7 Type of Inventory Risks Businesses Need to Manage

Inventory Risk January 21, 2021

Hanh Truong

Writer

A retailer's main purpose is to carry optimal levels of goods and services that will satisfy their customer demand and maximize their profit margins.

However, there are various inventory risks associated with holding stock that can negatively impact a business's ability to run its operations. Managers must understand these risks and take the necessary steps to mitigate them from occurring.

7 Forms of Inventory Risks

Inventory risks refer to the chance that a business will not be able to sell its supply of products and the probability that its stock will decrease in value. Organizations typically carry large volumes of stock, therefore, keeping track of and preventing inventory risks is important to protect the bottom line.

The 7 main types of inventory risks businesses should manage are-

1. Forecasting Inaccuracy

Forecasting demand and sales is a critical component to identifying the right inventory to buy, how much to stock, and when to make an order.

Inaccurate forecasting can result in understocking, which can lead to stock-outs, loss in sales, and unhappy customers. A business can also overstock inventory, which often results in excess products taking up space in the warehouse and inventory obsolescence.

Retailers can improve their forecasting capabilities by implementing inventory management software with ordering optimization. These digital solutions can increase ordering accuracy and will help managers maintain optimal inventory levels by providing visibility into sales data and stock levels.

It also has suggested ordering features that use historical sales data, current inventory levels, and supplier delivery information to ensure purchase orders are made at the right time and in the proper quantity.

2. Unreliable Suppliers

Reliable suppliers adhere to their agreed delivery time, stock quality standards, and quantities. Suppliers that perform well and accordingly will minimize any delays in production and instances of stock-outs.

However, working with suppliers that deliver too early or too late can cause fluctuating levels of inventory, which will greatly impact customer service. Therefore, businesses should specify delivery expectations and outline contracts to detail the consequences if a third party does not follow through with their agreements.

3. Product Shelf Life

Perishable products have a limited shelf life and can be an inventory risk, if not monitored well. Manufacturers and retailers need to focus on goods that have a short shelf life, such as dairy or raw meat products, to ensure that they do not expire while in storage.

One approach businesses will adopt to manage perishable goods is stocking minimal quantities. This allows older stock to be sold first before new products that have a later expiration date.

4. Theft

Inventory theft can greatly impact a business's operation and profits, and it can occur regularly if a business does not invest in security systems or personnel.

To further prevent theft, warehouses should conduct frequent cycle counts, which is a method of counting small subsets of inventory on specific days. By consistently checking inventory, managers can quickly spot any theft or discrepancies in stock levels. Businesses can also utilize antitheft tags that alert staff when it is removed without authorization.

5. Loss

Since inventory is considered a company's asset on its balance sheet, inventory loss would need to be written off of its financial books. Consequently, the business will have a reduction in assets, as well as its equity.

Generally, inventory loss will occur when a product is missing due to a lack of stock control, theft, or poor handling of goods. Management can improve its warehouse management with inventory administration software. Modern systems will ensure purchase orders are received accurately and can enable managers to track inventory in real-time.

6. Damage

Inventory damage can occur due to the mistreatment of goods or improper storage methods in the warehouse. Companies should define inventory protocols that outline how to handle products and reserve spaces in the warehouse to store goods.

For example, if a business is carrying fragile items, warehouse managers should set a maximum height limit that the products can be stacked. They should also put labels on the boxes that contain delicate products and make sure that staff does not load heavy packages on top of breakable goods.

7. Product Life Cycle

A product's life cycle is the stages an item goes through when it is introduced into the market and when it is removed from store shelves.

In the beginning stages of the cycle, products are usually popular among consumers until their demand becomes stagnant. As the goods reach the final phases in the cycle, they become high-risk because demand is declining.

Retailers need to monitor market trends for their products to understand what stage of the life cycle they are in. This will ensure they are not over-ordering inventory that is declining in demand, which will effectively prevent overstock and waste.

The latest inventory systems are cloud-based and can provide businesses with real-time data reports related to sales and customer demand. This could help managers identify their most profitable inventory products and mitigate wasteful ordering.

By understanding the risks associated with carrying inventory, businesses can take the appropriate measures to safeguard their profitability.