Effective inventory management is vital for businesses of all sizes, from small enterprises to transnational corporations. Inventory is often one of a company’s largest physical assets, so failing to properly track it could lead to severe financial repercussions.
Correctly tracking inventory is also crucial to ensuring smooth operations, avoiding possible risks or disruptions, and putting together accurate forecasting. Whether you rely on Excel spreadsheets or specialized inventory software, we explore the consequences of not keeping proper tabs on the amount of inventory you have and the importance of inventory risk management.
Risk #1 – Shortages and Overstocking
Remember in Econ 101 you spent the entire semester talking about the supply and demand chart? Picture that graph again and focus on the point where the two lines intersect. That magical spot, known as equilibrium, is precisely where you want your company to be. However, if your inventory system is outdated, you run the risk of encountering shortages or excess inventory.
Shortages can prove perilous, as they hinder your ability to fulfill customers’ orders promptly, leaving them dissatisfied and forcing you to incur additional expenses to meet the excess demand. On the other hand, overstocking leads to hefty storage fees, space constraints, and waste when dealing with perishable goods or technologically outdated products that may have a shorter shelf life.
So, how can you find the perfect balance?
By implementing robust inventory control measures and leveraging historical data, you can gauge the optimal order quantities. The goal is to maintain an inventory level that ensures customers can purchase what they desire whenever they want it. However, managing inventory comes with a significant cost, tying up valuable assets. To determine the ideal minimum stock, it’s beneficial to benchmark against industry peers.
Contact a trade association to gain insights into other companies in your field and aim to reduce your inventory by 3 to 5 percent compared to the industry average. For instance, if Company X maintains a minimum of 100 days’ worth of widgets, strive to keep only 95 days’ worth. This strategic approach allows you to outperform competitors by enhancing product flow and freeing up cash flow, which can ultimately lead to increased profitability and higher customer satisfaction.
Risk #2 – Employee Theft
According to the National Retail Federation, internal employee theft accounts for roughly 30% of retail shrink, resulting in estimated annual losses of more than $30 billion before accounting for warehouse or cargo-related incidents. However, by implementing robust inventory management software, you can proactively mitigate such risks by keeping a closer eye on the movement of your products, without making your employees feel overly scrutinized.
An automated inventory system significantly reduces the chances of fraudulent reporting by having multiple users review and update inventory details. Each user is assigned a unique login ID, enabling easy tracking of any fraudulent activities back to the responsible individual at the time.
It is crucial to initiate inventory tracking immediately upon the arrival of shipments to promptly address any missing or damaged items with the sender. While orders are being received and shipments are being dispatched, it is essential to compare the number of sales against the quantity of orders placed. If discrepancies arise, thorough investigation is necessary to determine whether items are being misplaced or even discarded, as these inaccuracies can lead to significant inventory loss and financial setbacks.
Risk #3 – Poor Customer Service
Have you ever experienced the frustration of ordering a product online, only to be left disappointed when the promised delivery date came and went without a trace of the package? It’s an all-too-common scenario that leaves customers feeling irritated and let down by the company they trusted. This dissatisfaction often arises from inadequate inventory tracking practices. When a customer adds an item to their cart, they expect it to be in stock and ready to reach them within the specified shipping time frame outlined in your policies. However, without meticulous inventory management, that item can mysteriously vanish, both figuratively and literally.
As a business owner, you’re forced to reorder the product and hope that the customer is patient enough to wait instead of canceling the order and taking their business elsewhere, which would result in lost sales. Timely delivery is not the sole determinant of exceptional customer service. Customers may also reach out with inquiries about inventory. By maintaining accurate stock level records, you can promptly provide quick and precise responses, leaving a positive impression of your company in their minds. Efficient inventory management is key to optimizing the ecommerce and retail experience, ensuring customer satisfaction, and retaining valuable business.
Safeguarding Your Business from Risks
Are you questioning whether your inventory management processes are as efficient as you thought they were? Contact us to schedule an appointment with one of our experts to discuss updating your inventory management system.
