Poor inventory management can cost you time, money and your business
Walmart lost $3 billion in 2013due to poor inventory management, leading to frequent stockouts.
If that’s how improper inventory management affects a mega-corporation, how do you think it would affect your business?
We don’t want to be too hyperbolic here, but poor inventory management could cost you your business.
That’s why it’s important to recognize that this kind of fundamental problem would negatively affect your bottom line and business growth long-term.
So, how do you know if you’re managing your inventory poorly?
Poor Inventory Management Symptoms
Depending on your industry, there are many signs your inventory management is bad and getting worse.
Here are the most obvious symptoms of poor inventory management:
- A high cost of inventory
- Consistent stockouts
- A low rate of inventory turnover
- A high amount of obsolete inventory
- A high amount of working capital
- A high cost of storage
- Spreadsheet data-entry errors
- Shipping the wrong items to customers
- Lost customers
- Imbalanced lead times
Of course, there are usually many factors that help produce these negative symptoms, but all of them have a root connection to the way you manage your inventory.
Which leaves us with this question:
What causes poor inventory management?
Causes of Poor Inventory Management
There could be a million reasons why you’re mismanaging your inventory.
This isn’t an exhaustive list, but it does outline a few of the most probable reasons why your inventory management is suffering.
Excel inventory managementis usually the first tool small-to-medium sized businesses (SMBs) use to manage their inventory.
While spreadsheets work fine in the beginning when you’re a small operation, they can quickly lead to severe issues.
While 40% of those errors had little impact on the businesses studied, 7 errors caused massive losses of $4 million to $110 million, according to the researchers’ estimates.
Manual Inventory Tracking and Stocktaking
Along the same lines as spreadsheets, manual inventory tracking and stocktakingare suitable for small businesses but becomes time-consuming and error-prone as your company grows.
You’ll always be one-step behindyour actual inventory levels, which will cause ordering issues.
If for example, your assistant manager forgets a crucial part of your stocktaking process– like updating your data – and today is when you typically make purchase orders, you may order too much and run into the problem of obsolete stock or order too little and experience stockouts.
A Large Inventory
Large volumes of inventory don’t just lead to more management headaches – they can cut into your profits as well.
Most businesses have 20-40% of their working capitaltied up in inventory.
Inventory reductionis difficult to do, but it’s essential if you want to go from poor inventory management to great inventory management.
If you don’t use or have access to accurate reports regarding sales trends, best-selling items, customer behavior, and the like – you’ll either order too much and experience the problems of a bloated inventory, or order too little and experience stockouts and lost customers.
With accurate reports, you can forecast your customers’ future behavior and order accordingly to meet customer demand without exceeding your budget.
Solutions to Poor Inventory Management
While we could go on with causes of poor inventory management, you probably have a good idea of why you may be in the mess you’re in – so let’s get to the solutions.
The first solution we recommend is to check out our post on inventory management best practices. It’ll walk you through 10 ways to transform the way you manage your inventory and warehouse.
The second solution is to test out our cloud-based inventory management software.
Shameless plug, we know.
But here’s why it’s a great solution to the problem of poor inventory management:
It solves most, if not all of the issues we’ve listed in this post.
- Accurate forecasting
- Real-time inventory tracking
- Automated data-entry
The best part is, it’s free to try for 14 days.
If you want to upgrade your inventory management, then we have the software you need to make it happen.
Schedule frequent stock auditing like daily cycle counting of different stock categories in small, manageable batches. Integrate inventory management software and demand forecasting features with your accounting and sales data to identify essential inventory.What are the causes of poor inventory management? ›
- Late Planning. Inventory slips out of control when old products are not moving fast enough, or when seasonal fluctuations in demand fail to meet inventory predictions. ...
- Poor Tracking. ...
- Overstocking Discounted Products. ...
- Neglected Trends. ...
- Limited Access to Inventory Control.
- High-cost goods.
- Slow or low inventory turn.
- Obsolete items in inventory.
- Excessive working capital requirements.
- High-cost storage.
- Spreadsheet (data-entry) errors.
- Customer shipping errors.
Your business startup cannot be successful if your inventory is poorly managed. According to the Small Business Administration (SBA), problems with inventory ranks among the major reasons new businesses fail. Poor management can often lead to inventory shortages and overages—silent cash flow killers.What are the steps to improve inventory management? ›
- 1) Supplier Assistance. A great way of managing your business inventory is by asking for help from suppliers. ...
- 2) Inventory Control Personnel. ...
- 3) Lead Time. ...
- 4) Monitor Inventory Levels. ...
- 5) Customer Delivery. ...
- 6) Inventory Consultant. ...
- Inventory Consultant.
- 7) Purchase Software.
Prioritizing your inventory helps you understand necessary ordering and manufacturing frequencies to meet your customers' needs. Inventory management tips include tracking sales, ordering and receiving stock consistently, and using specialized inventory management software.What causes inventory problems? ›
What causes inventory discrepancies? Inventory discrepancies can be caused by a multitude of factors, such as warehouse receiving errors, misplaced or lost inventory, inaccurate records of returns, using outdate warehouse technology, and poorly trained employees.What is the biggest challenge of inventory management? ›
- Overstocking. Most businesses tend to over-stock on items that take up additional space and increase your storage costs. ...
- Limited Visibility. ...
- Tracking Obsolete Stocks. ...
- Counterproductive Processes. ...
- Issues with Tracking Materials. ...
- Defects and Waste.
The two basic issues in managing inventory are determining how much to order and when to place the order.What are the risks involved in poor inventory management? ›
- Theft due to poor inventory control. One of the first consequences of poor inventory control is theft. Indeed, in any company, this is one of the most significant risks if it is not organised and thoroughly controlled.
Ans: Inventory management has two main concerns. One is the level of customer service, that is, to have the right goods, in sufficient quantities, in the right place, at the right time. The other is the costs of ordering and carrying inventories.What are five effects of poor inventory control to an organization? ›
- 1) Imbalanced Inventory. If the inventory is not managed well, then it becomes hard to maintain a balanced stock. ...
- 2) Delayed Delivery of Orders. ...
- 3) Increased Costs. ...
- 4) Unsatisfied Customers. ...
- 5) Wasted Time.
A low inventory turnover ratio might be a sign of weak sales or excessive inventory, also known as overstocking. It could indicate a problem with a retail chain's merchandising strategy, or inadequate marketing. A high inventory turnover ratio, on the other hand, suggests strong sales.What are the three 3 tools used to improve inventory management? ›
- Barcode data collection. The perpetual inventory system is highly dependent on timely and accurate reporting. ...
- Cycle counting to improve accuracy. ...
- ABC analysis for prioritisation. ...
- Integrated planning and execution. ...
- Lot tracking and traceability.
Four popular inventory control methods include ABC analysis; Last In, First Out (LIFO) and First In, First Out (FIFO); batch tracking; and safety stock.What are the 3 major inventory management techniques? ›
In this article we'll dive into the three most common inventory management strategies that most manufacturers operate by: the pull strategy, the push strategy, and the just in time (JIT) strategy.What are the most important inventory management techniques? ›
The three most popular inventory management techniques are the push technique, the pull technique, and the just-in-time technique. These strategies offer businesses different pathways to meeting customer demand.What are the key areas in inventory management efficiency? ›
Inventory management tries to efficiently streamline inventories to avoid both gluts and shortages. Four major inventory management methods include just-in-time management (JIT), materials requirement planning (MRP), economic order quantity (EOQ) , and days sales of inventory (DSI).How can inventory accuracy be improved? ›
- Pick a quality program and stick with it. ...
- Know what you are up against. ...
- Keep your processes simple. ...
- Examine your entire supply chain. ...
- Establish product traceability during the distribution life cycle. ...
- Select technology that fits your needs. ...
- Implement a continuous cycle-counting program.
Good inventory efficiency reduces the time stock spends in the warehouse, decreasing operational costs (such as storage fees) and minimizing the risk of products depreciating from becoming out of season, out of trend, or expired. This increases profits, giving you more money to invest in business growth.
An Inventory Manager is a professional who oversees the inventory levels of businesses. They lead a team to receive and record new stock as it's delivered or shipped out by analyzing different suppliers, recording daily deliveries, and evaluating new shipments.What are some of the results of poor inventory accuracy? ›
Poor inventory accuracy and order fulfillment will have a disastrous effect on customer service. Customers do not see all the background processes that go into ordering a product. They only know that they received an inaccurate order, paid too much, or could have purchased it from another retailer.Which of the following are results of poorly managed inventory? ›
- Constant stockouts.
- Delivering incorrect items to customers.
- Dissatisfied customers.
- Expensive storage costs.
- Higher inventory costs.
- Higher working capital.
- Large numbers of obsolete inventory.
- Lower turnovers.
Repetitive stock issues can damage the credibility of a business for customers and have a long-term impact on your business' reputation. Ultimately, this could lead to potential customers leaving for other more organised eCommerce providers.What is the most important part of inventory management? ›
One of the most critical aspects of inventory management is managing the flow of raw materials from their procurement to finished products. The goal is to minimize overstocks and improve efficiency so that projects can stay on time and within budget.How does poor inventory affect profitability? ›
Bad inventory management can cost your company tremendous amounts of time, money and, ultimately, its chances of success. It can heavily impact any business' organizational performance, leaving it with lackluster profit margins and elevated overhead expenses as a result.How do you fix inventory turnover? ›
- Know your inventory items' position in their product life cycle.
- Improve demand forecasting accuracy.
- Prioritize your inventory.
- Reorder smarter.
- Use up excess inventory by redistributing stock.
- Use automation to improve insights.
Poor MRO inventory management leads to increased downtime costs in that parts either run out or simply become difficult to find. Unplanned downtime could cost up to $260,000 per hour. Delays resulting from an item being out of stock could also lead to lost customers.What is the most important factor that influenced inventory management? ›
Consumer demand is the lifeblood of inventory management.
To avoid these negative outcomes – and their financial effects on your business – you have to track customer demands and product sales, and order inventory accordingly.
- Unreliable supply chains.
- Not understanding demand.
- Long setup times.
- Production speeds that are not aligned between production areas.
- Overcapacity in some areas and undercapacity in others.
- Poor monitoring systems.
The problem related to how much inventory should be maintained and how much order should be placed is called as Inventory Control Problem. A person goes to a shop to purchase an item but that was not in stock then he return empty hand from the shop it cause the current loss for shopkeeper.What is the single greatest cause of inventory errors? ›
1. Inventory shrinkage. Shrinkage, a leading cause of discrepancy in your inventory stock, accounts for on average over one percent of total retail sales. Shrinkage occurs through such means as clerical errors, shoplifting, employee theft and supplier fraud.Can you explain waste in inventory management? ›
Inventory waste refers to the waste produced by unprocessed inventory. This includes the waste of storage, the waste of capital tied up in unprocessed inventory, the waste of transporting the inventory, the containers used to hold inventory, the lighting of the storage space, etc.How can poor inventory control affect profits? ›
Overbuying and carrying excess inventory could also lead to overstocked inventory reaching the end of its product lifecycle and becoming obsolete. If that happens, you might not be able to sell the product or return it to the supplier, meaning you're stuck with the cost.