Inventory Variances: Persistent Nuisances Hindering Growth

[First Published in BusinessWorld, also posted on LinkedIn]

Inventory variances or discrepancies between what are actually on stock versus what are on records are key irritants that hinder business growth. It is an issue that is often discussed in executive meetings especially when they are blamed for strategic targets not being met. In many cases, inaccurate inventory records are cited for why customers complain about unfulfilled orders, in which marketing executives would point to for their not attaining revenue goals.

Many executives I’ve talked to have testified to sad experiences with inaccurate records which lead to inventory variances:

“We missed our annual sales goal equivalent to one month lost sales due to un-served orders caused by poor warehouse inventory records.”

“We failed to completely serve the order of one of our key customers despite our records showing available inventory in our warehouse and to make it worse, the customer has already paid in full.”

“We toll manufacture for a major consumer goods company, and we are short on materials inventory (even as records show we have on stock) the equivalent of a quarter of our annual revenue. It has been six (6) months and we are still in the inventory reconciliation process.”

“We have an equivalent of three (3) years stock of one material because our system showed zero inventory and we expedited the order. After the big shipment arrived, our warehouse personnel discovered the ‘lost’ stock.”

Inventory variances are not new issues in storage & handling operations. For example, when a warehouse operation is small and simple (i.e. few products in stock), inventory variances can be expediently handled and easily managed, typically within a day or two. But if a warehouse stores a wide range of products that frequently change in number and type due to a firm’s aggressive strategies to sell to a time-conscious and demanding marketplace, the storage & handling operations likely become overly complex and any incidence of discrepancy in inventory records may magnify in impact especially in delivery reliability to customers.

Thankfully, there are approaches that when implemented correctly would help the firm address poor inventory variances:

1. Education. Training of personnel at storage facilities should not be limited to just how to encode into information systems. Managers should educate personnel on procedures and make certain policies are clear and understood. These may include guidelines in transaction accuracy and cut-offs in updating records. Personnel need to be aware that their counterparts from Sales, Marketing, Purchasing, Manufacturing, and Planning are making decisions based on inventory records in the system. If records don’t match what are on-floor, decision makers would be using the wrong information;

2. Process Design. Some organizations blame their own people for inventory variances and overlook the more probable causes such as how existing systems capture the actual movement of items. Some executives assume new information systems already are perfect in their execution and dangerously conclude that people would be the cause for any error. The key to a successful inventory recording process is how well systems record transactions vis-à-vis how items are really handled on floor. For example, some systems would automatically assign bay locations to items received even when items have just been unloaded from a truck and are still sitting on the dock;

3. Physical Design. The design of the storage facility should be conducive to whatever inventory process is in place. For example, warehouses should have visible identification of storage locations such as bins and bays. There should be locations for quarantined merchandise or for items destined for scrapping or rework. Any storage lay-out should allow for easy access to products or materials. One should not have to move other items to access a particular product or material.

Implementing an inventory management process via the aforementioned approaches sometimes take time especially if merchandise are bulky, heavy, or in major disarray. The results would be well worth the effort, however, as such implementations have proven to generate inventory accuracies up to 95-98%.

Persistent issues resulting from inventory variances have made firms aware of the importance of the management of storage facilities. By reducing variances and attaining higher inventory record accuracy, managers would have the ability to improve productivity and delivery reliability. Executives would realize that the inventory process is a necessary back-office activity which critically contributes to competitive advantage.

Mr. Jovy Jader is a Supply Chain Advisor and Regional Speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international which have resulted to company-wide improvements in revenue, working capital, total cost, and service levels. Mr. Jader is the co-author of the book Speed Kills … your Competition: Driving Growth Through Supply Chain Excellence – a book on Supply Chain Insights and Best Practices. Should you have questions or comments, please e-mail them to jjjader@prosultsconsulting.com.

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