10 Causes of Inventory Discrepancies and How to Prevent Them

Inventory discrepancies are inevitable, but they don’t always have to hit businesses where it hurts. Sure, when they’re severe enough, these inconsistencies between recorded and actual stock levels can lead to stockouts, overstocking, lost sales, and increased carrying costs. But by proactively addressing the sources of inventory discrepancies through increased visibility and controls, modern inventory management methods and technologies can help companies limit the scope and impact that these irregularities have on their business. Read on to understand the most common causes of inventory discrepancies and explore ways to not only identify and fix these differences but to make improvements that will prevent them in the first place.

What Are Inventory Discrepancies?

Inventory discrepancies—one of the most common and disruptive problems in inventory management—occur when there’s a gap between what’s recorded in an inventory management system and the actual physical stock on hand. These inconsistencies can manifest themselves as overstock (when there’s more inventory than what’s recorded) or understock (when there’s less inventory than what’s recorded). Either scenario can significantly impact business operations, though many companies are most concerned with the latter because understock represents lost stock that will directly impact profitability. Also known as shrinkage, understock is often caused by unidentified theft, loss, damage, or spoilage. Overstock, for its part, is problematic because it ties up capital and could potentially increase storage costs.

Key Takeaways

• Inventory discrepancies are inconsistencies between recorded and actual physical inventory levels.
• This mismatch can be caused by a variety of reasons, including theft, spoilage, data entry errors, and even inconsistent measuring units.
• Regular recounts of physical stock can help identify discrepancies early and prevent future irregularities.
• Modern inventory management systems can help improve inventory management practices and boost inventory accuracy over time.

Inventory Discrepancies Explained

The mismatch between physical stock counts and recorded inventory is an inevitable problem in any business, but the frequency, severity, and causes of inventory discrepancies can vary greatly. Often, these discrepancies even fluctuate from one functional department or business unit to another. For this reason, many businesses turn to inventory accuracy rate, which measures how closely recorded inventory matches the actual physical count, as a crucial key performance indicator (KPI) to keep track of discrepancy variations. This KPI is typically calculated by dividing the number of counted physical products by the number of units on record.

Elevated inventory accuracy rates typically correlate with strong operational efficiency, high customer satisfaction, and strong financial performance. When companies improve their inventory accuracy rates, they’re less likely to experience stockouts, raised carrying costs, and unreliable financial reporting. But such improvement isn’t necessarily easy. Business units encounter unique challenges throughout the inventory life cycle that could result in different kinds of discrepancies. For instance, the procurement department might deal with supplier errors that could result in inconsistencies in raw materials inventory, while warehousing may contend with misplacement issues that seep into all types of inventory. Meanwhile, production departments may struggle with yield variances that cause discrepancies in work-in-progress inventory, and sales teams might run into picking errors that derail final delivery.

The average inventory accuracy rate for businesses in 2024 was 83%, with 69% of companies tracking that KPI, according to CAPS Research. This is considerably better than the rate of several decades ago, which ranged from 51% to 75%. According to many inventory management and supply chain management experts, 90% is often a realistic aspirational benchmark for inventory accuracy, with 95% considered top-notch in most instances. Regardless, an acceptable benchmark will vary by industry. For example, industries dealing with high-value items or perishable goods may want to target higher inventory accuracy rates than those dealing with low-cost, nonperishable items.

To mitigate risks associated with inventory discrepancies, such as stockouts and production delays, businesses will often set inventory thresholds and maintain safety stock, practices that also provide a buffer against demand fluctuations and supply chain disruptions. However, it’s critical for companies to work to solve the root problems that result in low inventory accuracy by making continuous improvements to inventory management processes and technology. This includes implementing advanced warehouse management systems, radio frequency ID (RFID) technology, Internet of Things tracking, and modern inventory management practices tied into broader enterprise resource planning (ERP) platforms to gain more accurate visibility into stock.

Whatever the approach to managing inventory discrepancies, cost considerations come into play. Companies must balance the operational costs of maintaining high inventory accuracy against the potential losses from stockouts or overstocking. This balance should inform the level of investment that businesses make in their inventory management systems, staff training, regular cycle counts, and financial auditing.

How Do Inventory Discrepancies Affect Your Business?

No matter the industry or business model, rampant inventory discrepancies can significantly impact a company. When recorded and actual stock levels don’t match up, a business risks operational disruption in the form of production delays, facilities headaches, and increased labor costs as workers scramble to find or replace missing items (when understocks occur) or look for a place to stash surplus inventory (when there’s overstock). Discrepancies can also cause a company to experience lost sales due to stockouts, increased carrying costs from overstocking, and costly write-offs of slow-moving inventory that’s become obsolete or expired.

Common Causes of Discrepancies in Inventory

Whether they manifest as unplanned excess inventory or shrinkage due to theft or spoilage, most inventory discrepancies occur because of a lack of visibility and control within the inventory management life cycle. The following are 10 of the most common scenarios that cause discrepancies in inventory.

1. Misplaced Inventory

Sometimes inventory is actually physically present in a warehouse or storage facility, but it simply can’t be located. Inventory can be misplaced in a number of different ways, usually because of subpar storage procedures or inconsistency in adhering to sound ones. For example, poorly trained staff may inadvertently place items in the wrong location, or they could forget to update the system when moving inventory. Shortcomings in labeling or poorly organized storage areas could also contribute to these errors, as can changes to warehouse layouts that aren’t adequately communicated to employees.

2. Damage and Spoilage

Damage and spoilage are common causes of inventory shrinkage, especially in industries that handle fragile items and perishable goods. Often, these problems go undetected until physical inventory counts are conducted—and the longer companies wait between counts, the worse damage- and spoilage-related discrepancies tend to be. In manufacturing, these issues can impact raw materials, works-in-progress, and finished stock, should quality control and production troubles rear their heads. And in transportation, damage caused by rough handling or poor packaging can render inventory unsellable, and inadequate warehouse conditions may cause spoilage.

3. Theft

Whether items are stolen by internal employees, shoplifters, or even organized retail crime groups, theft is a very real and common cause of inventory discrepancies across the supply chain. Often in retail, theft is referred to as shrinkage, though this term typically also includes understock discrepancies resulting from damage and spoilage. Regardless, inventory thievery ranges from small-scale, unsophisticated pilfering all the way to sophisticated, long-term fraud perpetuated by internal or external bad actors. The inconsistencies in inventory tracking attributable to theft give rise to unexpected stockouts, lost sales, distorted demand forecasting, and ineffective replenishment planning.

4. Shipping Errors

Shipping errors frequently result in discrepancies that can affect expected inventory levels of both incoming and outgoing goods. For example, incorrect quantities shipped by suppliers and a failure by receiving staff to inspect incoming shipments for accuracy could impact inbound inventory. Similarly, workers picking the wrong items, shipping incorrect quantities, or sending orders to the wrong places could cause outbound issues that create discrepancies. Shipping errors can often be compounded by inadequate training of warehouse staff, rushed operations, seasonal staffing during peak periods, and outdated inventory management systems that don’t use barcode scanning, RFID, or automated picking technology.

5. Human Errors

More often than not, inventory discrepancies come down to human error. Whether it’s a data entry error, a counting gaffe, or just forgetting to update stock movement, mistakes happen when people process and move inventory. On the data entry side, mistyping an inventory quantity or SKU could potentially throw off recorded numbers. Meantime, in the warehouse or on retail shelves, improper adherence to storage or merchandising procedures could lead to misplacement of items. And missteps in security procedures could leave expensive inventory vulnerable to undetected theft.

6. Poor Returns Handling

When companies don’t do a consistent job reintegrating and recording returned items into their inventory systems, inconsistencies are unavoidable. Irregularities in how returned items are put back into storage can lead to misplaced items, while inadequate inspection of returned goods could allow damaged inventory to be restocked and labeled as sellable. Sometimes, returned stock might be recorded but items could be misclassified or logged in the wrong location. Poor returns handling can spawn especially large discrepancies in industries that deal with a lot of returns, such as ecommerce and retail fashion. These issues can be especially hard to track down in omnichannel businesses that allow returns to physical stores following online purchases.

7. Supply Chain Issues

From delivery of raw materials to manufacturing and final delivery, supply chain issues create ripples across the entire inventory management life cycle. As a result, these issues frequently introduce discrepancies in recorded inventory. Among the most common problems are shipping errors, such as when suppliers send incorrect quantities of product or fail to secure product from damage or spoilage during shipping. Quality issues originating with suppliers could lead to mismatches between recorded stock and usable inventory, particularly if receiving staff doesn’t appropriately inspect goods on delivery.

8. Dead Stock

Also known as obsolete inventory, dead stock can contribute to inventory discrepancies if merchandise that remains unsold for an extended period isn’t appropriately classified in inventory records and, eventually, eliminated from storage. Not only does dead stock monopolize shelf space and tie up capital, but it can skew visibility into inventory levels, if unusable, older versions of the same product are counted alongside newer items. Dead stock can result from a range of issues, including quality problems and a lack of proper stock rotation.

9. Inconsistent Inventory Measurement and Counting

A lack of consistency in inventory measurement and counting practices can lead to inaccurate recording of inventory and errors in any associated financial reporting. For example, a lack of standardized counting methods across departments or storage locations could generate inconsistencies. One team might count partial units as full units, while another team rounds their count down. Similarly, inconsistent use of measurement units can precipitate confusion and errors when completing conversions. The timing of inventory counts can also produce discrepancies. If counts aren’t appropriately synchronized with shipping or receiving activity, temporary differences could be mistaken for actual inventory errors.

10. Ineffective Inventory Management Software

Outdated or ineffective inventory management software can exacerbate inventory issues and contribute to the very discrepancies that these applications are meant to control. For instance, if a system is unable to flexibly handle unique business requirements, such as managing multiple units of measure or tracking batch numbers, staff might use workarounds that introduce counting errors. Or, if the user interface is difficult to use, interaction with the software could result in errors in data entry or interpretation. Additionally, if inventory management systems lack real-time updating capabilities, employees may not be able to appropriately track variances in inventory levels in fast-moving environments.

How to Check for Inventory Discrepancies

Regular checks of physical inventory levels are essential for maintaining accurate inventory records. Though full inventory recounts can provide comprehensive visibility into actual inventory levels, they’re costly and disruptive to conduct. As a result, many businesses choose to do their checks via cycle counting, where just a portion of inventory is checked on a rotating basis. This allows businesses to counterbalance count frequency with business disruption. Whether a business prefers doing a full recount or a cycle count, the following steps can help.

1. Recount the stock: Start by conducting a thorough physical recount of inventory, verifying the quantity of each item against recorded stock levels. Use a systematic and repeatable approach, such as counting by location or category, to ensure accuracy. As the count is done, use a double-check system to catch potential counting errors.
2. Check the stock descriptions: As teams go through the recount, ensure that they’re verifying that stock descriptions match the actual items. This means checking that product codes, SKUs, and item names match up consistently across inventory records. Look for discrepancies in packaging and labeling, as well as product variations or damage that could lead to misclassification.
3. Ensure that the correct units of measurement are being used: Throughout the count, make sure staff verify that items are recorded using consistent units of measurement. For instance, look for variations that might occur if certain products could be measured by weight or by volume. Additionally, keep an eye out for discrepancies that could result from differences in recording units, cases, or pallets.
4. Check the stock locations: Confirm that inventory is stored and recorded in the appropriate location. Use the recount as an opportunity to ensure that misplaced stock is accurately labeled and placed on the correct shelves or in the appropriate bins. Similarly, make sure stock remains in its designated location and isn’t mistakenly relocated to a different area.
5. Confirm that sales are being correctly recorded: Verify that sales transactions are accurately recorded in inventory systems by checking for discrepancies in sales data, such as unrecorded sales or incorrect quantities sold. Similarly, confirm that returns are being correctly processed and recorded in the system.

How to Prevent Inventory Discrepancies

Taking proactive measures to prevent inventory discrepancies can help businesses bolster their operational efficiency, minimize losses, and keep customers happy in the process. Solid inventory management practices form the foundation for these efforts. Companies that implement standardized processes for all activities that could potentially introduce errors into recorded inventory tend to maintain higher inventory accuracy. Here are some of the best practices for achieving excellence and accuracy in inventory management.

1. Conduct Regular Inventory Checks

Frequent and consistent inventory counts identify discrepancies and help prevent them. First, frequent checks can ensure that smaller discrepancies are caught quickly before they turn into larger problems. In addition, regularly conducted checks can help identify any patterns underlying discrepancies to uncover root causes of inventory problems. This, in turn, will fuel continuous improvements in inventory management and tracking that will stem the tide of future inconsistencies. Frequent checking is also an excellent theft deterrent and creates a culture of accountability that ensures that employees will carefully record stock as it’s damaged, sold, or moved.

2. Enhance Quality Control Measures

Investing in quality control measures across manufacturing, shipping, receiving, and other operational functions can go a long way toward increasing inventory accuracy. For example, putting in place a systematic receiving process for checking the quantity, condition, and quality of received goods—and training staff to follow it—makes suppliers more accountable to inventory accuracy and prevents mismatches between what’s recorded and what’s actually received. Similarly, quality control measures in manufacturing can prevent both unmeasured waste of raw materials and damage that could render inventory unusable. In the meantime, inventory rotation measures, such as first in, first out practices, can limit discrepancies caused by expired or dead stock.

3. Maintain Strong Supplier Relationships

Cultivating tight supplier relationships that are backstopped by structured expectations and tracking keeps every stakeholder accountable for inventory discrepancies. When businesses set clear expectations with suppliers about product quality, packaging, and delivery schedules—and they check adherence to those expectations using vendor scorecards and vendor-managed inventory systems—they’re better able to keep suppliers on track. Staying proactive identifies and resolves supply chain issues that can lead to discrepancies before they become big problems.

4. Invest in Employee Training

Establishing repeatable inventory management protocols and procedures lays the foundation for inventory accuracy, but companies must also make sure employees know how to follow these mandates. Businesses that invest in comprehensive and ongoing employee training can be certain that staffers are following procedures pertaining to receiving and shipping, are accurately entering inventory data, and are correctly using inventory management software and hardware, such as barcode scanners and RFID systems. Training also helps establish a detail-oriented culture that values accuracy and ongoing improvement. All of these factors are vital for preventing inventory discrepancies.

5. Improve Forecasting to Avoid Dead Stock

Better forecasting capabilities can help businesses limit dead stock that creates gaps between recorded and usable inventory. Companies that use advanced analytics and machine learning algorithms to crunch numbers concerning historical sales and seasonal patterns stay ahead of trends in order to monitor slow-moving inventory that’s prone to going obsolete. Similarly, forecasting can help establish proactive processes for moving stock before it goes dead, such as through promotions or liquidations.

6. Invest in a Strong Inventory Management System

Investing in an inventory management system that facilitates real-time tracking across all sales channels and warehouse locations minimizes errors and discrepancies and boosts efficiency in the process. Ideally, the system will seamlessly integrate with a broader suite of business tools, including ERP and accounting software, as well as point-of-sale and ecommerce systems. An effective inventory management system should also support in-the-field counting and tracking capabilities, such as barcode scanning, RFID tracking, and automated picking, to promote end-to-end inventory visibility. A modern system should also include advanced forecasting capabilities that minimize discrepancies and help maintain the optimal stock levels for prevailing business conditions.

Benefits of a Modern Inventory Management System

Modern inventory management systems are invaluable for businesses seeking to increase their inventory accuracy and optimize operations. These platforms help businesses rapidly record inventory updates and confidently adapt business processes and ordering based on centralized inventory data. The major benefits of these systems include:

• Real-time tracking and analytics: Modern inventory management systems provide businesses with instant updates on stock levels, locations, and movements. This kind of real-time data helps companies spot discrepancies faster, so they can be fixed quickly before blowing up. These systems generally help businesses make confident, informed decisions on optimizing inventory levels.
• Improved visibility and oversight: Inventory management systems provide a unified platform to centralize visibility into inventory levels for all locations and inventory types. Not only is this a boon for inventory accuracy, but it also makes it easier to plan timely replenishment without tying up too much capital with overstock.
• Intelligent cycle counting: The regularity of cycle counting can help companies conduct frequent checks on physical inventory with little disruption. Modern inventory management systems facilitate structured and repeatable rotations and automatically schedule counts based on operational data.
• Enhanced forecasting: One of the key benefits afforded by modern inventory management systems comes by way of their inventory forecasting capabilities, which typically lean on real-time analytics, historical data, and market trends to predict demand more accurately. These capabilities limit waste and keep supply in line with current business conditions.
• Integration with ERP: Today’s most advanced inventory management systems integrate seamlessly with ERP software to ensure that accurate data flows among inventory, finance, sales, and other departments. This eliminates data silos and cuts down on errors from manual data entry. Integration also makes it easier to automate workflows and generate more comprehensive reports that include accurate and timely information about inventory levels.

Perfect Your Inventory Levels With NetSuite

NetSuite Inventory Management is a modern inventory management solution with a full slate of features that gives businesses the power to bolster inventory accuracy and operational efficiency. NetSuite offers real-time tracking and analytics to give users instant visibility into stock levels, and its intelligent cycle-counting feature optimizes checks on physical inventory, making it possible to conduct frequent counts without disrupting operations. The software’s advanced forecasting capabilities make it easier to predict future inventory needs, and they facilitate automated reordering based on customizable rules to maintain healthy inventory levels without overstocking.

Finally, NetSuite’s comprehensive reporting feature gives inventory managers and other business stakeholders the data they need to make continuous improvements that boost inventory accuracy and refine operations around every aspect of inventory management. These capabilities can prove invaluable to companies in industries, such as manufacturing, retail, and logistics, that are looking to optimize their inventory levels.

Inventory accuracy is a center of excellence for businesses seeking to consistently forecast and meet customer demand for their products. Understanding the causes of inventory discrepancies allows companies to develop targeted methods for minimizing future tracking errors and improving the fidelity of their inventory data. By using the methods explained in this article, businesses stand to streamline operations, bolster profitability, and improve customer satisfaction.

Inventory Discrepancies FAQs

How do you handle the difference between physical and recorded inventory?

You’ll need to conduct a physical inventory recount to identify discrepancies between physical and recorded inventory, then adjust inventory records to match what’s actually available.

How do you identify the root cause of inventory discrepancies?

Regular inventory recounts through cycle counting can help identify patterns in discrepancies that offer clues about root causes to shortages or overages in actual inventory. These discrepancies are often caused by unnoticed theft, spoilage, or human error.

What is an acceptable inventory accuracy rate?

The average inventory accuracy rate today is 83%, though many businesses aspire to rates of 90% or above.