The Ultimate Inventory Discrepancy Guide for eCommerce Owners

Authored by TARA CONWAY

Tara Conway is an Advisor, Digital Pioneer, Speaker, Ecommerce, and Logistics Expert. Tara offers a retailer's perspective on logistics, shipping, and customer experience. She speaks at top conferences like eTail Canada and DX3 and mentors female founders in logistics and tech.

Running an e-commerce business requires juggling numerous elements—keeping your website updated, managing customer inquiries, and crucially, ensuring accurate inventory management.

But what happens when your stock records don't match what's actually on your shelves? This mismatch, known as an inventory discrepancy, can disrupt your business operations and impact your bottom line.

In this comprehensive guide, we'll explore what inventory discrepancies are, why they happen, and most importantly, how to prevent and resolve them.

Table of Contents

• Understanding Inventory Discrepancies
• The Impact of Inventory Discrepancies
• Identifying Inventory Discrepancies
• Common Causes of Inventory Discrepancies
• Handling Inventory Discrepancies
• Preventing Inventory Discrepancies
  
  
  

What is an Inventory Discrepancy?

An inventory discrepancy, also known as an inventory error, occurs when there's a mismatch between your actual physical inventory and what's recorded in your inventory management system. This could manifest as:

• Stock shortage: Having less stock than your records indicate
• Overage: Having more stock than your records show
• Misplaced items: Stock that exists but isn't where it should be

These discrepancies can lead to more than just frustration—they can result in overselling, stockouts, and lost revenue. For e-commerce businesses, where customer satisfaction heavily depends on accurate stock availability, managing inventory discrepancies is crucial.

Inventory Shrink

A related concept is inventory shrink, which specifically describes inventory loss due to factors such as:

• Theft (both external and internal)
• Damage
• Spoilage
• Administrative errors

Shrink is a significant contributor to inventory discrepancies and can have a substantial impact on a business's profitability.

The Impact of Inventory Discrepancies

Ignoring inventory discrepancies can lead to a cascade of problems, affecting various aspects of your business:

1. Financial Losses:
   Every discrepancy represents potential lost revenue. While overages tie up your capital in excess stock, shortages can lead to missed sales opportunities.
2. Customer Dissatisfaction:
   When a customer orders a product, you think you have in stock but don't, it results in:
   
   • Canceled orders
   • Delayed shipments
   • Unhappy customers
   
   This can damage your reputation and lead to negative reviews, potentially driving away future customers.
3. Operational Disruptions:
   Discrepancies can throw a wrench into your entire operation:
   
   • Fulfillment delays
   • Inaccurate stock forecasts
   • Inefficient use of storage space
   
   These issues make it difficult to maintain smooth business operations and can increase operational costs.
4. Dead Inventory:
   Inaccurate inventory records can lead to overstocking, resulting in dead inventory—items that remain unsold for an extended period due to a decline in demand or obsolescence.
5. Decreased Team Morale:
   Constant inventory issues can frustrate your team, leading to decreased productivity and increased turnover.
6. Compliance Issues:
   Inaccurate inventory records can cause problems during audits or tax filings, potentially leading to fines or legal issues.

Identifying Inventory Discrepancies

Early detection of discrepancies can prevent larger issues down the line. Here are some effective methods to identify discrepancies:

1. Conduct Regular Physical Counts

Stocktaking or Inventory Counts

Stocktaking is the process of physically counting all inventory items to verify accuracy and reconcile any discrepancies with recorded data. This comprehensive count is typically conducted annually and is essential for businesses using periodic inventory systems.

Cycle Counting

For businesses using a perpetual inventory system, cycle counting is a more frequent and less disruptive method of inventory auditing. It involves counting a subset of inventory on a rotating schedule to continually verify accuracy.

Spot Checks

Random counts of specific items throughout the year can catch discrepancies early, benefiting both periodic and perpetual inventory systems.

2. Compare Physical Counts with System Records

After conducting your counts, compare the numbers with your inventory management system. In a perpetual system, discrepancies are easier to spot and rectify in real-time. For periodic systems, regular counts and comparisons are critical to avoid unnoticed discrepancies.

3. Analyze Receiving and Shipping Records

Keep a close eye on your receiving and shipping logs. In perpetual systems, inventory is updated in real-time, minimizing errors. For periodic systems, delays in recording can lead to significant discrepancies over time.

4. Check for Data Entry Errors

Mistakes in data entry, such as incorrect quantities, wrong SKUs (Stock Keeping Units), or duplicate entries, can cause discrepancies in any inventory system. Implement checks and validations to catch these errors early.

5. Investigate Discrepancies Promptly

When a discrepancy is found, investigate it immediately. In a perpetual system, you can act swiftly to minimize impact. In periodic systems, discrepancies might not be discovered until the next count, so timely resolution is key.

Common Causes of Inventory Discrepancies

Understanding why discrepancies happen is the first step in preventing them. Here are some common causes:

1. Human Error

Miscounts during physical inventory, typos during data entry, or misplacing products can all lead to discrepancies. This is repeatedly highlighted as a leading cause of inventory discrepancies. Because of it’s reliance on individuals, which is why training is so important when on-boarding new staff.

2. Process Gaps

Inconsistent or poorly defined processes for receiving, storing, and shipping goods can cause discrepancies. This term refers to inefficiencies or inadequacies within established inventory management procedures, often linked to poor training, unclear documentation, and a lack of standardization.

3. Tech Troubles

System outages, data loss, or software glitches can disrupt your inventory tracking. Partner closely with your IT team to monitor systems, define reporting protocols, and plan for regular upgrades and testing.

4. Vendor Issues

Incorrect shipments or damaged goods from your suppliers can create discrepancies. Implement vendor scorecards to track performance and establish clear Service Level Agreements (SLAs).

5. Damage Control

Products can be damaged in transit or during handling. If these damages aren't accounted for, they will inflate your inventory count. Ensure teams have a process to write-off or remove these damaged units from sellable stock.

6. Theft

Theft accounts for a significant portion of retail losses. Balance security measures with customer experience to minimize theft while maintaining a positive shopping environment. Consider both external theft and employee theft.

It's important to note that employee theft is a serious concern - studies have shown that 75% of Canadian employees have stolen from employers at least once. This statistic underscores the need for robust internal controls and monitoring systems.

7. Demonstration Products

If your e-commerce business has retail stores or conducts product demos, these items can often become a source of discrepancy. When a product is unboxed for customers to touch and feel, it leads to wear and tear, potentially creating an unsellable unit. Ensure teams have a process to write-off or remove these demo units from sellable stock.

8. Refund Mismanagement

When customers return products, they should be scanned back into the inventory system accurately. If the process is not well-defined or properly executed, it can lead to discrepancies. There needs to be a clearly defined process to identify items that are re-sellable and items that should be returned to warehouse to avoid issues.

9. Misplaced Inventory

Inventory that is physically present but incorrectly stored within the warehouse can lead to inaccurate counts and artificial stockouts.

How to Handle Inventory Discrepancies

When a discrepancy occurs, act quickly and methodically to minimize its impact on your business:

1. Acknowledge and Quantify the Discrepancy

Confirm that a discrepancy exists by comparing your physical inventory count with your system's records. Calculate the variance to understand the extent of the issue.

2. Identify the Root Cause

Determine whether the discrepancy is due to human error, process gaps, technology issues, or external factors like vendor errors or theft. This will guide your response.

3. Adjust and Refine Your Processes

Once you've identified the cause, refine your procedures to prevent similar issues in the future. This might involve additional employee training, updating inventory management protocols, or introducing more robust checks and balances.

4. Account for Damaged Products

Have a process for reporting and writing off damaged items. This ensures your inventory records reflect what is actually sellable.

5. Remove Unsellable Display Units

Track and remove demo or display units from your sellable inventory count to maintain accurate records.

6. Document and Implement Changes

Each discrepancy offers a learning opportunity. Document your findings and update your practices accordingly to prevent future issues.

7. Continuous Improvement

Managing inventory discrepancies isn't a one-time fix; it's an ongoing effort. Regularly review your procedures, monitor for recurring issues, and make incremental improvements to enhance accuracy and efficiency.

How to Prevent Inventory Discrepancies

Prevention is always better than cure. Here are strategies to keep discrepancies at bay:

• Train Your Team Thoroughly: Proper training on inventory management procedures is your first line of defense.
  
  
• Standardize Processes: Create detailed, standardized procedures for receiving, storing, picking, and shipping inventory. Regularly review and refine these processes.
  
  
• Leverage Technology:
  
  
  • Implement a robust Inventory Management System: Software designed to automate and streamline inventory tracking, often incorporating features like barcode scanning, demand forecasting, and order management.
    
    
  • Use Real-Time Inventory Tracking: A system that constantly updates inventory levels based on transactions, ensuring data accuracy and visibility.
    
    
• Keep Vendors Accountable: Use vendor scorecards and SLAs to ensure your suppliers are performing as expected.
  
  
• Handle Damages Promptly: Have a clear process for writing off damaged products, including store display items.
  
  
• Address Theft: Implement measures like staff training, security systems, and store layout optimization to reduce theft while maintaining a positive customer experience.
  
  
• Optimize Warehouse Management:
   
  • Implement efficient warehouse receiving processes
    
    
  • Streamline order fulfillment procedures
    
    
    • Establish clear returns management protocols
      
      
• Consider Partnering with a 3PL: Third-Party Logistics Providers specialize in warehouse and fulfillment. They can often improve inventory management efficiency and accuracy.
  
  
• Implement Regular Audits: Conduct periodic inventory counts and implement a cycle counting program to catch discrepancies early.
  
  
• Manage SKUs Effectively: Assign unique Stock Keeping Units to each product variation to track inventory precisely.
  
  
• Address Dead Inventory: Regularly review and manage slow-moving or obsolete stock to prevent it from skewing your inventory accuracy.
  
  
• Improve Communication: Foster clear communication between all entities involved in your inventory management process, including warehouses, distribution centers, fulfillment centers, stores, vendors/suppliers, and customers.

Conclusion

Inventory discrepancies are a common challenge for e-commerce businesses, but they're not insurmountable. By understanding the causes, implementing preventive measures, and refining your processes, you can minimize these discrepancies and keep your business running smoothly.

Remember, effective inventory management is a continuous process that requires attention and adaptation. With the right strategies in place, you can overcome these challenges and ensure your e-commerce store is well-equipped for success.

As you optimize your inventory management, don't forget the importance of efficient shipping and fulfillment. Services like Buster Fetcher can help you save on shipping costs and streamline your logistics, freeing up more time to focus on perfecting your inventory processes.

Here's to accurate inventories and thriving online stores!

FAQ

How do you calculate inventory discrepancy?

To identify an inventory discrepancy, start by taking a physical count of your inventory and comparing it to the numbers recorded in your system. The difference between these two figures is your inventory variance. Use this formula:

Inventory Variation = Actual Count - Recorded Count

If the result is positive, it means you have more items on hand than expected, indicating a surplus. If it’s negative, you have fewer items than anticipated, signifying a shortage. For a more precise understanding, calculate the discrepancy as a percentage of your recorded inventory with the following formula:

Percentage of Inventory Variation = (Inventory Variance / Recorded Count) x 100

How Do You Investigate Inventory Discrepancies?

Begin by conducting a thorough recount of the items in question, ensuring accuracy and checking for misplaced items. This is the first step in verifying the accuracy of your inventory count.

What are the consequences of inventory discrepancies

Ignoring inventory discrepancies can lead to a cascade of problems, affecting various aspects of your business:

1. Financial Losses: Every discrepancy is a leak in your profits. These errors translate directly to lost revenue.
2. Customer Dissatisfaction: When a customer orders a product you think you have in stock but don't, it results in canceled orders, delayed shipments, and unhappy customers.
3. Operational Disruptions: Discrepancies can disrupt your entire operation, from fulfillment delays to inaccurate stock forecasts, making it difficult to maintain smooth business operations.
4. Dead Inventory: Inaccurate inventory records can lead to overstocking, resulting in dead inventory—items that remain unsold for an extended period due to a decline in demand or obsolescence.