Rows of unsold products gathering dust and stockouts leaving customers empty-handed (and turning to competitors)—these are but two of an inventory planner’s worst nightmares. For warehouse managers and e-commerce business owners, inventory risks can quietly (or not so quietly) drain resources, underscoring the essential need for efficient inventory management.
If you want to prevent or completely avoid inventory mistakes, here’s what you need to know about inventory risk, its devastating consequences on a company, and how cutting-edge automation solutions can help in risk mitigation.
What Is Inventory Risk?
Inventory risk is the possible financial loss a company may face due to stockouts and overstocking, or keeping damaged, outdated, or unsaleable inventory. Simply put, it’s the likelihood you’ll have either too many items that don’t sell well or not have enough, which could result in stockouts.
Inventory risks can result from different factors, such as supply chain delays, technological improvements, market fluctuations, and changes in consumer preferences. Inventory not sold within a certain time can adversely affect a company’s cash flow and profitability by increasing storage costs and insurance premiums, possibly resulting in write-downs or write-offs.
Numerous case studies show that no business is too small or big to suffer substantial loss due to inventory risks. Take Nike, for example. In the early 2000s, the brand faced significant inventory challenges when a new supply chain management system was implemented without proper testing. That led to incorrect demand forecasts, resulting in excess stock of less popular products and shortages of high-demand items like Air Jordan shoes.
9 Common Inventory Risks and Their Business Impact
Demand Forecasting Errors
The correct prediction of future demand is essential for efficient inventory attainment. That’s why inaccurate forecasting is one of the most significant inventory risks, with a more damaging effect on stock management than any other part of the business. Underestimating the demand can lead to stockouts, while overestimating can lead to excess inventory that remains unsold for longer periods.
One common example: overstocked seasonal items that cause massive losses. Such slaps to a company’s P&L can result if it lacks proper data analysis, leans towards manual tracking, or relies only upon past trends without considering current market conditions.
Seasonal trends, weather, and consumer preference shifts all contribute to unpredictable demand patterns that complicate inventory planning. While a business should have enough stock for both normal and busy seasons, unexpected changes in customer behavior can throw everything off balance if it fails to anticipate them.
Stock Shelf Life and Perishability
Products like food and beverages, pharmaceuticals, cosmetics, and seasonal goods come with an expiration date. The shorter the product’s shelf life, the bigger the inventory risk, causing spoilage, dead stock, or problems with regulatory compliance, particularly for pharmaceutical products.
This risk, mostly to manufacturers, retailers, or e-commerce with more sensitive inventory control challenges, can be properly managed. Required are careful forecasting, regular inventory audits, and implementing strategies such as first-in, first-out (FIFO) for products with a short life span and perishable goods.
Supply Chain Disruptions
Natural and man-made disasters, supply and transportation issues, inventory shortages, and regulatory changes can all significantly disrupt the usual progression of goods within a supply chain. While there are many real-life examples, the COVID-19 pandemic is a classic example of how something beyond human power can profoundly impact the global supply chain. Lockdowns in the pandemic’s early stages caused factory closures and production interruptions, international trade restrictions, and uncertainty.
To better prepare for future disruptions, many businesses have redesigned their supply chain strategy, invested in digital technology, and put risk mitigation measures in place. Nonetheless, the pandemic brought to light the necessity of increased supply chain flexibility and agility in an increasingly interconnected world economy.
Supplier Unreliability
Working with suppliers that promise fast, on-time delivery but consistently miss deadlines can take a serious hit on your inventory. Besides being incredibly frustrating, delayed production can leave you without essential stock during peak sales periods, leading to missed revenue opportunities and unsatisfied customers.
Theft
Sometimes, criminally bad planning isn’t the only reason for inventory loss. Actual crime like employee theft, shoplifting, and organized retail crime can lead to large losses. Both due to untruthful employees or smart thieves, inventory shrinkage costs the retail sector $46.8 billion in the United States alone.
Damaged Goods
Mistakes made by employees, dangerous shelving systems, and improper storage can all lead to inventory damage, especially in businesses that sell fragile products, such as glass items. In any case, damaged or broken inventory that’s no longer suitable for sale and becomes trash results in expenses to dispose of the broken goods plus lost revenue.
Ordering Mistakes
Staff making mistakes when making orders poses a great inventory risk. Examples: ordering the wrong products or quantities, entering incorrect details in the system, and miscommunication with suppliers. Something as small as ordering blue shirts instead of black ones can quickly lead to inventory shortages and customer dissatisfaction.
Inventory Record Inaccuracies
Outdated or incorrect data, not counting the inventory regularly, and poor tracking processes can all lead to your recorded inventory numbers not matching the actual stock. Whether because of mislabeled products, wrong location storage, or theft, inaccuracies in inventory records can make managing stock efficiently challenging.
Manual Processing Errors
Manual inventory can lead to data entry mistakes, misplaced items, and missed transactions, causing major headaches and confusion. Implementing automated solutions can help prevent this common problem.
How to Mitigate Inventory Risks With Automation
As warehouses face increasing complexity and tighter margins, automated inventory management has become essential, not optional. The nine inventory risks discussed in this article can be significantly reduced through a comprehensive warehouse management system (WMS) that automates critical inventory processes.
While many solutions offer partial automation, the Da Vinci Unified platform provides complete warehouse visibility and control through integrated modules that fully address inventory risks in both brand-owned and 3PL facilities.
Inventory Value Tracking
Monitoring the stock value helps firms manage stock effectively. It involves keeping track of the costs, depreciation, and the risk of goods becoming obsolete. FIFO and LIFO are methods used to determine value and guide pricing, liquidation, and reordering decisions.
How DaVinci helps: The DaVinci Unified WMS allows value tracking of inventories in real time. Companies know stock levels and alter pricing or reordering plans in response. The system uses FIFO as a default allocation mode for inventory management, helping companies to maximize the flow of inventory and minimize losses due to obsolescence.
Predicting Demand
Predicting Demand
Precise demand forecasting allows firms to maintain proper inventory levels to avoid stockouts and overstocking. By analyzing past sales data and market trends, businesses can make informed stocking decisions.
How Da Vinci helps: Da Vinci WMS integrates with external demand forecasting solutions through standardized APIs. The system provides forecasting tools with accurate historical data on inventory movements and can automatically adjust reorder points based on forecasting inputs. Seasonal planning tools help warehouses prepare space and labor resources for predicted demand fluctuations.
Confirming Supplier Reliability
An orderly supply chain relies on dependable suppliers. Companies must screen potential suppliers based on the reliability of their deliveries, financial soundness, and quality requirements to avoid disruption.
How DaVinci helps: While it doesn’t directly track supplier performance, the solution integrates with various systems to simplify supplier communication. It allows businesses to track deliveries, control lead times, and maximize overall supplier coordination to eliminate the risk of undependable partnerships.
Implementing Security Measures
Safeguarding stock against loss and theft is essential. Companies can enhance security with surveillance systems, restricted access and limited areas, and stock monitoring technology.
How DaVinci helps: The system increases security with user access control to block unauthorized stockroom access. It further helps in real-time tracking to identify discrepancies instantly and allow businesses to catch and rectify theft threats in advance before they grow into major losses.
Conducting Quality Checks
Damaged or spoiled goods lead to losses. Regular inspections and stringent quality control procedures ensure the quality of the items and prevent wastage.
How DaVinci helps: Da Vinci Unified can track expiration dates and FIFO-based stock control to ensure that perishable goods are consumed before they spoil. The directed put-away and cartonization functionality additionally minimizes handling damage and maximizes overall stock quality. That way, companies can improve inventory management procedures, minimize operational risks, and increase overall efficiency.
Reduce Inventory Risks and Improve Your Bottom Line
Lowering inventory risks to operational efficiency and profitability in both brand-owned and 3PL warehouses requires automated systems for inventory tracking, quality control, and security.
Da Vinci Unified WMS improves inventory accuracy and controls risk through:
- Real-time inventory visibility across multiple facilities
- Automated cycle counting that maintains inventory accuracy
- Integration capabilities with ERP, accounting, and forecasting systems
- Lot and batch tracking with expiration date management
- Configurable security controls with comprehensive audit trails
- Multi-client inventory segregation for 3PL environments
Warehouse operations using Da Vinci reduce inventory holding costs and inventory write-offs through improved processes and controls.
Contact Da Vinci for a demonstration to see how these capabilities can be configured for your specific warehouse operation.