Negative Inventory

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To business owners new to inventory management, being told that there is a negative inventory is likely to send them into a panic. After all, how is it possible to have a deficit, or non-existence of inventory? In short, negative inventory is a fairly common occurrence and one that shouldn’t cause business owners any lack of sleep. In most instances, negative inventory is self-correcting, a temporary misalignment of inventory level reporting and actual levels on the ground. However, in some cases a negative inventory can lead to a negative supply-chain reaction. The difference lies in understanding the causes of the negative inventory and what steps, if any, need to be taken to rectify the situation.

Timing issues

For the most part, negative inventory is merely an indicator of a transaction timing issue. For instance, in some cases a shipping report is generated ahead of a production report. In this case, records will show that a certain quantity of inventory has been shipped, whereas there will be no record of the inventory on hand, hence a temporary negative inventory balance. This is because the inventory, designated to move directly from production through to shipping, is still being manufactured at the time the shipment report is created. In such cases, there really is no issue other than having to wait until the production is completed and the report issued. The system then will correct itself.

Transaction timing is a harmless inventory management issue that, while inconvenient, does not significantly burden inventory operations one way or the other. An awareness that transaction timing is to blame for negative inventory being reported and waiting for the production report to be recorded is all it takes to ‘solve’ the issue.

Other causes of negative inventory are not so harmless or easy to detect and it is important to understand what they are, how to identify them and what actions (if any) to take to correct the situation.

Location-Level negative inventory

Negative inventory balances that result from recording inventory movement to or from the incorrect warehouse or store are termed Location-Level Negative Balances. For example, let’s say a sporting goods chain receives an order for 500 soccer balls. In processing the shipment, instead of shipping the balls from location A, which has a starting inventory of 1,000 balls, the business incorrectly picks the 500 soccer balls from location B, which has a starting inventory of 0 balls. The business will now show a negative inventory of -500 in location B and an inventory of 1000 still in location A.

This does not present an actual inventory problem but rather a perceived one. The fact of the matter is that the inventory item-level balance remains the same. This means that the physical balance of goods on hand is correct, the issue is of them being recorded to the wrong location. An integrated, real-time inventory management software solution will easily be able to direct process managers to the root of the issue.

In any case, the correction can be made and business can move on as usual. However, without the ability to track, trace and account for inventory accurately, what should be a harmless blunder can lead to some costly mistakes down the line.

For instance, purchasing managers may look to compensate for the missing inventory by ordering in more than is actually needed. When the quantities are small, the ripples down the supply chain are small too, but when dealing with a large quantity of inventory, compensating by ordering in a large amount can very quickly burden the business.

Overstocking inventory is never a good thing. It ramps up operating costs, ties up cash-flow and raises the risk of goods being damaged, stolen or becoming outdated. With a data-driven inventory management solution in place, negative inventory as a result of location errors are far less likely to occur, and if they do, will be instantly and easily identifiable.

Item-level negative inventory

Of the two drivers of negative inventory balances, item-level negative inventory is the one that indicates a more serious issue at play and if corrective measures are not taken, things can quickly spiral out of control.

Item-level negative inventory balances have a number of errors, most of which are transactional; erroneous adjustments to cycle counts, over reporting stock quantities, over reporting production, sending surpluses to manufacturing for production runs, duplicating transactions and over shipping to customers.

These errors have an immediate and potentially crippling effect on planning operations. Forecasting future demand will be driven by inaccurate inventory levels, logistics will run into a number of issues as the actual inventory levels on storage and warehousing become over burdened with replenishment inventory that is neither wanted nor planned for.

In automated inventory control systems, inventory deficits are interpreted as surges in positive demand and new orders will immediately be sent out to maintain optimal inventory levels to meet the inaccurately perceived demand. If the system is operating off flawed inventory data due to an item-level negative inventory balance, then those automated purchase orders will simply act to bring more water on board to an already burdened ship.

Dealing with negative inventory proactively

The old saying goes ‘the best defense is a good offensive’, and with regards to tackling the issue of negative inventory, the first solution is one where negative inventory balances are prevented from occurring in the first place. This can be achieved by investing in a powerful inventory management system that seamlessly fosters integration and remote access via cloud technology to the flow of inventory in real-time.

Having said that, in some instances, negative inventory is a necessary facet of conducting business. The important thing in working with necessary negative inventory is to always have your finger on the pulse of the business and know exactly what is causing it. (Please note: Unleashed does NOT recommend using negative inventory).

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Melanie - Unleashed Software

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.

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