Negative Inventory is Not a Positive

July 14, 2016

newsletter - empty warehouse

“You can’t sell something you don’t have.”

This statement should be the first commandment of inventory management. However, some warehouses don’t always abide by this statement, and a few even consider running negative quantities as a normal part of inventory processes.

How many of these phrases have you heard before?

  • I will adjust the inventory later, but I have to take care of the customer now!
  • The customer needs it now, and I can’t wait for the order. I will put the order in later when I get back!
  • We can receive it later–just fill the order and get it out!

While these statements demonstrate the urgency required in processing orders, they also show how easily cutting process corners can result in bad inventory data. In fact, negative inventory should be seen as a flag that there is a larger problem within the process itself.

We know that negative inventory is undesirable, but avoiding it can be challenging because there are multiple triggers that cause it. As shown in a statement above, transaction timing can result in negative inventory levels if the shipment transaction is completed while the production run is in process or prior to receiving delivery from a vendor. Another cause of negative inventory is the result of human error by having the wrong item pulled from inventory. Any transaction that changes on-hand balances can result in a negative inventory balance if the transaction is erroneously executed.

What are the effects of negative inventory?

  • The next order will be wrong if not adjusted on the spot.
  • The next promise to the customer claiming that a product is in stock when, in fact, it is not will cause a dissatisfied customer.
  • Purchasing will not know that we need to buy an item. When they are told it is needed, it would then be processed as a rush buy which eliminates the profits and ends up costing money to sell.
  • The wrong cost will be associated to the order causing the GP to be wrong and the commission to be affected.
  • Inventory value would be misstated, and the general ledger would not match.
  • Nobody will trust the system causing continual inventory checks which causes 4 times the amount of work.

If left uncorrected, this bad inventory data will cause inaccurate on-hand quantities, unfulfilled orders, increased expenditures due to unnecessary overstocking, and sales and service delays due to inventory shortages. Negative inventory will negatively impact sales. In these cases, two negatives do not make a positive.

Because a warehouse management system is only as good as its data, it’s important to remember how quickly negative inventories can disrupt your entire process. Relying on incorrect data from negative inventories can result in purchasing unneeded products and clogs valuable warehouse space.

As an option, ERP-ONE does not allow negative inventories to occur. Our software is designed to set options to warn users of inventory discrepancies in order to avoid bad data from entering the system. ERP-ONE provides checks and balances for the basics of standard operation in order to keep your inventory turning, orders processing, and profits growing.

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