The main purpose of carrying inventory is to provide your customers with the goods and services they expect, when and how they expect them.
But holding stock comes with numerous risks that can negatively impact operations, customers satisfaction and profitability. You must invest time and resources into reducing the inventory risks associated with carrying stock.
What is inventory risk?
Inventory risk is the probability of an organisation being unable to sell its goods or the chance that inventory stock will decrease in value. Many manufacturers, wholesalers and retailers have huge amounts of inventory and keeping track of one stock item is challenging enough but keeping track of thousands of SKUs can be a daunting task.
Understanding the seven common types of inventory risk and the potential impact on your business is the first step in helping to determine the best strategies for risk mitigation and to implement best practice inventory control.
The 7 types of inventory risk mentioned in this guide can cause devastating financial implications if left unmitigated.
The 7 types of inventory risk
Inventory control is very much a double-edged sword – expertly managed and controlled, it has the power to boost profitability and slice away costs.
But if a supply chain falls prey to inefficiency, inaccuracy and mismanagement, inventory has the ability to hack into the bottom line with devastating effect and sever the most important artery of any business – cash flow.
Below are 7 types of inventory risk you need to know about.
1. Inaccurate inventory forecasting
The goal of many a business is to achieve that perfect forecast, so you are ordering and selling the right inventory stock, in the right amounts, at the very time your customers demand it.
Underestimating demand can result in stock outs, lost sales and potentially lost customers, while overestimating may leave you with excess stock that ties up cashflow and is at risk of waste.
Improve forecasting and make more informed purchasing decisions using inventory control software and automated inventory control processes. Online inventory control software uses real-time analytics to determine demand relative to your current inventory stock levels.
Integration of your online inventory control systems with RFID scanning and Point of Sales software helps companies to determine the most profitable product categories and the most popular types of products, helping to guide more strategic purchase decisions.
2. Unreliable suppliers
Supply-side inventory risks include the reliability of a supplier to deliver to the agreed lead time and adhere to stock quality and quantities. The impact of underperforming suppliers through failure to meet delivery schedules or quality standards can result in production delays, inventory stockouts and customer dissatisfaction.
An unreliable supplier is when they quote one lead time then deliver early or late, meaning you fluctuate from having too much to too little stock. The wider the gap between early and late deliveries, the greater the level of risk and inventory uncertainty.
Ensure purchase orders clearly specify the exact delivery date expected for each item. Supplier contracts should clearly detail how the supplier will be held accountable for late or inaccurate deliveries.
Good supplier relationships are a must for minimising inventory risk and if you continue to have erratic supply issues, it may be time to find a more reliable supply source.
3. Stock shelf life
Perishable goods and products with a shelf life pose another risk to stock control, the shorter a product’s shelf life the greater the inventory risk.
For manufacturers, this requires robust manufacturing and inventory control practices. Wholesalers and retailers should adopt a minimal stocking approach, especially regarding perishable items.
Stock monitoring and rotation helps to clear older stock before it expires, and rotating spot checks should be frequently undertaken for top sellers, perishables and expensive items.
4. Inventory theft
One of the biggest risks associated with inventory control is theft, especially when it comes to high-value inventory stock. Companies spend millions of dollars annually on security measures to safeguard inventory and prevent theft, however it still occurs on a regular basis.
Theft can occur in several ways — it may be opportunist, a thief walking out of a low-security warehouse after helping themselves to a box of T-shirts, cleaning staff taking advantage of being in-store alone after hours or an employee getting creative with inventory stock adjustments to move products from the inventory control system.
For manufacturers, cycle counting ensures that inventory is frequently checked for accuracy making is easier to spot theft because discrepancies are identified sooner rather than later.
Retailers can implement different control measures such as self-alarming antitheft tags that sounds an alarm when a shoplifter attempts to remove it from the store or electronic cash register transactions that prevent employees from ringing up goods for less than their actual cost.
5. Loss of Inventory
Inventory is an asset on a company’s balance sheet therefore whenever inventory is lost, the asset is written off the company books, essentially reducing the equity of a company because equity equals total assets minus liabilities. Writing off inventory stock reduces assets and equity as a result.
Inventory loss occurs in the form of the physical loss of a product or when errors occur during the receipt of goods. Goods can get lost through poor inventory control or mishandling by employees therefore online inventory control systems and automated inventory control can help to identify the cause of each loss to prevent future losses and reduce costs to the company.
Perishable inventory comes with a risk of spoilage, making proper inventory control essential for food and plant production businesses.
6. Damaged stock
Damage generally occurs during normal business operations and certain industries will have a higher risk of damage than others. Damaged inventory stock that cannot be used becomes waste and increases costs to the business.
Industries with the risk of high damage need inventory control policies in place to minimise damage. For example, where items are prone to crushing businesses may set a maximum stack height for cartons to reduce the risk, even when pallets can hold significantly more weight.
7. Product life cycle
Product life cycle refers to the market phases of product introduction, growth, maturity, decline and withdrawal that all products experience. Goods entering the final two phases of their life cycle become high-risk inventory and manufacturers need to balance the production of parts and units to meet existing demand while avoiding overproduction that sees then stuck with obsolete inventory.
Retailers should keep abreast of market trends to ensure they are not over-ordering inventory stock in its decline or withdrawal phase. Online inventory control and data analytics will help to identify products entering this phase so that retailers and wholesalers can avoid overstocking and being left with the expense of unsaleable obsolete stock.
3 ways unmitigated inventory risk can harm your business
There are many variables that make a company vulnerable to inventory risk. Part of your inventory management process could be running smoothly, while other areas could be jeopardising your situation.
It’s important to understand the consequences of inventory risk so you can mitigate any problems and shoot for the best practices in the inventory world. Here are three of the biggest ones.
1. Missing Valuable Sales
When a business does not have what a customer needs, in the right quantity and at the right time, they risk losing valuable sales. In the short term, lost sales means lost revenue but in the long term, the inability to meet customer needs can mean lost business.
A business that cannot track inventory in real time or that cannot accurately forecast changes in demand is a business at risk of missing valuable sales.
This is particularly the case with seasonal items. If you don’t order or produce enough of a seasonal product and miss out on a major spike in demand, your business could be leaving tens or hundreds of thousands of dollars on the table.
2. Stressful product recall
If you operate in the food and beverage or health industries, the prospect of a product safety recall might keep you up at night from time to time. When the worst happens, you want to be able to act quickly – crucially, you don’t want to be hunting through old emails and spreadsheets to work out what happened.
Inventory control software can take off some of the pressure during such a stressful time. By assigning each batch of a product a unique identifier and then tracking which ingredients or components went into that batch, it is possible to work backwards and find the source of the problem more quickly.
3. Too much stock
In a bid to simplify inventory control or to prevent stock-outs, some businesses regularly reorder a set amount of inventory on the assumption that they’ll use a constant amount. These ‘fixed orders’ can lead to inventory building up unused for a time and, worst case scenario, wasted altogether.
Deliberately or accidentally, carrying too much inventory means that your business has tied up vital working capital in an asset that, for now, has no productive value.
Inventory management software can automate your systems and reduce the number of inventory risks in your business.
Mitigating inventory risk
Inventory stock ties up significant financial investment, and for the most successful businesses, inventory control really is key to sustaining cash flow.
Since cash flow is the lifeline of future activities, businesses must invest time and resources into reducing inventory risks.
Cloud inventory management software proves a reliable tool to help businesses like yours mitigate inventory risks and keep track of your inventory stock using real-time information. This not only optimises forecasting but also tracks supplier data for stock coming in.
Keeping track of inventory stock using cloud software and online inventory control tools ensures that you are working with real-time information. It optimises forecasting and provides accurate, real-time inventory data to manage stock and mitigate inventory risk.
