Companies that handle goods and products regularly conduct inventory. Inventory counts are important not only for checking inventory levels but also for evaluating a company's assets.
Inventory doesn't match!? Causes of inventory discrepancies and how to deal with them
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One of the important points in inventory management is to understand inventory discrepancies.
If inventory discrepancies occur, it can affect your financial situation and potentially cause inconvenience to your customers.
This time, we will explain the causes of inventory discrepancies and how to deal with them.
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\What measures are necessary to improve the efficiency of inventory management operations?/
What is inventory variance?
Inventory discrepancies refer to the quantitative discrepancy between the actual inventory quantity stored in the warehouse and the inventory quantity recorded in the management ledger.
Inventory discrepancies are a common problem in industries that handle a wide variety of parts and products.
This section explains the types of inventory discrepancies, their impact, and tolerances.
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Types of inventory differences
Inventory discrepancies may occur when the actual inventory amount is higher or lower than the control ledger.
This is measured as an inventory difference rate, and if it is positive it is called an "inventory gain" and if it is negative it is called an "inventory loss."
The inventory discrepancy rate is the actual inventory quantity minus the inventory quantity on the books, divided by the inventory quantity on the books.
For example, if the inventory quantity in the management ledger is 100 units and the actual inventory quantity is 95 units, then (95-100) ÷ 100 = -0.05, so the inventory difference rate is -5%.
Impact of inventory discrepancies
The impact of inventory differences differs depending on whether the inventory variance rate is positive or negative.
If the inventory difference rate is negative, not only will the inventory value as an asset decrease, but there will also be a shortage of products planned for sale, meaning the expected sales and profits will not be generated.
If the inventory variance rate is positive, there is no negative financial impact because the inventory increases as an asset.
However, since there is a possibility that the product was lost during storage or that it was delivered to the warehouse by mistake, it is necessary to investigate the cause.
In either case, inventory discrepancies have financial implications, so it's important to keep them within acceptable limits.
Inventory difference tolerance
Ideally, inventory discrepancies would be kept to zero, but in reality, some discrepancies will occur.
Although it varies depending on the industry and product, the tolerance for inventory discrepancies is generally set at up to 5%.
5% may seem like an error, but it has a significant impact as it directly affects sales and profits.
Causes of inventory discrepancies
If inventory discrepancies occur, it will not only have a financial impact, but it may also result in a loss of external credibility due to an inability to meet shipping requests.
To minimize inventory discrepancies, it is important to understand their causes.
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[Cause of inventory discrepancies ①] Product inspection errors
When goods are received or shipped from a warehouse, if the item or quantity is incorrect, it will lead to inventory discrepancies.
Inspection at the time of receiving and shipping is the basis for proper inventory management.
As the variety and quantity of products handled increases, the possibility of inspection errors also increases, so a sufficient checking system is necessary.
[Cause of inventory discrepancies ②] Data entry errors
After goods are received or shipped, the data is entered into the management ledger, but any input errors will cause inventory discrepancies.
When there is a huge amount of data entry work to do, it is necessary to assume that mistakes will inevitably occur and take preventative measures.
[Cause of inventory discrepancies 3] Delays in document processing
There is no problem as long as the invoices and products are always linked and the data is updated in real time.
However, in reality, sudden shipping operations can sometimes cause delays in processing documents.
If you forget to do the follow-up processing, inventory discrepancies will occur, so be careful.
[Cause of inventory discrepancies ④] Processing future-dated invoices
If a document is reflected in the management ledger first, it can also cause inventory discrepancies.
For example, when a voucher is issued for the next month's shipment, the inventory will show that there is no inventory in the management ledger, but there is product in the warehouse.
If an inventory is taken at this time, there will be a discrepancy between the management ledger and the actual inventory.
If you want to process invoices with future dates, separate management is required.
[Cause of inventory discrepancies ⑤] Input errors during inventory work
Inventory work involves checking the management ledger and actual inventory levels.
During inventory work, we count and check the actual inventory one by one while checking it against the ledger.
Even if inventory management is done properly on a regular basis, if there is a counting error or input error at the time of inventory taking, it will be recognized as an inventory discrepancy.
Don't be complacent and think that it's just a matter of counting; make sure to coordinate the verification procedures with all parties involved before starting work.
[Cause of inventory discrepancies ⑥] Insufficient enforcement of storage rules
Inventory discrepancies can also occur if storage rules are not strictly followed or are not properly recognized.
For example, there may be cases where inventory is not where it should be, or the order in which it is shipped is incorrect.
[Cause of inventory discrepancies 7] Loss of inventory
Even if inventory is managed properly, inventory discrepancies will occur if items are lost during storage.
Inventory that has asset value is also at risk of theft, so measures such as restricting access to the warehouse and installing security cameras are necessary.
How to deal with inventory discrepancies
If an inventory discrepancy occurs, similar discrepancies will continue to occur unless the cause is identified.
If any discrepancies occur, it will take a huge amount of time and effort to check them.
For efficient business operations, it is important to manage inventory on a daily basis to prevent discrepancies.
Here are some measures to minimize inventory discrepancies.
[How to deal with inventory discrepancies ①] Match the actual items with the data
By constantly matching the data with the actual inventory, the risk of inventory discrepancies is reduced.
For example, we will create a system that allows any incoming or outgoing goods to be immediately reflected in the management ledger.
By introducing an inventory management system, you will be able to reflect the work done on site in the data in real time.
In addition, manual input is minimized as much as possible, and by utilizing barcodes and QR codes, work can be done accurately and quickly.
This will reduce human errors such as incorrectly entering items and quantities, which should lead to a lower inventory discrepancy rate.
[Measures to prevent inventory discrepancies ②] Increase the frequency of inventory counts
For accounting purposes, most companies conduct an inventory once a year.
However, if inventory discrepancies are higher than expected, it may be better to conduct the inspection more frequently.
Although it requires human resources and time, increasing the frequency makes it possible to narrow down the causes of inventory discrepancies.
As a temporary measure to identify the cause and reduce the inventory discrepancy, try increasing the frequency of inventory counts.
[Measures to deal with inventory discrepancies 3] Implement "deemed shipments"
Some companies implement "deemed issues" as a way to prevent inventory discrepancies.
With deemed shipping, no invoice processing is performed each time an item is shipped, and the reduced inventory quantity is considered to have been shipped.
Only the actual quantity that has decreased is recorded, so there are no inventory discrepancies. It also simplifies document processing work.
On the other hand, simply switching to deemed shipping does not allow you to grasp the shipping destination, item, or quantity.
A recording mechanism will be required in place of the usual paperwork process.
Another disadvantage is that when discrepancies arise in the number or amount of goods delivered to a customer, there are few clues to help determine the cause.
If the shipping destinations and items are limited, you may want to consider simplifying your work by using deemed shipping.
[Measures to deal with inventory discrepancies ④] Establish rules for inventory entry and exit operations
Among the causes of inventory discrepancies, those caused by human error can be prevented to some extent by establishing business rules.
It is a good idea to create a manual of business rules in case the person in charge changes.
Sharing work details helps prevent mistakes.
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[Measures to deal with inventory discrepancies ⑤] Use inventory discrepancy reports
To continually reduce inventory discrepancies, create and use inventory discrepancy reports.
By analyzing inventory discrepancies by warehouse and item from a bird's-eye view, you can separate issues into those for the entire warehouse and those for each work area. It can also be used to spread success stories for some items across the company.
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summary
In this article, we have explained the causes of inventory discrepancies and how to deal with them.
Inventory discrepancies can affect not only a company's financial health but also its credibility with customers.
Establish inventory management procedures and rules, such as introducing an inventory management system and inventory discrepancy reports, to minimize inventory discrepancies.
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