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Business Inventory Risks

Updated: Dec 10, 2021

Stock is a major factor that impacts the financial health and overall viability of a business that deals in physical products. Maintaining adequate inventory allows an organization to fulfill its fulfillment commitments and meet its customers' expectations. Low inventory levels, on the other hand, prevent it from meeting schedules and ultimately delay shipping orders on time. Furthermore, keeping more inventory in stock sabotages the cash flow and makes the business vulnerable to losses caused by theft/damage/the inability to store other revenue-generating items, i.e., opportunity cost.

A business should prepare a plan to combat different inventory risks and maintain sustainable operations. In the absence of a contingency plan, your company will be vulnerable to multiple cascading bottlenecks. We'll look at some of the main inventory risks today that affect businesses of varying sizes and sectors, along with steps to prevent them.

Inventory Risks

An organization may be unable to keep its operations in sync with its plans if it receives its inventory too early or too late. Receiving stock before its due date does cause inconvenience as you might need to free up storage space unexpectedly, leaving your inventory disorganized.

The scheduling of other items may also be impacted. The failure to receive inventory from suppliers on time would derail production at your end or force you to obtain the items from alternative sources at a higher price. As inventory is a dominant component of most business processes, the root of the problem lies in uncertainty. In most instances, the solution to inventory risk is to minimize uncertainty and build robust measures to protect your interests. We will examine different types of inventory risks and how you can minimize their effects:

Poor Sales Forecasting

When your sales forecasts overestimate or underestimate the actual demand, you end up with excessive inventories. A large inventory reduces the financial health of your business, while a small inventory jeopardizes the fulfillment of your commitments. Inventory risks associated with 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.

Perishable Inventory

When your business stores goods that are perishable in nature, you run the risk of additional inventory carrying costs. While maintaining their storage conditions will require additional resources, their consumption rate also needs to be considered. A high usage rate could greatly slow down the production line, while a low consumption rate would result in them becoming unsuitable for use. Maintaining a steady production flow with adequate cushioning can reduce the risk of perishable goods going out of stock by ensuring instant availability. Alternatively, you may wish to pool your excess stock with other businesses that are not direct competitors so that they can absorb the excess as needed. It is always possible to increase the production rate and direct your sales channels to send additional finished goods into the market according to their marketing strategy if that is not possible.

Storage Damage

A great deal of damage occurs when stored items are mishandled during storage or are stored in the wrong conditions. When an item is stained with oil, it can damage items like clothing and cause the item to be rejected.

Lost Inventory Items

By concentrating on the more precious items that require the least effort to count, ABC analysis can be viewed as effective in reducing theft. You may also experience miscellaneous losses of inventory items, and most businesses are forced to write off a certain amount of their inventory as losses. The only way to approach this area is to improve your inventory management tools, practices, and staff training.

Reducing Inventory Risks

Enhance your sales forecasts first by using advanced BI tools where needed. The inventory management system for your online store should also be integrated with the store's POS system and front end. By doing so, you will gain access to real-time sales trends and gain insight into them. To achieve inventory visibility goals, you might also want to upgrade your storage facility and material handling system. Installing various sensors or even implementing an AS/RS package can accomplish this. In this way, you can analyse popular products, related SKUs, inventory levels, lead times, and a lot more important metrics.

Inventory risks can be minimized by maintaining a transparent supply chain and responding quickly to fluctuations in demand. In order to protect your business interests, it will be necessary for you to maintain a bidirectional flow of data between your suppliers and sales channels. It is critical to have a technical stack that mitigates inventory risk.

Managing Inventory Risks with Dear Systems

No matter how large or small a business is, inventory risks always exist. Developing relevant business strategies backed by optimized solutions will be required at every stage of an organization's growth. Using DEAR Systems' inventory management software, you can mitigate inventory risks and safeguard your business interests. Because we have a long history of serving different industries, we are proud of the modules, automation workflows, and intuitive dashboards we have developed to assist in analyzation and proactive actions. No matter what your needs are, our system will help you through its extensive automation workflows that will simplify your business while providing insight.

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