- Reid Hanson
The Costs of Inventory Inaccuracy
When a company experiences inventory inaccuracy issues, problems extend through the entire supply chain to the end customer.
When a company experiences inventory inaccuracy issues, problems extend through the entire supply chain to the end customer. Since inventory is typically a company’s most substantial expense, inaccurate inventory can cost a company a significant amount of time and money, negatively impacting profitability and efficiency. As a result, companies must strive for inventory accuracy to avoid these negative consequences, including: Inaccurate inventory levels – Inventory inaccuracy leads to the overstocking and understocking of products, missing parts, or employees not being able to locate parts in different locations. As a result, employees may inadvertently reorder parts that are already in stock or purchase more inventory than what’s needed, which lowers efficiency and reduces profits. Decreased productivity – Inaccurate inventory decreases employee productivity since workers spend significant time and energy chasing down lost or misplaced items, verifying item locations, collaborating with coworkers, making adjustments in the system, and replenishing the inventory. Many businesses struggle to thrive when they are unable to get control over their inventory. Lost business – Companies with inaccurate inventory are not able to fulfill orders as quickly or efficiently since physical counts will likely not match system counts. If customers experience shipping errors or delays, they will likely go elsewhere to make purchases in the future, leading to lost revenue. Order fulfillment issues – Inaccurate inventory leads to order fulfillment problems, and the associated costs with managing backorders, including employee time, inventory storage, and transportation. Inaccurate accounting reporting – Inaccurate inventory will affect accounting reporting since profit reporting won’t be accurate, and reports will show inaccurate stock cost values. More expensive insurance premiums – Inventory inaccuracy leads to incorrect reporting and inventory levels, so the company’s insurance premiums might increase to cover the cost of the additional product. Shipping issues – Inaccurate inventory counts often result in shipping the incorrect items or having to incur unnecessary expedited shipping costs to avoid losing a sale or a dissatisfied customer. Shipment delays often result in having to spend more money on expedited shipping. Opportunity costs – Inventory is a significant investment for a business, so it is necessary to carefully monitor stock levels since investing in too much inventory due to inaccuracy results in an opportunity cost when too much cash is tied up. A company might miss out on other investment opportunities or can’t able to make additional improvements. Tax Payment Discrepancies – Since inventory inaccuracy may lead to underreporting or overreporting of inventory levels, a company might be responsible for higher taxes. Inaccurate levels can also trigger an audit if taxes are underpaid.