As a business owner, you're constantly managing risk. But what about inventory risk? This term can encompass many different things, from spoilage to theft. Understanding the different types of inventory risk and how they can impact your bottom line is critical to keeping your business running smoothly. Here are seven of the most common types of inventory risk and what you need to know about them.
What Is Inventory Risk, And Why Should You Care About It?
Inventory risk is the possibility that an organization cannot sell its goods or that inventory stock will lose value. Many manufacturers, wholesalers, and retailers have massive inventories, and keeping track of even one stock item can be difficult, let alone thousands of SKUs.
Keeping track of one stock item among hundreds or one SKU among thousands in many manufacturing and supply chain operations can be challenging. This is especially true for maintenance, repair, and operations (MRO) materials, frequently overlooked in supply chain management. Disruptions in normal operations can have disastrous consequences if not handled properly with risk mitigation strategies.
How Can You Measure Inventory Risk?
To calculate inventory carrying costs, add the expenses—capital, storage, labor, transportation, insurance, taxes, administrative, depreciation, obsolescence, and shrinkage—over a year. Then, divide those carrying costs by the total inventory value and multiply by 100 to get a percentage.
What Factors Contribute To Inventory Risk?
Inventory management is Important for running a successful business. In addition, robust risk management strategies can keep your manufacturing operations running smoothly.
Increased MRO visibility into company systems, such as SKUs, data procurement, better software, or other risk management, can help avoid stock errors and track parts efficiently.
Efficient Inventory Management
Stock holding costs money. Proper inventory storage, handling, and transportation will incur numerous fees and insurance. Furthermore, any capital your company owns is vulnerable to theft, loss, natural disasters, or becoming obsolete. The installation of technology via natural language processing capabilities will allow inventory to be identified and ensure optimal levels of MRO inventory, preventing delays or downtime.
This risk management strategy assists you in avoiding stockouts or excess inventory. In addition, better planning and incorporating space in operations for scheduled downtime can help businesses reduce the number of days items are low or out of stock.
Increasing visibility is an important part of risk management. Companies can now spot usage trends, track future product needs, and predict when interruptions may occur with MRO inventory tracking control and massive subsets of data at their fingertips.
Improved Data Insights
These newly acquired skills culminate in data-driven supplier relationships. For example, adding inventory risk management measures to supply chain systems provides deeper data insights, such as knowing which MRO items to transfer, sell or keep at any given time.
The benefits of proper inventory risk management are numerous. For one thing, the methods you can use to protect systems from risk usually improve general business operations; however, they also prevent unforeseen risks from draining your profits and destroying your inventory.
How Can You Reduce Your Company's Inventory Risk?
Risk mitigation strategies in manufacturing operations take many forms; however, integrating AI and machine-learning-enabled software within supply chain systems can address many of today's issues.
Harmonizing data to optimize inventory ensures that you are working with real-time data, allowing you to manage stock and mitigate risk effectively.
Implementing these modern solutions will ensure the safety and success of your company. Businesses can do that by considering the abovementioned factors and minimizing supply-chain disruption while adding value through intelligent management practices.
7 Types Of Inventory Risks
The most essential seven types of inventory risks are:
1. Inaccurate Forecasting
One of the most significant inventory risks is inaccurate forecasting. This can lead to overstocking or understocking, which can be costly. Without accurate data, making informed decisions about inventory levels is difficult.
2. Unreliable Suppliers
Another considerable inventory risk is unreliable suppliers. If your supplier can't be counted on to deliver goods on time and in good condition, it can throw off your entire inventory system. This can lead to stockouts and other problems.
3. Shelf life
Another risk to consider is shelf life. Some products have a limited shelf life and must be sold before expiring. You could have worthless inventory if you don't keep track of expiration dates.
Theft is another common inventory risk. If your products are valuable or in high demand, they may be tempting targets for thieves. Be sure to secure your inventory and keep track of inventory levels to prevent losses due to theft.
Loss is another inventory risk that can occur in several ways. Products can be damaged, lost, or stolen. Keep track of inventory levels and monitor for any discrepancies to avoid losses.
Damage is another inventory risk that can occur during storage or shipping. If products are damaged, they may be unusable and need to be returned or disposed of. This can lead to inventory shortages and other problems.
7. Life cycle
The final inventory risk to consider is the life cycle of products. Some products have a limited lifespan and will need to be replaced eventually. Others may become obsolete or go out of style—plan for these changes by monitoring trends and stocking appropriate inventory levels.
By understanding these inventory risks, you can take steps to mitigate them and protect your business. By having a well-rounded inventory management system, you can avoid many dangers that can lead to inventory problems.
Managing inventory risk is a critical part of any business. Understanding the different inventory risks and how to mitigate them can protect your bottom line and keep your business running smoothly. At Conveyr, we build the tools 3PLs use to compete and win new business. Contact us today to learn more about our innovative solutions and how we can help you manage your inventory risk.
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