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The True Costs of Poor Inventory Management

Poor inventory management can affect everything from customer loyalty to business operations, costing you time and money.

 

An All Too Common Problem

 

Inventory management is a demanding necessity that requires constant attention. In fact, inventory management can be so difficult that even large companies, with thousands of employees, can struggle. In 2013 Walmart lost $3 billion as a result of poor inventory management, resulting in frequent stockouts. Walmart had the capability of bouncing back from this loss but, the picture is very different for SMEs who do not have such a large bank of reserves to use as a bail out. Good inventory management is invaluable, and a dearth of it could cost you your business.

 

Poor Inventory Management Identifiers

 

Many businesses do not realize they are experiencing issues with inventory management until it is too late. To ensure that you are not inadvertently damaging your business, here are some signs of poor inventory management:

 

  • Frequent stockouts
  • A low inventory turnover ratio
  • High return rates
  • A large amount of obsolete inventory
  • High storage costs
  • Damaged stock
  • Low inventory turnover rates
  • Poor customer reviews

 

Causes of Poor Inventory Management

 

There are a huge variety of reasons for poor inventory management – the list below elucidates just a few of the most common causes:

 

  • Spreadsheet errors

 

Studies have found that there are typically 117 human errors in 15 workbooks. Seven of the errata in the linked study had the potential to cost businesses millions of dollars.

 

  • Large inventories

 

Large inventories cut into your profits and tie up capital; they are also more liable to human errors. Having a lot of your capital tied up in inventory leaves you vulnerable as larger inventories are much harder to manage.

 

  • Poor Forecasting

 

When you fail to do the right research into customer behaviour and rates of sales then you are not able to make the most informed decisions regarding future products. This can result in large or slow-moving inventories that slow down operations and take up space.

 

The reasons for poor inventory management are endless. While the specificities might vary, all these causes have one thing in common, they are a result of human error. Luckily for businesses, there is a way to effectively eliminate the threat of poor inventory management: computerized maintenance management systems (CMMS). This site breaks down and compares CMMS so you can learn more about how one can benefit your business.

 

The Costs of Poor Inventory Management

 

When businesses do not have systems in place to manage their inventories, they are likely to lose money for a variety of reasons, such as:

 

Poor Customer Satisfaction

 

The quality of products you provide, as well as the rate and accuracy of delivery, affect customer satisfaction. Poor customer satisfaction can manifest in different ways, all of which impact the health of your business. For example, a customer dissatisfied with a product is likely to return it, costing your business time and money to process. Alternatively, a dissatisfied customer might leave a bad review, or choose not to shop with you again, both of which impact future sales.

 

Wasted Capital

 

When your stock is damaged, or the stock you have ordered is obsolete, then you are wasting money that could be better spent growing your business. Not only is a large inventory more likely to be damaged but holding costs can be a huge drain on capital.

 

Poor Processes

 

When your inventory is too large, disorganized or out of date, it results in less effective operations. When an order is made, it takes longer for staff to complete delivery. Mismanaged inventories also demand more labor to be reduced and organized.

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