Inventory is something a business can count, so it is surprising that inventory can be negative on paper or in an inventory management system. It can also be worrying for business owners who may believe that they have committed more stock than they actually have. Generally, negative inventory is less concerning than it first appears. In some cases, however, negative inventory can lead to excess stock or missed opportunities, so it is important to understand the common drivers of a negative inventory balance.
Often the simplest explanation is the most accurate. In the context of negative inventory, timing issues can often explain negative inventory in the system. For example, in a factory, different departments may process inventory events in the system. Someone might enter a product into inventory once it is received at the warehouse and then a member of the sales team may check it out of inventory once they have closed a sale. If the product has not been entered into inventory before it is removed, then the stock count may not reflect the actual level of inventory – and in some cases become negative. Once the whole team has caught up on the paperwork, the inventory count will balance.
Location-level negative inventory
Another simple explanation for negative inventory is incorrectly entering stock movements into the inventory management system. For example, Warehouse A has 250 cases of Pinot Noir and Warehouse B only holds white wines. If 250 units are shipped from Warehouse A to the distribution center, but the record in the system shows 250 cases being shipped from Warehouse B, then there will be a negative number of cases of Pinot Noir against Warehouse B (there will also be an extra 250 cases listed at Warehouse A).
Location-level negative inventory is usually benign and fixing it is typically a matter of adjusting the records in the system. Provided that regular checking takes place (or better yet, always accurate real-time inventory monitoring), errors will usually be spotted before they can cause any real problems. However, problems can arise if a business does not pick up on negative inventory and subsequently relies on stock that is not actually there. This could range from missing a small sale to failing to meet a major client commitment, impacting the entire downstream supply chain.
Production-level or item-level negative inventory
Similar to location-level errors, production-level or item-level inventory can occur as a result of incorrect records being entered into an inventory management system. If a vineyard uses 3000 bottles and 3000 stoppers, but records both as bottles, the number of bottles in inventory will be underestimated and the number of stoppers overestimated. Production may be interrupted if the vineyard doesn’t recognise that it needs more stoppers and fails to place an order. If the vineyard automates inventory operations, having negative inventory may trigger an order for more bottles. This could potentially fill up the warehouse and incur inventory-holding costs.
Although negative inventory is usually only a minor issue, it can coincide with stock shortages, misplaced stock or ordering excess stock. Consequently, it pays to be proactive and address problems as they arise. Using a real-time inventory management system is the best solution. However, if you use a periodic inventory system, regular stock takes can be a good measure to prevent problems.
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.