The main purpose of carrying inventory is to provide your customers with the goods and services they expect, when and how they expect them. Businesses make significant financial investment into inventory to facilitate the running of their business, for the purpose in which that business exists.
Holding inventory, however, comes with numerous risks that can negatively impact operations, customers satisfaction and profitability. Therefore, businesses must invest time and resources into reducing the risks associated with carrying inventory stock.
What is inventory risk?
Inventory risk is the probability of an organisation being unable to sell its goods or the chance that inventory stock will decrease in value. Many manufacturers, wholesalers and retailers have huge amounts of inventory and keeping track of one stock item is challenging enough but keeping track of thousands of SKUs can be a daunting task.
Understanding the seven common types of inventory risk and the potential impact on your business is the first step in helping to determine the best strategies for risk mitigation and to implement best practice inventory control.
1. Inaccurate forecasting
The goal of many a business is to achieve that perfect forecast, so you are ordering and selling the right inventory stock, in the right amounts, at the very time your customers demand it. Underestimating demand can result in stock outs, lost sales and potentially lost customers, while overestimating may leave you with excess stock that ties up cashflow and is at risk of waste.
Improve forecasting and make more informed purchasing decisions using inventory control software and automated inventory control processes. Online inventory control software uses real-time analytics to determine demand relative to your current inventory stock levels.
Integration of your online inventory control systems with RFID scanning and Point of Sales software helps companies to determine the most profitable product categories and the most popular types of products, helping to guide more strategic purchase decisions.
2. Unreliable suppliers
Supply-side inventory risks include the reliability of a supplier to deliver to the agreed lead time and adhere to stock quality and quantities. The impact of underperforming suppliers through failure to meet delivery schedules or quality standards can result in production delays, inventory stockouts and customer dissatisfaction.
An unreliable supplier is when they quote one lead time then deliver early or late, meaning you fluctuate from having too much to too little stock. The wider the gap between early and late deliveries, the greater the level of risk and uncertainty.
Ensure purchase orders clearly specify the exact delivery date expected for each item. Supplier contracts should clearly detail how the supplier will be held accountable for late or inaccurate deliveries.
Good supplier relationships are a must for minimising inventory risk and if you continue to have erratic supply issues, it may be time to find a more reliable supply source.
3. Shelf life
Perishable goods and products with a shelf life pose another risk to inventory control, the shorter a product’s shelf life the greater the inventory risk. For manufacturers, this requires robust manufacturing and inventory control practices.
Wholesalers and retailers should adopt a minimal stocking approach, especially regarding perishable items. Stock monitoring and rotation helps to clear older stock before it expires, and rotating spot checks should be frequently undertaken for top sellers, perishables and expensive items.
One of the biggest risks associated with inventory control is theft, especially when it comes to high-value inventory stock. Companies spend millions of dollars annually on security measures to safeguard inventory and prevent theft, however it still occurs on a regular basis.
Theft can occur in several ways — it may be opportunist, a thief walking out of a low-security warehouse after helping themselves to a box of T-shirts, cleaning staff taking advantage of being in-store alone after hours or an employee getting creative with inventory stock adjustments to move products from the inventory control system.
For manufacturers, cycle counting ensures that inventory is frequently checked for accuracy making is easier to spot theft because discrepancies are identified sooner rather than later. Retailers can implement different control measures such as self-alarming antitheft tags that sounds an alarm when a shoplifter attempts to remove it from the store or electronic cash register transactions that prevent employees from ringing up goods for less than their actual cost.
Inventory is an asset on a company’s balance sheet therefore whenever inventory is lost, the asset is written off the company books, essentially reducing the equity of a company because equity equals total assets minus liabilities. Writing off inventory stock reduces assets and equity as a result.
Inventory loss occurs in the form of the physical loss of a product or when errors occur during the receipt of goods. Goods can get lost through poor inventory control or mishandling by employees therefore online inventory control systems and automated inventory control can help to identify the cause of each loss to prevent future losses and reduce costs to the company.
Damage generally occurs during normal business operations and certain industries will have a higher risk of damage than others. Damaged inventory stock that cannot be used becomes waste and increases costs to the business.
Industries with the risk of high damage need inventory control policies in place to minimise damage. For example, where items are prone to crushing businesses may set a maximum stack height for cartons to reduce the risk, even when pallets can hold significantly more weight.
7. Life cycle
Product life cycle refers to the market phases of product introduction, growth, maturity, decline and withdrawal that all products experience. Goods entering the final two phases of their life cycle become high-risk inventory and manufacturers need to balance the production of parts and units to meet existing demand while avoiding overproduction that sees then stuck with obsolete inventory.
Retailers should keep abreast of market trends to ensure they are not over-ordering inventory stock in its decline or withdrawal phase. Online inventory control and data analytics will help to identify products entering this phase so that retailers and wholesalers can avoid overstocking and being left with the expense of unsaleable obsolete stock.
Mitigating inventory risk
Keeping track of inventory stock using cloud software and online inventory control tools ensures that you are working with real-time information. It optimises forecasting and provides accurate, real-time inventory data to manage stock and mitigate inventory risk.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.