Is Negative Inventory Really That Negative?

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Despite its ominous title, negative inventory is an often-benign issue that crops up in various types of inventory management. While it can harm a business’ operations if left unchecked, a savvy inventory manager can assess it when it happens, and use the right tools to correct it. Correcting it can be as simple as waiting until the system self-corrects, or by producing a product location transfer.

Like a lot of inventory management challenges, there are different reasons why negative inventory happens. There are also different ways to deal with these. With an eye towards what to look for and what to do about it, let’s take a closer look at the ins and outs of negative inventory.

Timing issues causing negative inventory

Timing issues that cause a negative inventory balance are common among manufacturing business and are usually easy to fix. When an order is transacted for shipment but production is not fully finished, a negative balance may occur temporarily. Generally, this will correct itself once production has finished and the items have been shipped.

Location level negative inventory

A common cause of negative inventory is the incorrect movement of stock from one location to another. If stock is moved from one location but accidentally attributed to a different location, then both an overstatement and an understatement results.

As far as it goes, this will often be an easy fix as there are matching discrepancies in each location. Of course, the overall count – or item level balance – won’t be out, as the total number hasn’t changed, just the location.

Item and production level negative inventory

Negative inventory at the item or production level is often far harder to spot and fix than location or timing issues. As many production processes are complex, involving multiple entries, transactions and orders within any normal day, there is much more that can go wrong. This is especially true when large amounts of human error come into play.

A common problem for businesses in this area is when a negative balance triggers the automated or manual restock of items that don’t need replacing. While this may prove harmless in the microcosm, when allowed to become systemic, huge problems can occur. If this goes unchecked for too long, a snowball effect can occur, costing the business both financially and operationally.

Working smarter

If one of the aims of inventory management is to guard against errors and mistakes, the golden rule of dealing with negative inventory is to always go and find the original mistake. Neglecting to do so means you’re flying blind, something that isn’t a good recipe for inventory management success.

When correcting an item level negative balance that isn’t a timing issue, it is essential to go back to the original mistake and correct it with the original transaction program. This is especially important for manufacturing businesses, as any further mistakes can quickly compound the problem, making getting back on track harder, more time consuming and more costly to the business.

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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