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INVENTORY RISK COSTS
Inventory risk is the chance that companies won’t be able to sell their goods supply or that there will be a decrease in value. Many firms with facilities for manufacturing have huge inventory amounts. Wholesale and retail businesses also have inventory in enormous amounts. Even if inventory is sufficient and ensures a smooth business process flow without delays in manufacturing, there are still some risks associated with the inventory.
Types of Inventory Risk
There is a certain shelf life amount for most products. For the company selling the goods, this is an inventory risk. Items that are perishable such as eggs and milk have less shelf life than other product types. The companies that produce goods such as these may have higher inventory risks.
To every firm, the inventory is a current asset. When the inventory goes through a loss, there is reduced equity for the company. In the inventory, goods can get lost with improper management of the inventory or if employees do not handle inventory carefully. These days, firms have created a control system for inventory to identify the exact inventory loss amounts as well as the causes of each loss. This enables them to prevent such losses of inventory from occuring in the future and reduces expenses of the company.
Inventory Damage and Loss
Usually, inventories used in normal processes of business tend to get damaged. Inventory that is damaged goes to waste as it cannot be used. This increases business cost. To reduce waste cost and to avoid damaged inventory, inventory control policies are created by companies. Effective use of inventory also needs to be regulated by rules to prevent further waste.
There is a product life cycle that each product goes through. There is a higher inventory risk for products that are at the decline stage. Products from firms such as this tend to tighten the manufacturing policies and inventory control. They only produce enough to meet the current demand sufficiently. A production surplus of goods not sold in the marketplace becomes obsolete and for the firm, this becomes a heavy burden.
When it comes to inventory control, theft is one of the biggest risks. This is particularly true when there is higher value in inventory. If theft is something that internal employees are involved in, it is harder to be able to identify where the theft happens since these employees are more familiar with the system in its entirety. Each year, theft risk prevention is something that firms spend millions of dollars to achieve. Money is invested in measures of security such as hiring guards to watch or cameras to prevent inventory theft incidents.
Understanding inventory risk will help you draft the best strategies for risk management and use inventory control best practices.