For any business that deals in physical products, inventory is one of the biggest factors that can impact its financial health and business case at large. Having adequate inventory enables an organization to uphold its fulfillment commitments and stay in line with its customers’ expectations. On the other hand, a low inventory level prevents it from manufacturing its products as per the schedule and ultimately delays shipping the orders on time. On the flip side, having more inventory in stock sabotages the cash flow and makes the business vulnerable to the losses caused by damages/theft/being unable to store other items that can bring in revenue, i.e., opportunity cost.
Every business should prepare a plan to fight back different inventory risks posed to maintain the sustainability of operations. Failing to do so will result in your company being vulnerable to multiple cascading bottlenecks with no contingency plan in place. Today, we will go through some of the major inventory risks that affect most sectors and business sizes, along with the steps you can take to prevent them. Let’s get started.
What Is Meant By An Inventory Risk
Inventory risks are possible situations where an organization is unable to keep its operations in sync with its planning due to receiving its inventory late or early. Yes, receiving stock before its due date also results in inconvenience as you might need to free up your storage space unexpectedly, leaving your overall inventory disorganized.
It may also impact your production planning and shipping schedule for other items. Not receiving inventory from suppliers on time would derail production at your end or force you to procure the items from alternative sources at a higher premium. In both cases, the root of the problem lies in uncertainty, as inventory is a dominant component of most business processes. Thus, the solution to most of the inventory risk types is to minimize the uncertainty and build robust mechanisms to safeguard your interests. Let us have a look at different types of inventory risks and how you can minimize their effects:
Improper Sales Forecasting
When your sales forecasts overestimate or underestimate the actual demand, you end up with disproportionate inventory levels. As mentioned earlier, having more than necessary inventory reduces your business’ financial health, while having less inventory jeopardizes your fulfillment commitments. The biggest results of inventory risks faced by improper sales forecasting include:
- Losing sales.
- Frequent stock-outs.
- Inflated procurement costs due to alternate sourcing.
- Holding excess stocks.
- Adverse impact on cash flow management.
Bottlenecks On Supplier End
Supplier side bottlenecks are equally common, and they can impact even more negatively since you don’t have any strategic outlook over the issue, unlike sales forecasting. It is necessary that you receive the stock exactly as per the schedule, or else you will face the perils of overstocking or understocking inventory items. If the suppliers consistently fail to honor the delivery deadlines, it will put undue pressure on your production and sales channels. Suppose you are fully dependent on a single vendor or supplier for a particular item. In that case, it is necessary to mitigate such risks with the help of SLAs and clearly define the deliverables. Also, decide the accountability for all parties, including your logistics partners, in order to streamline the overall supply chain management.
Storing Perishable Goods
If your business stores goods that are perishable in nature, it poses additional risks which are associated with the inventory carrying costs. No doubt you will have to employ additional resources to maintain their storing conditions, but at the same time, their consumption rate needs to be checked. If you use them at a higher rate, the lead time could halt your production line, while slow consumption will result in them becoming unfit for use. The best way to manage risks associated with perishable goods is to maintain a steady production flow with adequate cushioning by ensuring instant availability if they go out of stock. On the other hand, you may want to pool such items with other businesses that are not your direct competitors so they can absorb the excess stock if required. In case that’s not possible, you can always increase the production rate and direct your sales channels to send additional finished goods into the market as per their marketing strategy.
Damage During Custody
In many cases, the stored items get damaged due to mishandling during storage or due to wrong storage conditions. For instance, placing an item on store shelves that are stained with oil can damage items like clothing and cause total rejection. On the other hand, faulty retrieval can also harm the fitness of an item for production. This is a serious challenge for any business as your staff members will only get to know about the issue right before production/assembly. Here, accidents and natural calamities can also create negative effects for your business.
Theft And Loss Of Inventory Items
Theft is a common problem with large storage facilities that lack adequate monitoring. ABC analysis can be considered as an effective way of minimizing theft as it allows you to focus on more precious items that need less effort to count. On the other hand, you may also face miscellaneous loss of inventory items, and most of the businesses do need to write off a certain part of their inventory as losses. This area can be approached only by overall refinement of your inventory management practices, tools used, and training your staff properly.2
Product Lifecycle-Based Concerns
For many businesses, the decreasing product life cycles are becoming a major source of inventory risks. The bullwhip effect can be considered as one of its common reactions as many suppliers would reduce/increase the production of their products depending on the market speculations. For instance, if an OEM feels that a certain automobile company will discontinue a vehicle, they might cut down or even stop the production of the parts they manufacture without acknowledging the same with their client. This also goes the other way around, and the best way to reduce such risks is improving communication. You can also create separate provisions like giving notice before stopping procurement and ensuring that you pay your vendors on mutually agreed terms.
How To Reduce Inventory Risks Caused By These Issues
Firstly improve your sales forecasts and take the help of advanced BI tools wherever needed. You should also integrate your inventory management system with your ecommerce store’s front end and POS systems. This will give you a better idea of the sales trends and provide you with real-time insights into sales trends. You can also modernize your material handling system and upgrade your storage facility to meet inventory visibility goals. This can be in the form of installing various sensors or even implementing an AS/RS package. This way, you can swiftly analyze the popular products, related SKUs, current inventory levels, lead times and a lot of other important metrics.
Your success in minimizing inventory risks depends on how transparent your supply chain is and how well you respond to the changes in demand. It will require you to maintain the bidirectional flow of data with both your suppliers and sales channels with appropriate measures to safeguard your business interests. A large portion of your inventory risk mitigation depends on your technical stack.
Mitigating Inventory Risks with Dear Systems
Every business, no matter how big or small, faces inventory risks invariably. At every phase of organizational growth, you will need to develop relevant business strategies backed by optimized solutions. DEAR Systems offers a versatile, scalable inventory management software that helps you mitigate inventory risks and safeguard your business interests. With our broad expertise in serving different industries through their growth, we feel proud to have created various modules, automation workflows, and intuitive dashboards that will help you analyze and take proactive measures as needed. Be it order picking or tracking pipeline inventory; our system will assist you with its extensive automation workflows that bring the right insights to you while simplifying your business.
Feel free to contact DEAR Systems to get expert advice on mitigating inventory risks and getting a free 14-day trial.