For companies dealing with inventory, accuracy in record-keeping is one of the key factors for successful business operations. However, in practice, businesses often face inventory discrepancies, undermining their financial stability. Errors in accounting, misunderstandings in the supply process, human factors, and other issues can lead to incorrect inventory representation. These errors can complicate managerial decision-making, reduce operational efficiency, and create additional financial risks.
In our article, we will analyze the 10 main causes of stock discrepancies and discuss how to minimize their impact on business.
- What Is Inventory Discrepancy?
- Types of Stock Discrepancies
- How Do Inventory Discrepancies Affect Business?
- 10 Common Causes of Stock Discrepancies
- How to Check and Resolve Inventory Discrepancies?
- How to Reduce Inventory Discrepancies in the Future?
- Conclusion: Automation is a key element of accurate accounting
What Is Inventory Discrepancy?
Inventory discrepancies are the difference between the actual quantity of goods in the warehouse and the data recorded in the inventory system. They occur for various reasons and can affect both physical assets and their documentation.
Discrepancies are identified during inventory counts when employees compare physical stock with recorded data. Their presence may indicate the need to review accounting and control methods, as well as to increase attention to inventory management processes. Such discrepancies can significantly affect a company’s financial performance, cause difficulties in customer service, and lead to higher operational costs.
Types of Stock Discrepancies
Inventory discrepancies can manifest in various forms and at different stages of the supply chain, making their detection and resolution more challenging. Each error has its own characteristics and can impact the business in different ways. To effectively address inventory accounting issues, it is important to understand what types of inventory discrepancies can arise during the inventory process.
Counting discrepancies
This type of discrepancy arises from errors made during the physical counting of goods in the warehouse. Incorrect data can result from human factors, lack of attention, or insufficient employee qualifications. Such discrepancies can lead to misunderstandings in purchasing planning and inventory management.
Theft
Theft is one of the most serious causes of inventory discrepancies. It can occur both from employees and customers. Losses from theft can significantly impact a company’s financial performance and require measures to enhance warehouse security and implement effective control systems.
Damage
Damage to goods can occur due to improper handling, insufficient packaging, or exposure to external factors. Such items require write-offs, which negatively impact the company’s financial performance.
Shrinkage
Shrinkage is the reduction in the quantity of goods in the warehouse that cannot be explained by accounting errors or theft. It can result from natural wear and tear, spoilage, or loss of items. Shrinkage can be difficult to track and account for, making it a serious issue for many organizations.
Documentation errors
Improper documentation can similarly lead to discrepancies between actual inventory and recorded data. This can include errors in invoices, receipts, or other accounting documents. Such mistakes complicate inventory control and can also result in financial losses.
How Do Inventory Discrepancies Affect Business?
Inventory discrepancies can trigger a chain reaction of problems, affecting not only inventory management but also customer service levels, resource management, and the company’s reputation. They can become a serious issue that negatively impacts the overall efficiency of your business. First and foremost, you may encounter:
Financial losses
When inventory data does not match actual stock levels, you may end up ordering excess goods or, conversely, underordering necessary items. This leads to overspending, sales difficulties, and lost profits.
Customer issues
Insufficient stock levels can lead to delays or order cancellations, negatively affecting customer satisfaction. This is particularly critical for online businesses, where competition is high and timely delivery is essential.
Decreased supply chain efficiency
Incorrect inventory data complicates procurement, production, and logistics planning. This leads to disorganization in processes at all levels of the supply chain, resulting in delays in production and product delivery.
Costs of error correction
To resolve discrepancies, it is necessary to conduct additional inventory checks, correct data, and reevaluate business processes. This consumes time and resources that could be used more effectively.
Erosion of trust in the accounting system
Frequent inventory errors undermine employees’ trust in the inventory management system. This can reduce the effectiveness of its use and increase the risk of human errors in the future.
Difficulties in decision-making
Incomplete or inaccurate inventory data complicates the ability to make informed management decisions. Management may find itself in a position where it cannot effectively plan future purchases or reduce expenses.
In the long term, inventory discrepancies can negatively impact your company’s competitiveness by complicating the decision-making process and increasing operational costs.
10 Common Causes of Stock Discrepancies
Accounting errors may seem minor at first glance. However, over time, they accumulate and impact all operations related to procurement, sales, and logistics. To maintain control over inventory and minimize losses, it is essential to understand what causes such discrepancies.
1. Human errors
The human factor is one of the main causes of inventory discrepancies. Even the most experienced employee can make a mistake when entering data manually during receiving, packing, shipping, or inventory counting. For example, a slight misplacement of a decimal point or confusion in units of measurement can lead to serious distortions in inventory data.
These errors often occur due to fatigue, lack of attention, or insufficient training of employees. In manual inventory processes, especially with large volumes, such oversights are almost inevitable. This further underscores the importance of automated control and verification systems.
2. Failures in inventory management systems
System errors can occur for various reasons, ranging from technical failures and inadequate integration with other systems to incorrect software configuration. For example, one part of the supply chain may be using one version of the software, while another part may be using an outdated version, leading to data inconsistencies. Additionally, if the software is not updated or staff are not trained on how to properly use new features, this also increases the risk of errors.
3. Theft and losses
Theft poses a significant threat to inventory accuracy. It can be perpetrated by customers, suppliers, or employees within the company. Inventory losses can also occur due to mishandling, damage, or natural wear and tear during storage and transportation. For example, in warehouse complexes, items may fall from shelves, get damaged during handling, or become unusable, which is not always recorded promptly. These losses often go unnoticed until the inventory count, leading to significant discrepancies in the data.
4. Errors in the supply process
Supplier errors can also be a source of inventory discrepancies if such situations are not properly tracked. For example, if a supplier sends you 95 units of a product instead of the 100 stated in the shipping documents, and employees do not verify the quantity upon receipt, this will immediately create a stock discrepancy.
There can also be errors in order fulfillment – when one type of product is substituted for another. These oversights may go unnoticed until the inventory count or the product is sold, leading to additional costs and customer dissatisfaction.
5. Incorrect handling of returns
Return processes often involve accounting errors. A customer may return a product, but this return is not always recorded in the system promptly. Alternatively, the product may be returned in damaged condition, but this is not indicated in the inventory data. In some cases, items sent for return between warehouses or from customers can be lost during shipping.
6. Errors in product movement
Internal movements of goods between warehouses, departments, or branches of a company often become a source of inventory discrepancies, especially if such movements are not recorded in the system promptly. In large logistics centers, where items are regularly moved from one location to another, the lack of a clear tracking and automation system can lead to significant data distortions. Even small deviations during these movements can accumulate and create considerable inventory discrepancies.
7. Natural wear and tear
Some products are subject to natural wear and tear, spoilage, or reduced shelf life. This is especially true for perishable goods, items with specific storage conditions, and fragile products that can easily be damaged during transportation or storage. Companies often fail to write off such items in a timely manner, which over time leads to the accumulation of accounting errors.
8. Poor inventory management
Inefficient inventory management is a key cause of discrepancies. It can manifest as a lack of clear processes for controlling the receipt, expenditure, and movement of goods, leading to chaos in accounting. This is often linked to the absence of automation. Companies that rely on manual accounting or use outdated systems are more likely to encounter such problems.
9. Delivery errors
Delivery errors occur when goods are delivered to the wrong address, in incorrect quantities, or damaged. Issues can also arise with partial deliveries or non-delivery of items, especially when cargo is transported through multiple intermediaries. Discrepancies may go unnoticed until a full inventory count is conducted, creating challenges for inventory accounting and supply chain control.
10. Fraud
Fraud is a more serious and complex issue that can significantly impact inventory accuracy. It can occur both from employees and from external partners or customers. Employees may exploit their access to goods and systems to manipulate inventory data, concealing thefts or unauthorized transfers of products. External fraud can include false returns, where customers receive refunds for items that were never actually returned.
Companies lacking clear security systems and access controls for warehouses and inventory data are at risk of fraud, which can go unnoticed for extended periods. Regular inventory counts, as well as automated accounting systems and video surveillance, help detect such issues at an early stage.
How to Check and Resolve Inventory Discrepancies?
To eliminate inventory discrepancies and identify the reason for the errors, it is important to act systematically. Here are several key steps that will help you accurately pinpoint the source of the problem and restore order in your records:
✔ Rechecking inventory is the first step for inventory discrepancy investigation. The issue may be related to a simple counting or data entry error.
✔ If a shortage is detected, it’s important to check whether the item was moved or returned to the wrong location. This is especially relevant in large warehouses or businesses with multiple storage areas. Sometimes items end up on the wrong shelves, which can be misleading during inventory counts.
✔ Ensure that you have actually received the goods from the supplier. Often, the system may indicate that the item has been received while it is still in transit or has not been physically delivered. It is important to cross-check shipping documents and verify the actual presence of the goods.
✔ Check if there have been returns from customers that have not been properly recorded in the system. Returns are a common source of inventory discrepancies, especially if they are not processed in a timely or accurate manner.
✔ Ensure that the counting is done in the same units of measurement as the records in the system. For example, if the material is tracked in kilograms but counted in grams, this can lead to discrepancies. Units of measurement should be consistent throughout the supply chain.
✔ Errors can occur due to incorrect labeling of items or confusion with product codes (SKUs). Ensure that you are checking the exact items listed in the system and that they are correctly labeled.
✔ Sometimes small differences in product variations (such as size or color) can lead to confusion. Check that the correct product has been counted and that different variations have not been combined or mixed up during the inventory process.
✔ Review the purchase and production history in the inventory management system. Data entry errors can cause inventory discrepancies. For example, an order may be entered incorrectly or with mistakes, leading to inconsistencies in the records.
✔ Ensure that all orders and production operations are accurately reflected in the system. If production or purchasing data is not entered on time, it can lead to discrepancies between actual and recorded inventory.
✔ Check that the data on material usage during production is accurately reflected. Compare the actual material usage with the records in the system by measuring product batches to identify discrepancies.
✔ If all other reasons have been ruled out, consider the possibility of internal or external theft. This is an unpleasant but necessary step. Check for instances where employees or customers may have taken goods without being accounted for.
How to Reduce Inventory Discrepancies in the Future?
Managing inventory discrepancies is just part of the job. It’s important to prevent their occurrence in the future. Effective inventory management methods can ensure your successful operations and the stability of financial performance. Below, we have outlined the key strategies and recommendations that will help minimize the risks of stock discrepancies, improve accuracy in accounting, and ensure better inventory management.
Automate data accounting and control
Invest in modern inventory management systems (ERP or WMS) that allow for real-time tracking of goods. This will reduce the number of errors related to human factors and ensure accurate data updates during receipts and shipments.
Conduct regular cycle counts
Instead of conducting inventory checks once a year, organize frequent cycle counts. This approach helps detect inventory discrepancies earlier and correct them before they impact business operations. Regular checks also enable more proactive inventory management and prevent small issues from escalating into larger problems.
Ensure warehouse security
Organizing secure and structured storage of inventory will reduce the risks of loss and theft. Install surveillance cameras, restrict access to warehouse areas, and implement systems to monitor the movement of goods within the warehouse.
Train staff on inventory accounting and handling standards
Clearly defined inventory management procedures and employee training on adhering to them will help reduce the number of errors. It is important that every employee understands their role in the process and follows the established protocols.
Choose reliable partners
Work only with reliable suppliers who can ensure timely deliveries and accurate product data. This will minimize the risk of inventory errors and prevent disruptions in the supply chain.
Insure all your cargo
Invest in cargo insurance to protect yourself from financial losses in the event of damage or loss during delivery. This is an important measure that will provide additional security when moving goods.
Have a backup plan for system failures
A failure in the inventory management system can lead to serious consequences. Prepare a backup plan for such failures: regularly back up data and ensure access to manual accounting methods in case of emergencies.
Counteract internal and external fraud
Fraud is one of the hidden causes of stock discrepancies. Implement strict control measures, conduct regular audits, and monitor suspicious transactions. This will help prevent theft and abuse.
Conclusion: Automation is a key element of accurate accounting
Without accurate and timely data on product availability, movement, and usage, a business risks facing inventory discrepancies. Modern automated inventory management systems, such as Ysell.pro, help reduce the likelihood of human error and enhance the transparency of all warehouse processes. Technologies enable real-time tracking of inventory levels, speed up stocktaking, and simplify data analysis for more informed decision-making. You will be able to avoid shortages, excess inventory, and the associated additional costs.
What tasks can the automated inventory management system Ysell.pro handle:
✔ Create a transparent inventory tracking system across all warehouses
✔ Organize control over every movement of goods both within the warehouse and between multiple locations
✔ Implement electronic document management for accurate deliveries
✔ Optimize space and routes within the warehouse to enhance productivity
✔ Speed up the process of receiving and shipping goods by using a barcode scanner
✔ Ensure control over returns and quick updates to accounting systems
✔ Accelerate the inventory counting process
✔ Automate reporting for inventory analysis
Automation is not just a solution to eliminate current inventory discrepancies. It is a powerful tool for optimizing your business. With Ysell.pro, you can avoid many common accounting mistakes, speed up workflows, and improve inventory control. This approach will allow your business to operate faster, more accurately, and more efficiently, ultimately leading to increased profits and strengthened market positions.