Inventory Discrepancy: Everything You Need to Know in 2023
In this article, we cover what inventory discrepancy is and uncover its common causes. We also share our step-by-step process to avoid discrepancies in your inventory and effectively manage it.
What is Inventory Discrepancy?
Inventory discrepancy refers to a situation where there is a mismatch or inconsistency between the recorded or expected inventory levels of a product and the actual physical count of that product in a company's stock.
Example: A retail store's computer system may show 100 smartphones in stock, but upon conducting a physical count, they find only 90 smartphones on the shelves. This indicates a 10-unit inventory discrepancy and could be due to errors in data entry, theft, or other factors.
Common Causes of Inventory Discrepancy
Inventory discrepancies can occur for numerous reasons. Here are some common causes:
1. Data Entry Errors:
Mistakes made when recording inventory transactions, such as inaccuracies in receiving or shipping goods, can lead to discrepancies.
2. Theft and Pilferage:
Unauthorized removal of inventory by employees or external parties can result in missing items and discrepancies in inventory levels.
This encompasses losses due to damage, spoilage, obsolescence, or other factors that reduce the quantity or quality of inventory.
4. Inaccurate Forecasting:
If a business's demand forecasts are inaccurate, it may order too much or too little of a product, leading to discrepancies when comparing actual stock levels with expected levels.
5. Stocktaking Errors:
Errors made during physical inventory counts, such as miscounts, misplacements, or overlooking items can create discrepancies.
6. Supplier Errors:
Discrepancies can occur if suppliers send incorrect quantities of goods or if there are discrepancies in the items received.
7. Process Inefficiencies:
Poor inventory management practices, lack of control over stock movements, and inefficient processes can contribute to inventory discrepancies.
Identifying and addressing these causes is essential for effective inventory management and minimizing discrepancies.
7 Steps to Avoid Inventory Discrepancy
To maintain accurate inventory records and avoid inventory discrepancies, you can follow our simple 7 step process below:
1. Establish Clear Inventory Policies
Create and document comprehensive inventory management policies that outline procedures for receiving, storing, tracking, and disposing of inventory items. Ensure that all employees understand and adhere to these policies.
Example: A grocery store sets clear guidelines on how to handle perishable items like fruits and vegetables specifying that they must be checked daily for freshness and removed if necessary. This prevents the overstocking of expired produce.
2. Implement Inventory Tracking Systems
Utilize inventory management software or systems to track real-time inventory levels, update stock quantities automatically, and provide visibility into stock movements.
Example: An electronics retailer uses a barcode system to track the quantity of laptops in stock. When a customer purchases a laptop, the system deducts one unit from the inventory automatically.
3. Conduct Regular Physical Audits
Schedule periodic physical inventory counts to compare actual stock levels with recorded data. Identify and investigate any discrepancies promptly.
Example: A clothing boutique conducts monthly spot-checks of its high-value designer dresses. During a recent audit, they found one designer dress missing, leading to an investigation into potential theft.
4. Train and Educate Staff
Provide training to employees responsible for handling inventory. Ensure they understand proper procedures, data entry accuracy, and the importance of following inventory policies.
Example: A warehouse manager trains new staff on how to handle fragile glassware. After training, incidents of breakage and inventory discrepancies due to mishandling decreased significantly.
5. Set Reorder Points and Safety Stock
Determine reorder points for each product based on historical demand and lead times. Maintain safety stock levels to account for unexpected fluctuations in demand.
Example: An auto parts supplier establishes a reorder point for a popular car battery at 50 units. When the inventory falls to 50, a replenishment order is triggered to prevent stockouts.
6. Use FIFO and FEFO Methods
Implement the First-In-First-Out (FIFO) or First-Expired-First-Out (FEFO) inventory methods for products with expiration dates to ensure older items are sold or used before newer ones.
Example: A pharmacy prioritizes selling medications with the closest expiration dates first, reducing the risk of costly expired inventory.
7. Cross-Verify Supplier Shipments
Upon receiving goods from suppliers, cross-verify the quantity and quality against the purchase order. Resolve discrepancies with the supplier before accepting the shipment.
Example: An electronics manufacturer receives a shipment of microchips from a supplier. They count the chips and notice that 100 units are missing. They contact the supplier to rectify the issue before accepting the shipment.
Tech Haven is a small electronics retailer that is facing inventory shortages for their popular product, the 'TechPhone X,. They also have excess stock for other products. Let’s explore how the company applied our 7 step process to avoid inventory discrepancies.
Step 1: Establish Clear Inventory Policies:
Tech Haven creates comprehensive inventory management policies that cover receiving, storing, tracking, and disposing of products. For instance, they specify that all employees must immediately report expired items and record product quantities accurately.
Step 2: Implement Inventory Tracking Systems:
They invest in advanced inventory management software that integrates with their point-of-sale system. This software provides real-time updates on inventory levels. For example, it shows that they currently have 30 TechPhone X units in stock.
Step 3: Conduct Regular Physical Audits:
During a monthly physical audit, Tech Haven identifies a significant discrepancy in TechPhone X units. They find that there is a shortage of 20 units compared to what the system indicates.
Step 4: Train and Educate Staff:
Employees responsible for inventory management receive training on proper handling procedures. For instance, they are trained to report discrepancies immediately, and their training includes real-world examples like the TechPhone X shortage.
Step 5: Set Reorder Points and Safety Stock:
Using historical data, Tech Haven sets a reorder point for the TechPhone X at 50 units and maintains safety stock to cover sudden spikes in demand. This is done to avoid running out of stock in the future.
Step 6: Use FIFO and FEFO Methods:
The company implements the First-In-First-Out (FIFO) method for items with expiration dates, like phone batteries. This practice ensures that older items are sold first, reducing the risk of obsolescence.
Step 7: Cross-Verify Supplier Shipments:
Upon receiving a shipment of TechPhone X units from a supplier, they cross-verify the quantity and quality. In this case, they find that the shipment matches the purchase order, eliminating discrepancies in the incoming inventory.
Tech Haven continues to conduct regular physical audits, update inventory policies as needed, and ensure consistent staff training. This ongoing commitment to accurate inventory management helps them avoid discrepancies and optimize their inventory for profitability.
We hope that you now have a better understanding of what inventory discrepancy is and how to effectively manage your inventory to avoid discrepancies.