Bad inventory management can cost your company tremendous amounts of time, money and, ultimately, its chances of success. It can heavily impact any business’ organizational performance, leaving it with lackluster profit margins and elevated overhead expenses as a result.
No business is exempt from the effects of poor inventory management. Even multinational corporations like Walmart know first-hand just how much a disorganized inventory can cost them. The aforementioned grocery chain giant lost a whopping $3 billion to poor inventory control back in 2013, and suffered regular stock-outs for months after the fact.
The Causes of Bad Inventory Management
There could be a million reasons why you’re mismanaging your inventory. This isn’t an exhaustive list, but it does outline a few of the most probable reasons why your inventory management is suffering.
Most small to medium-sized businesses (SMBs) use Microsoft Excel spreadsheets to manage their inventory. Spreadsheets tend to start out working well for smaller businesses, but their use can quickly lead to the development of devastating issues. This is particularly true for businesses that are growing rapidly.
In a study of errors in 25 sample spreadsheets, Stephen Powell from the Tuck Business School at Dartmouth College found that 15 workbooks contained a total of 117 errors. Around 40% of those errors discovered had minimal impacts on the businesses studied. However, according to the researchers, 7 of them led to significant losses of between $4 million and $110 million in revenues.
Manual Stocktaking and Inventory Tracking
Manual inventory tracking is perfectly functional for smaller businesses, but can become time-consuming and prone to errors. If you use these processes to manage a medium or large business’ inventory, you’ll always fall one step behind your true inventory levels. This will cause ongoing issues with ordering.
Large volumes of inventory can create more managerial challenges, but they can also negatively impact your profits. Most businesses have between 20% and 40% of their working capital tied up in inventory. Inventory reduction is difficult to do, but it’s important if you want to improve overall organizational performance.
There are two scenarios that can stem from your business not having access to accurate reports regarding customer habits, best-selling products, sales trends, and other vital data. One, you may order too many raw materials and deal with the issues of an overstocked inventory. Two, you could under-order and experience dead stock as a result. The latter scenario could lose you precious customers.
Once you insist on gathering and working with accurate reports, you’ll be able to better predict your customers’ future behaviors. This means you can order raw materials to manufacture products that meet customers’ demands without exceeding your firm’s budget.
What Effects Does a Bad Inventory Have on a Business?
Poor Customer Service
The Microsoft Midsize Business Center (MMBC) website states that lack of inventory control can result in delayed product shipments to customers. Moreover, the R. Michael Donovan & Co. website notes that bad inventory due to lack of control can create a scenario in which you don’t have the proper parts available for a product because you failed to check your inventory. This results in customer dissatisfaction and overall poor service to the clients you serve.
Loss of Cost Effectiveness
Bad inventory can be quite costly to your organization. Entrepreneur.com states that if you have too much inventory, it has the potential to be destroyed or damaged over time due to reasons beyond your control. If you have no system to weed out bad inventory, it may end up with shrinkage, according to the MMBC. If you are spending more on additional inventory that you don’t need, you are wasting money.
Businesses track inventory so that they are able to fulfill customer orders at all time. However, many businesses also plan ahead and when you start with a bad cache of inventory, you can’t properly plan. Moreover, if you have an unexpectedly large order, bad inventory may again cost you money if you can’t fulfill it.
To mitigate the negative effect of bad inventory on your business, you can integrate a few solutions into your workflow. We suggest an automated inventory management system to track your inventory and show you where you’ve gone wrong. If you prefer one-on-one advice and fast answers, you may hire an inventory consultant to periodically review your stock, show you where you can make improvements in storage, and advise you on the process by which inventory moves in and out of your business.