What is inventory risk? Management and Solutions

For any company that sells physical goods, inventory is one of the critical elements that can significantly impact a company's financial situation and overall business case. An organization can fulfill its obligations and adhere to the expectations of its customers by maintaining an adequate inventory. 

On the other hand, a low inventory level makes it impossible for it to produce its goods on time and ultimately delays the delivery of orders. On the other hand, keeping more inventory hinders cash flow. It exposes the company to losses brought on by theft, damage, and the inability to store other items that could generate income or opportunity costs. 

To protect against the various inventory risks posed and maintain the viability of operations, every business should develop a plan. If you don't, your business will be exposed to multiple cascading bottlenecks without a backup plan.  

We'll review some of the critical inventory risks relevant to most industries and businesses today and the precautions you can take to avoid them. Let's get going.

What Does an Inventory Risk Mean?

Inventory risks are potential occurrences where a company's operations are out of sync with its planning due to receiving its inventory early or late. 

• Yes, receiving stock ahead of schedule can cause some inconvenience. For example, it might mean you need to free up storage space, which would mess up your inventory.
• Receiving stock ahead of schedule can also affect the shipping timing of other items.
• If your production wasn't going as planned, and you didn't have the necessary inventory from suppliers, your business would be stopped.
• To keep your business running smoothly, you must ensure that the items you order from suppliers arrive on time. If they don't, you may have to pay a higher price to get the things you need.
• In both situations, uncertainty is the main factor causing the problem.
• Uncertainty about inventory can cause issues for both retail and manufacturing companies.

As a result, most inventory risk types can be overcome by reducing uncertainty and developing reliable safeguards for your interests. Here are some examples of distinct inventory hazards and some techniques for reducing them:

Incorrect sales forecasts

You develop excessive inventory levels when your sales predictions over- or under-estimate the actual demand. 

• Having more inventory than you need can hurt your company financially.
• Having too little inventory puts your company in a difficult situation because you may not be able to fulfill your orders.

The following are the main effects of inaccurate sales forecasting's inventory risks:

• Loss of sales
• Regular stock shortages
• Increased purchasing costs as a result of alternative sourcing.
• Holding surplus inventory.
• Adverse effect on managing cash flow

Obstacles at the supplier end

Similar to sales forecasting, supplier-side bottlenecks are frequent and may have an even more significant negative effect since you lack a strategic perspective on the problem. You must get the stock precisely when it is supposed to be received to avoid the risks of having too much or too little inventory.

1. If the suppliers consistently break delivery deadlines, this can put undue pressure on your production and sales channels.
2. This can cause problems for the company, as it will be challenging to meet deadlines set by the customers.

Let's say you only have access to one supplier or vendor for a specific good. In that case, it is essential to clearly define the deliverables and use SLAs to mitigate such risks. To simplify the overall supply chain management, decide who is responsible for what, including your logistics partners.

Storing Perishable Goods

There are extra dangers that come with keeping inventory that is related to perishable commodities that your company stocks. You will need to use more resources to support their keeping conditions ideal, but you also need to keep an eye on how quickly they are being consumed. 

If you use them more quickly, the lead time may stop your manufacturing line, but if you use them more slowly, they will eventually become unusable. 

1. The best way to deal with risks related to perishable items is to maintain a constant production flow. This will help in ensuring that there is always something available no matter what happens.
2. To make sure that there is always something available, it's essential to have a buffer in case of stock shortages.

On the other side, you could wish to combine these products with other companies that aren't your direct rivals so they can take on the extra stock as needed. If that isn't practicable, you may always speed up production and instruct your sales channels to launch more completed items into the market through their marketing plan.

How to Reduce Inventory Risks Resulting from These Problems

Improve your sales projections first, and use cutting-edge BI tools when necessary. Your online store's front-end and POS systems should be integrated with your inventory management system. 

As a result, you'll have a clearer understanding of the sales trends and access to current sales trend information. You can also update your storage facility and material handling system to achieve inventory visibility goals. This may be done by putting in different sensors or even by putting in an AS/RS package. 

You can quickly examine the most popular goods, related SKUs, present inventory levels, lead times, and other crucial indicators. Your ability to reduce inventory risks will rely on how transparent your supply chain is and how effectively you can adapt to demand fluctuations.

• It is essential to have a two-way data flow with your suppliers and sales channels. This way, you can get information about what they are doing and ensure that your company's interests are protected.
• You will need to take precautions to protect your company's interests while maintaining the two-way data flow. This means making sure that information is not being leaked or stolen.

Your technical stack significantly impacts how you can reduce the risk associated with your inventory.

Conclusion

Controlling inventory is not a simple process. When you have too much list, you run out of money to spend in other parts of the company or risk having dead stock; when you have too little inventory, you miss out on potential sales, suffer significant delays, and customer satisfaction suffers.

The input and output from operations must match demand, promotions, and financial constraints for effective inventory management. Without inventory management, even if you generate many sales, your company's profitability will suffer and will likely fail. You must spend money on procedures and equipment that enhance inventory management if you want to work more efficiently.