficiency of their inventory management.
- Cycle Counting Accuracy
Indicates the percentage of matching between the physical stock counts and inventory on hand during cycle counts.
Formula:
Cycle Counting Accuracy = (Matching Counts / Total Counts) x 100
It allows companies to find products and storage locations where mismatches happen quite often.
Conclusion
Inaccuracies in inventory may present various problems for business firms, such as lack of sufficient stock, delays in the delivery of orders, high operational costs, and inaccurate accounting information. They usually arise from mistakes made by people, pilferage, spoilage of goods, faulty entries of information, and inadequate organization in warehouses.
The prevention of these problems is through regular counting of stocks, accurate documentation of stock, barcode system, employee training, and sound management of inventories. Business firms may utilize computerized inventory systems that help to monitor the movement of stock in the warehouses.
Business firms may reduce their stock inaccuracies through proper documentation of stock and good warehouse practices.
FAQs
Inventory discrepancies are any differences that may arise between the quantity of the stock that is recorded in the inventory management system and the stock that actually exists physically in the warehouse.
They may include human error while counting the stock, data entry mistake, shortages from suppliers, theft of the goods, damages in the product, packing and picking errors, among others.
Companies may avoid inventory discrepancies through inventory auditing, barcode scanning, keeping proper record of goods, organized inventory, training of employees, and use of automation for inventory management.
The term inventory discrepancy implies the difference between the recorded and the actual number of items in stock. On the other hand, inventory shrinkage is defined as loss of inventory because of theft, damage, and other reasons. Inventory shrinkage is just one of the causes of inventory discrepancy.
