Although most organizations take part in some type of inventory management, not all organizations engage in this critical process in the best ways possible, resulting in inaccurate inventory. In fact, within many businesses, paper-based manual operations is still the approach used for inventory management. Spreadsheets are printed out, and workers must physically check items off the list.
This strategy isn’t just time-consuming but incredibly costly as well. It is also prone to human error, which could further drive the price of inventory management up. But this isn’t the only source of inaccuracy when it comes to keeping track of merchandise and offerings. Other areas could create situations in which the company loses considerable working capital without even realizing it.
Let’s take a look at some of the processes and strategies associated with inaccurate inventory management, and how these could be causing your organization to waste money.
“Investing too much working capital in inventory reduces the amount of liquid financial resources.”
Tying up working capital
Any inaccurate count of inventory could create a situation in which purchasers buy more merchandise than what’s needed. It’s something that comes up quite often and continually costs a company money.
Let’s say a business’s inventory tracking system states that it has 50 units of a certain item, but there are actually 100 within the warehouse. In order to shore things up and reach recommended stocking levels, managers purchase an additional 50 units. Because of the inaccuracy, this means that there are now 50 extra units’ worth of working capital is tied up in this inventory on the warehouse shelf, unavailable for other business pursuits.
Overall, inventory represents an investment for a business. Investing too much working capital because of an inaccuracy reduces the amount of liquid financial resources the business has and can unnecessarily drive up inventory costs. The Fabricators & Manufacturers Association calls this “opportunity cost,” wherein a company misses out on investment opportunities because working capital is tied up in inventory and can’t be used to support other initiatives.
Increased inventory shrink
Inventory shrink is something that comes up more often than many warehouse managers and business executives would like. In fact, according to the National Retail Federation, 1.44 percent of all sales are actually lost to inventory shrink.
While shrink can be attributed to numerous problems, including theft or damage, it can also be the product of miscounting, mismeasuring and other inventory tracking inaccuracies. The greater the discrepancy, the greater the potential shrink.
It’s also important to factor in the labor costs that can be associated with inaccurate inventory management.
Take, for example, a situation in which an inventory system notes that there is a specific item within the warehouse, but the item in question actually isn’t there or isn’t in the location indicated in the system. An employee, relying on this inaccurate information, goes through the warehouse seeking out the specific merchandise and cannot find it. This worker then asks assistance from his supervisor, who takes time out of her day to find the item listed in the inventory system.
“Labor accounts for a large percentage of warehouse operating costs.”
If this item has been misplaced, or is simply not there, it means that not only has the first employee wasted valuable time, but his supervisor has as well. Because labor accounts for a large percentage of warehouse operating costs, it’s critical that workers use their time efficiently and not waste resources because of inaccurate inventory counts.
Cost of lost customers
Any mistakes in inventory management can also heavily impact the business’s ability to fulfill customer orders and meet consumer demands. Missing inventory that is listed as available in the inventory system but is actually sold out in the warehouse translates to a late order to the customer. This, in turn, can cause clients to cancel their orders because they will not receive them on time.
If this type of situation comes up repeatedly or impacts a large number of consumers, it can cause the business’s reputation to dip among its clientele. These type of inventory inaccuracies don’t just hamper internal company operations, but they also reflect negatively on the brand from customers’ perspectives as well.
Optimizing with a digital inventory management system
Any organization that operates a warehouse or in any way deals with inventory tracking must have a robust inventory management solution in place. now is the time to do away with error-prone, paper-based tracking processes for digital solutions.
Advanced inventory management software can considerably reduce inaccuracies in counting and tracking. They help ensure that the inventory data that employees and customers rely on is correct. In this way, costs associated with wasted labor, the inability to fill orders and tied-up working capital are significantly reduced.