7 Types of Inventory Risks in an Organization

Inventory Risk February 05, 2021

Hanh Truong

Writer

Customers expect businesses to have the products and services they need at the right time and in the desired quality. To ensure that these expectations are consistently met and customer satisfaction is achieved, companies need to mitigate inventory risks.

Businesses that invest their resources and time into preventing the likelihood of overstocking inventory are able to protect their bottom line.

7 Forms of Inventory Risks

Inventory risk is the probability that a company cannot sell its products. It is also defined as the likelihood that the business's stock items decrease in quality or value in the warehouse. Manufacturers, wholesalers, and retailers generally carry large volumes of inventory; therefore, preventing inventory risks is a key responsibility to maintain profitability.

In order to effectively develop strategies to manage inventory, business owners need to have a comprehensive understanding of the different types of inventory risks.

1. Flawed Forecasting

Accurate forecasting enables management to order the right stock at the optimal level at the best time that customers need it. If forecasts underestimate consumer demand, retailers may have stock-outs, which will lead to lost sales and unhappy shoppers.

On the other hand, overestimating demand could result in excess inventory. When the warehouse is cluttered with unsold goods, holding costs will rise and waste will increase.

Businesses can improve their forecasting by utilizing inventory management software. This cloud-based tool provides users with real-time reports related to stock levels, sales, and spending. They also give insight into which products are most popular among shoppers, allowing owners to know exactly what they need to replenish to meet demands.

2. Unreliable Suppliers

Unreliable suppliers are those who fail to meet their established delivery schedules and quality standards. This causes businesses to have delays in production and fluctuations in inventory levels. Consequently, an underperforming supplier can negatively impact a customer's shopping experience.

To ensure that suppliers adhere to an agreed lead-time, quality, and quantity, management must outline their expectations in a contract. Purchase orders should also detail all the specifications, such as delivery date and location. This will hold suppliers accountable and can help both parties establish a transparent relationship.

3. Shelf Life

Many products, such as perishable goods, have a shorter shelf life and can be an inventory risk if not managed properly. This includes dairy items, raw meat, flowers, and beverages.

Business owners need to establish a robust inventory control process that ensures perishable products are used or sold before it is expired. For example, they should frequently monitor and rotate perishable items to ensure older stock is placed on the display before new products.

4. Theft

Theft is considered to be one of the biggest risks to inventory and it can occur at the hands of employees and customers. Companies should invest in security systems or personnel to safeguard their warehouse. Retailers can also use anti-theft tags that will set off an alarm if it is removed improperly.

Warehouse managers can conduct regular cycle counting, which is the practice of counting small subsets of inventory from a specific location on a specified day. This will help them quickly and easily identify any theft or inventory discrepancy.

5. Loss

Inventory is considered an asset on a company's financial statement, specifically its balance sheet. Therefore, when inventory is lost, an asset is written off the statements, effectively reducing the company's equity as well.

Typically inventory loss occurs when products are physically misplaced in the warehouse or when items are not received during shipments. Managers can mitigate this from happening by enacting inventory control and ensuring that employees are handling and storing the items properly in the warehouse.

6. Product Damage

Inventory products that become damaged or broken lose their value and cannot be sold to customers. These items inevitably become waste and can increase costs associated with disposal and lost sales.

To minimize damage, warehouse managers should develop storage protocols that indicate how and where inventory should be organized. For example, having a specified area in the facility for fragile goods and setting height limits on how many products can be stacked will make sure the items do not get crushed.

7. Life Cycle

Each product has its own life cycle, which is the phase it goes through in the market. When goods are introduced to the market, their demands grow steadily until it becomes stagnant. Eventually, as the product matures in the market, demand may slowly decline until it is withdrawn from stores completely.

Retailers and manufacturers need to consistently monitor their product's life cycle to understand what phase they are in. This will ensure they order or produce the right amount of inventory to meet current demands.

Having the optimal levels of the right inventory is necessary for a business's profitability. By understanding the various risks that can impact inventory, companies can be prepared and safeguard their financial health.