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.
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:
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.
A related concept is inventory shrink, which specifically describes inventory loss due to factors such as:
Shrink is a significant contributor to inventory discrepancies and can have a substantial impact on a business's profitability.
Ignoring inventory discrepancies can lead to a cascade of problems, affecting various aspects of your business:
Early detection of discrepancies can prevent larger issues down the line. Here are some effective methods to identify discrepancies:
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.
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.
Random counts of specific items throughout the year can catch discrepancies early, benefiting both periodic and perpetual inventory systems.
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.
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.
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.
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.
Understanding why discrepancies happen is the first step in preventing them. Here are some common causes:
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.
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.
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.
Incorrect shipments or damaged goods from your suppliers can create discrepancies. Implement vendor scorecards to track performance and establish clear Service Level Agreements (SLAs).
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.
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.
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.
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.
Inventory that is physically present but incorrectly stored within the warehouse can lead to inaccurate counts and artificial stockouts.
When a discrepancy occurs, act quickly and methodically to minimize its impact on your business:
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.
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.
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.
Have a process for reporting and writing off damaged items. This ensures your inventory records reflect what is actually sellable.
Track and remove demo or display units from your sellable inventory count to maintain accurate records.
Each discrepancy offers a learning opportunity. Document your findings and update your practices accordingly to prevent future issues.
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.
Prevention is always better than cure. Here are strategies to keep discrepancies at bay:
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!
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
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.
Ignoring inventory discrepancies can lead to a cascade of problems, affecting various aspects of your business: