Causes of Inventory Discrepancies And How to Prevent Them
Inventory discrepancy happens when there is a, well, discrepancy between the quantity of items you have at hand and what appears in your system.
Picture this: Stacy, a clothing retailer dealing in women’s beach wear, has received a bulk order for 150 Palazzo pants from one of her customers. She accepts the order, believing she has enough stock to cover it. She uses a spreadsheet to manage inventory, and currently, it reports 235 Palazzo pants on hand.
But as she sets out to fulfill the order, she realized she has only 85 pants on hand, contrary to what the spreadsheet was reporting. The difference is huge. Inevitably, this inventory management mistake costs her that sale.
This is inventory discrepancy at play here.
In this post, we discuss a little more what inventory discrepancy is about, its consequences, and how to prevent it.
What is the Definition of Inventory Discrepancy?
Inventory discrepancy is a phenomenon that occurs when there is a mismatch between the physical stock count and the inventory recorded in the inventory records, often due to differences between recorded inventory levels and the actual inventory count. This can lead to several challenges, including financial losses, disrupted supply chains, and dissatisfied customers.
Inventory shrinkage, such as losses from theft, damage, or spoilage, can also cause differences between recorded inventory levels and actual stock.
It can also lead to missed sales opportunities and costly inventory errors, as inventory discrepancies affect business operations, financial accuracy, and customer satisfaction.
How Does Inventory Discrepancy Impact Your Business?
Failure to keep accurate inventory records can lead to discrepancies in your stock levels, and this can affect your business adversely in many ways. Here are some of them:
Financial Impact
Revenue Loss: Inventory discrepancies can lead to understocking, which directly impacts sales. If a product appears to be out of stock due to inaccurate records, you miss out on potential sales. Conversely, overstocking, which may occur due to overestimating inventory needs, ties up capital that could be used more effectively elsewhere.
Increased Costs: Solving inventory issues often involves additional labor costs in recounting and auditing, not to mention the potential need to expedite shipping to fill unexpected stock gaps. Moreover, discrepancies often lead to markdowns to move overstocked items, reducing profit margins. Inventory shrinkage, losses caused by theft, damage, spoilage, or errors, can further increase costs and negatively impact overall profitability.
Operational Impact
Supply Chain Disruptions: Inaccurate inventory data can cause ripple effects throughout the supply chain. It complicates the reordering process, potentially leading to either excess inventory or stockouts. Both scenarios are detrimental, as they prevent the business from operating efficiently and responsively.
Warehouse Inefficiency: Discrepancies often result in additional time spent locating missing items or managing surplus stock, reducing overall warehouse efficiency. Inaccurate tracking of storage locations can lead to misplaced inventory, making it difficult to locate products and causing further discrepancies between physical stock and inventory records. This can delay shipping times, affecting customer satisfaction and increasing operational costs.
Customer Satisfaction
Unfulfilled Orders: Customers expect their orders to be filled promptly and accurately. Inventory discrepancies that lead to stockouts can result in unfulfilled orders, delayed shipments, and cancelled orders, all of which harm customer trust and loyalty.
Brand Reputation: Frequent stock issues can tarnish a brand’s reputation. In the age of social media, a few negative reviews about product availability can quickly escalate into a broader perception problem, affecting customer loyalty and prospective sales.
Strategic Impact
Effective inventory management relies on accurate data to forecast demand and make purchasing decisions. Discrepancies skew this data, leading to poor strategic decisions regarding product lines, promotions, and expansion.
Loss of Competitive Edge
In a competitive industry like fashion retail, the ability to quickly respond to market trends and customer demands is crucial. Inventory discrepancies slow down this responsiveness, giving competitors the opportunity to capture market share.
Streamline your processes with a tailor-made inventory management solution.
Causes of Inventory Discrepancy
Understanding the causes of inventory discrepancy can help you prevent it from occurring in the first place. Here are some of the notable causes:
Human Error
One of the most common causes of inventory discrepancies is human error. This can occur at various points in the inventory management process:
Data Entry Mistakes: Incorrectly entering data into inventory management systems can lead to significant discrepancies. This includes typing errors, miscounting items during receipt or shipment, and mislabeling products.
Manual Counting Errors: During physical counting, simple miscounts can happen, especially with large volumes of stock or during rushed auditing processes.
Process Inefficiencies
Operational inefficiencies can also lead to inventory discrepancies. These include:
Inadequate Training: Employees who aren’t properly trained in inventory management practices are more likely to make mistakes that lead to discrepancies.
Poorly Defined Processes: Lack of standardized procedures for receiving, storing, and shipping inventory can result in inconsistent handling of stock, leading to inaccuracies. Streamlining and automating inventory processes can help reduce errors and improve accuracy.
Theft and Misplaced Inventory
Unfortunately, theft and mistakes due to misplaced inventory are also significant causes of inventory discrepancies in the retail sector, including:
Internal Theft: This involves employees stealing merchandise from the warehouse or store. Such actions not only lead to direct product loss but also skew inventory records.
Shoplifting: External theft by customers or visitors can also cause inventory levels to fall below what is recorded, especially in high-traffic retail environments.
Technological Issues
Technology plays a crucial role in inventory management, but it can also be a source of problems:
System Errors: Software glitches or failures can lead to incorrect inventory records. This could be due to bugs in the system, improper integration with other platforms, or outdated software.
Barcode Scanning Errors: Misreads or failures to scan can result in items not being recorded during transactions or stock movements.
Supplier Discrepancies
Issues with suppliers can lead to inventory mismatches as well:
Receiving Errors: If items aren’t checked properly upon receipt, discrepancies can arise from the outset. This includes receiving the wrong items, incorrect quantities, or damaged goods that are not immediately identified.
Shipping Errors: Mistakes in packing lists or shipments from suppliers that do not match the purchase orders can lead to discrepancies that might only be discovered during subsequent auditing.
Inventory Shrinkage
Inventory shrinkage is basically another form of discrepancy. It happens when the inventory you have on record doesn’t match what you have physically on hand.
More often than not, inventory shrinkage is caused by accounting errors.
Damages and Spoilage
In the apparel industry, damages and spoilage can also lead to discrepancies:
Damaged Goods: Items that are damaged in transit, in storage, or on display can sometimes go unrecorded, especially if the damage is not immediately apparent.
Unsellable Returns: Returns that are damaged or otherwise unsellable and that are not properly accounted for can lead to inventory inaccuracies.
Mismatched Inventory Counts(Physical Counting)
Mismatched inventory counts happen when the actual physical inventory in your warehouse doesn’t match what’s recorded in your inventory management system. This type of inventory discrepancy can lead to a host of problems, including stockouts, overstocking, and ultimately, lost sales. Common causes include human error during data entry, mistakes made during physical inventory counts, and supply chain issues such as shipping errors or mislabeled products.
To tackle mismatched inventory counts, it’s essential to implement robust inventory management processes. Regular audits and physical inventory counts help catch discrepancies early, while barcode scanning and RFID technology can automate inventory tracking and minimize errors. Proper employee training is also crucial—ensuring your team understands how to accurately enter data and follow inventory management procedures reduces the risk of mistakes.
By maintaining accurate inventory records and using your inventory management system to monitor stock levels in real time, you can quickly identify discrepancies and take corrective action. This proactive approach not only helps minimize errors but also ensures your inventory levels are aligned with customer demand, supporting smoother operations and better customer satisfaction
Strategies to Prevent Inventory Discrepancies
Here are practical ways to reduce and prevent inventory discrepancies in your apparel retail business:
1. Enhance Training and Education
One of the foundational steps in preventing inventory discrepancies is ensuring that all personnel involved in inventory management are well-trained. Proper employee training programs should cover:
Proper handling and scanning of products.
Accurate data entry techniques.
Understanding of the inventory software and systems used by the company.
Ongoing employee training also helps prevent future discrepancies by ensuring staff are up-to-date on best practices.
2. Standardize Processes
Creating standardized procedures for every aspect of inventory management can help minimize errors. Standard procedures should include:
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Detailed steps for receiving, storing, picking, and shipping inventory.
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Regular inventory audits and cycle counts.
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Clear guidelines for dealing with returns and damaged goods.
Implementing these standardized processes won’t only help minimize inventory discrepancies but also improve operational efficiency.
3. Utilize Automated Systems
Leveraging technology can significantly reduce human error and improve inventory accuracy. Consider investing in:
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Robust inventory management systems that update in real time and can integrate seamlessly with other systems like POS and e-commerce platforms.
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Barcode scanning systems to ensure accurate tracking of inventory movements.
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RFID technology for high-value items to enhance tracking and reduce theft.
4. Implement Regular Audits and Cycle Counts
Regularly scheduled audits are crucial in catching and correcting discrepancies before they become larger issues. Strategies include:
Conducting cycle counts frequently, where a small subset of inventory, categorized by type or location, is counted on a rotating schedule.
Annual full physical inventories to reconcile with inventory records and adjust any persistent discrepancies.
5. Improve Security Measures
Theft and fraud can lead to significant inventory discrepancies. Enhancing security measures can help reduce these risks:
Security cameras and anti-theft systems in warehouses and retail locations.
Strict access controls to inventory storage areas.
Regular reviews of security footage and access logs to detect suspicious activities.
6. Foster a Culture of Accountability
Creating an environment where staff feel accountable for inventory accuracy can lead to more careful handling and reporting. Encourage this by:
Assigning responsibilities for inventory counts and audits to specific team members.
Implementing checks and balances where different staff members verify counts and data entry.
Offering incentives for maintaining accuracy in inventory records.
7. Regularly Update and Maintain Inventory Systems
Keeping your inventory management systems up-to-date ensures that you are using the most efficient tools available, which can reduce errors and improve overall inventory management. Regular updates and maintenance also help ensure accuracy in inventory records and processes. This includes:
Regular software updates and maintenance.
Upgrading hardware such as scanners and tablets used for inventory management.
Training sessions following system updates to keep all users proficient with the latest functionalities.
Streamline Inventory Management With Uphance
Utilizing advanced inventory management software, as discussed earlier, can be instrumental in minimizing, if not completely eliminating, inventory discrepancies.
If you run an apparel retail or wholesale business and are in need of an inventory software you can count on, Uphance is your best bet.
Uphance takes the headache out of managing your inventory by enabling you to automate inventory management processes. From robust inventory stocktakes and putaway to real-time inventory adjustments to streamlined warehouse management, Uphance brings all the tools you need to manage your inventory accurately in one place.
Schedule a demo right away to see Uphance in action.
Inventory Discrepancy FAQs
Let’s say you sell sneakers. Your system shows you have 200 units of sneakers in your warehouse that haven’t been ordered yet by the time the first quarter of the year ends.
Then you perform a physical inventory count, only to discover you only have 175 shoes, not 200. This is an example of inventory discrepancy.
To handle inventory discrepancies and errors, conduct regular audits, train employees thoroughly, and analyze discrepancies.
When facing inventory discrepancies, take these steps:
- Conduct a Recount: Verify the count to ensure accuracy.
- Investigate Causes: Identify if errors are due to theft, misplacement, or administrative mistakes.
- Update Records: Correct the inventory records to reflect accurate data.
- Review Procedures: Assess and improve inventory management processes to prevent future discrepancies.
