5 Most Common Reasons for Inventory Discrepancy & How to Resolve Them

Inventory Discrepancy July 27, 2020

Chloe Henderson

Writer

Inventory discrepancy occurs when the reported number of stocks of a particular item differs from the actual quantity in-store.

For any company, large or small, accurate inventory is essential and key to running a successful business. However, inventory discrepancy is not uncommon due largely to human error. Common causes could include incorrect recording, supplier errors, organization problems, theft, and more.

Minor discrepancies can be resolved by implementing a reliable inventory system to aid with physical stocktakes and cycle counts. Regardless, reconciling inventory can cost a business time and money that could be used to improve other aspects of the establishment. Therefore, it's better to take preventative measures to stop discrepancies in their place before they become financial burdens.

Checklist for Resolving Discrepancies

Spotting inaccuracies between recorded inventory figures and the actual counts may be alarming. However, businesses can create a plan of action for addressing these discrepancies to avoid unnecessary panic.

This checklist should include the most basic actions such as recounting the stock as well as considering the possibilities of internal and external theft.

1. Check if the stock has been misplaced or mistaken for another item - It's possible that the missing inventory has simply been misplaced or mistaken for a similar item. Check different locations in storage, especially where similar items are stored to see if the product in question can be recovered. In the future, remember that organization is vital for accountability in inventory management.

2. Recount the stock - Even the most experienced senior managers can make mistakes during physical stock counts, especially if the business lacks a clear inventory system. When the numbers aren't adding up, consider having another member of the management team step in to double-check.

3. If you suspect theft, investigate - Theft can occur internally or externally and should not be taken lightly. Whether it is a customer or employee taking goods, this can contribute significantly to inventory shrinkage. Speak to possible witnesses and gather physical evidence, such as security footage, to pinpoint the culprit before accusing someone with no evidence.

4. Ensure damaged stock has been accurately logged - Whether the item has been damaged due to mismanagement in the warehouse or supplier error, make sure these instances have been recorded in the inventory reports as they happen to make sure all inventory levels are up to date.

5. Ensure all employees are using the correct unit of measurement - As a part of the training, employees in charge of handling inventory should be advised as to how stock is counted and recorded. If workers are not on the same page, miscounting is inevitable.

Common Discrepancies and Preventative Measures

Establishing measures to increase the effectiveness of inventory counts or limiting shrinkage using inventory software will require additional labor and finances in the beginning. However, this can have a significant positive impact on profits down the line.

These preventative measures may require upfront costs but have high returns on investment as they limit expenses relating to inventory loss or mismanagement by increasing accuracy and accountability. The first step is to identify areas where discrepancies frequently occur and understand how to rectify each of these issues.

Managing Multiple Warehouses

As a business grows, its inventory will naturally grow alongside the profits. However, managing multiple storage locations requires more organization and surveillance.

No matter the size or industry of the business, they need assigned locations for all incoming and outgoing stock. This is especially important for large companies that require several warehouses to store their products. There should also be specific locations dedicated to safety stock, along with appropriate paperwork to inform employees of appropriate inventory levels.

If there appear to be missing units of a certain product, it is important to first determine exactly how much is missing. If there are large units missing make sure to check that the scheduled shipments are on time before scouring the warehouses. If all incoming shipments are on schedule then it is likely that the units were misplaced. Ask the responsible worker(s) where they have placed the product in the storeroom, and double-check if it was sent to an entirely different location.

On the other hand, if there only seems to be small units of a good missing and the procedures above were followed then it could point towards the possibility of theft or damage.

Lack of Automation

Tools such as barcodes and inventory software are very useful when counting stock. They make tracking fast and efficient, especially when dealing with large amounts of stock.

Most barcode scanners can be easily integrated with inventory management software so there is no need to input data manually, eliminating the chance of human error. Even small businesses, such as mom-and-pop shops, can make use of inventory management systems to limit discrepancies, and save money in the long run.

Human Error

To limit the number of discrepancies caused by human error, employees managing inventory should be properly trained on inventory checks and labeling. Some common discrepancies caused by human error include-

Miscounted inventory
Mislabeled items
Incorrect units of measurement
Misplaced product

The best way to prevent incorrect labeling is to assign a unique barcode or identification number to every product. This will make it easier for businesses to manually restock and perpetually track inventory levels using barcode scanners.

Theft

To ensure that a business does not experience internal theft, background checks should be run on all potential workers. From there, employees should be trained on how to deal with stealing customers.
Little things such as greeting incoming shoppers to let them know that they have been seen can reduce the chances of theft. Businesses can also consider purchasing security cameras or security guard services to protect their products.

In the event that a business is sure someone has stolen their product, they must determine if it was internal or external. If it was internal, then the responsibility falls on management to collect physical evidence and determine what disciplinary action they will choose. If the crime was external, the authorities can be contacted when necessary.

Insufficient Physical Counts, Audits, and Cycle Counts

One of the best ways to effectively trace stock usage is by performing maintenance checks. However, stock control is not a one-time job. Perpetual tracking, quality checks, and routine cycle counts can make a difference when analyzing the accuracy of inventory data.

Designating a certain time each month or quarter to conduct physical stock counts and performing monthly or quarterly audits can help businesses with severe discrepancies target the root cause of their shrinkage.