An inventory discrepancy happens when the actual on-hand inventory stock is different from the item quantity recorded in an inventory system.
Discrepancies are not uncommon and can have a substantially negative impact on any business operation. Undetected stock discrepancies can result in lost sales, overstocking and poor customer service.
Frequent causes of inventory discrepancy
Most inventory discrepancies are caused by human error or flaws in inventory control procedures. They can vary from shrinkage through to theft, misplaced stock to simply by placing inventory stock in the wrong location.
1. Inventory shrinkage
Shrinkage, a leading cause of discrepancy in your inventory stock, accounts for on average over one percent of total retail sales. Shrinkage occurs through such means as clerical errors, shoplifting, employee theft and supplier fraud.
2. Misplaced inventory
Misplaced inventory occurs when items are receipted into stock then placed in the wrong aisle, shelf or bin. It is also caused by customers picking up products and placing them in a different location.
3. Human error
Human error can account for a variety of discrepancies at any point along the supply chain and is a major contributor to discrepancies in inventory counts. From errors in physical counting to scanning errors and mistakes in picking and placement.
One of the easiest ways to minimise human errors is to provide adequate staff training. You could also simplify processes and clarify stock locations, making sure they are marked clearly, are easy to access and the locations kept well organised and properly maintained.
4. Mismanaged returns
Another area where inventory discrepancy can originate is through mismanaged returns. When returned products are coded incorrectly and placed back into inventory stock, you get an inaccurate record of the return. Effective inventory control helps facilitate smoother product returns, and proper employee training is necessary to ensure accurate codes are being applied before placing products back into stock.
Not only do discrepancies cost in terms of lost revenues and profit but they also lead to wasted man-hours spent trying to reconcile inventory records with stocktaking tallies.
Checking for stocktaking discrepancies
Performing regular stocktaking is good practice and crucial to effective inventory control. It lets you know exactly what inventory stock you have on hand, helps to identify issues and can improve operational efficiency and reporting accuracy.
Conducting physical stocktaking is the most reliable method for revealing discrepancies between inventory records and the actual stock you have on hand. The most efficient way to resolve any stocktaking inconsistencies is by using a checklist to determine and remedy discrepancies in inventory numbers. Checklists should address the following:
Recount the stock
This is the first step if numbers don’t match up. A simple mistake during the original count can easily be rectified with a product recount.
Check to ensure stock is not in the wrong location. It may not be missing, just in the wrong bin or in another area of the storeroom altogether.
Have the correct unit of measurement been used? Make sure units are recorded as they have been receipted: individual units, by box, weight, length or litre. Establish a measurement and stick with it.
Make sure the description in your inventory records actually matches the product being counted. A common error in stocktaking is when staff mistakenly count items with a different identification number or a similar product that has a variation in size or colour.
Inwards & outwards stock
Confirm that all sales have been accounted for and entered into your inventory management software. Ensure orders from suppliers have been delivered and entered into stock.
The physical count counts
Regardless of whether or not you can determine the cause of stock discrepancies, it is important to update your inventory records to reflect the results of your physical count. Whatever the records say, it is the physical, on-hand inventory that matters.
Implementing an inventory management system into your operations will help to eliminate poor inventory control practices, provide enhanced visibility of real-time inventory levels, SKU management and cycle counting. This enables you to have a correct view of inventory levels going forward.
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.