Inventory Discrepancies: Definition, Causes, and How to Avoid Them

For ecommerce brands and logistics providers–like third party logistics (3PL) warehouses–it is crucial to keep operations well-stocked so you can fulfill orders quickly and accurately. However, maintaining accurate inventory is challenging, especially when managing a large inventory. Everything from human errors to system glitches can make inventory management a nightmare, ultimately leading to inventory discrepancies, unhappy customers, lost sales, and decreased profits.

Accurate inventory is the heart of your operations. By taking preventative measures and addressing discrepancies when they arise, you can ensure your warehouse inventory management runs smoothly and successfully. Understanding the reasons behind inventory discrepancies and how to manage them can help you turn challenges into opportunities to refine your systems, improve efficiency, and create a seamless experience for everyone.

To avoid these issues, it’s important to understand why they happen, identify common pitfalls, and explore root causes so you have the knowledge to prevent them—and effectively respond when they occur.

What is inventory discrepancy?

An inventory discrepancy happens when a tracked or recorded amount of stock doesn’t match the actual number in your stores, warehouse(s), or distribution centers. When inventory records don’t align with stock on hand, you may be left scrambling to fulfill orders, leading to frustrated customers and lost sales. Or, conversely, you could have overstocks, which cost you money and take up valuable warehouse space.

Common Causes of Inventory Discrepancies for Sellers and 3PLs

Inventory discrepancies pose significant challenges for ecommerce sellers, affecting operations, customer satisfaction, and financial performance. They can also impact 3PL providers, who handle warehousing and fulfillment strategies for ecommerce sellers. Below are six examples of inventory discrepancies you may encounter:

Mismatched Inventory Counts

Mismatched inventory counts occur when your stock counts in the warehouse or fulfillment center don’t match the recorded inventory count in your system. For example, your inventory control system could indicate that you have 200 units in stock, but your team only finds 180 units during a routine inventory check. This could be caused by errors when receiving goods, misplacing items, theft, or incorrect tracking of sales and returns.

Out-of-Stock When System Shows Availability

Out-of-stock discrepancies often occur when your tracking system shows that a particular item is in stock and ready for purchase, but when customers try to buy it, your warehouse operators discover it’s out of stock. For example, if you’ve integrated your warehouse inventory management system with your online storefront, you could encounter delays or errors when your stock levels get updated. If your stock levels aren’t updated frequently enough–or leveraging real-time data–customers may place orders for items that are already sold out, but the system hasn’t yet reflected this. As a result, the system could still show the item as available, which can lead to customer dissatisfaction and order cancellations.

Overstocking and Dead Inventory

Overstocking happens when sellers stock too much inventory, causing it to exceed demand. Dead inventory occurs when items are unsold for a long time and tie up capital and storage. This can happen if you overestimate demand for a particular product based on optimistic sales projections, seasonality, or bulk supplier discounts. However, if demand does not materialize as predicted, the items may sit in warehouses for an extended period, resulting in dead inventory. Overstocking could also lead to financial losses if you eventually have to discount or write them off.

Misplaced Inventory

Misplaced inventory occurs when items are not stored correctly, such as in the wrong location or places within the warehouse or fulfillment center. This leads to discrepancies between the actual count and recorded inventory count. For instance, when you receive a shipment of products, you assign them to specific storage locations based on your inventory management system’s instructions. However, common warehouse management challenges associated with inefficiency and human error can result in some items going in the wrong bins, shelves, or aisles. As a result, when someone conducts an inventory count, discrepancies arise.

Shipping Errors

Shipping errors occur when the wrong items are picked, packed, or shipped, resulting in inconsistencies between inventory records and delivered products. For instance, if there are discrepancies in your fulfillment processes, such as selecting incorrect items or quantities, or if someone damages products during packing, customers may receive incomplete or inaccurate orders. Consequently, your inventory records will not match the shipped items, leading to discrepancies.

Inventory Shrinkage

Inventory shrinkage refers to the loss of inventory due to theft, damage, or other errors, which creates a difference between the recorded inventory numbers and the actual stock. For instance, you may encounter product theft by warehouse employees, external theft during transportation or storage, or mistakes in receiving, counting, or recording inventory. Inventory shrinkage can cause significant financial losses for both the 3PL provider and the ecommerce sellers whose inventory is affected.

How to Prevent Inventory Discrepancies

By implementing some best practices, you can effectively prevent inventory discrepancies, improve accuracy, and optimize operations for greater efficiency, control, and customer satisfaction.

Ecommerce sellers and 3PLs can take various measures to reduce inventory discrepancies:

• Conducting regular physical inventory checks
• Investing in systems that support omnichannel inventory management and provide real-time updates
• Optimizing procurement processes to avoid overstocking
• Monitoring sales trends closely to prevent the accumulation of dead inventory
• Establishing stringent quality control measures, such as barcode scanning and RFID technology for accurate tracking
• Adopting advanced warehouse management system (WMS) software
• Implementing training programs for warehouse staff to minimize picking, packing, and shipping errors

Read below for expanded insights into some of these key tips for reducing inventory discrepancies.

Conduct Regular Inventory Counts

It’s important to schedule regular physical inventory counts at predetermined intervals. During these counts, physically count every item in stock and compare it against recorded inventory levels. To make things easier, consider using inventory software with automatic, real-time updates that can integrate with your sales and shipping systems.

If you find any discrepancies during these counts, reconcile them quickly. You should also routinely check for errors in receiving, picking, packing, or recording inventory so you can take corrective actions and ensure greater accuracy.

Maintaining accurate inventory records is crucial because it reduces the likelihood of stockouts or overstocking, improves order fulfillment accuracy, and enhances business continuity. It also helps prevent revenue loss due to shrinkage or incorrect inventory counts.

Invest in Robust Inventory Management Systems

Advanced inventory management software provides a range of features such as real-time inventory tracking, automated replenishment, barcode scanning, and integration with ecommerce platforms and other systems. This software helps reduce discrepancies by providing accurate and up-to-date visibility into stock levels across all locations and channels.

With real-time tracking, you can monitor inventory movements, identify differences, and reconcile records promptly. Barcode scanning and automated processes streamline operations, reduce manual errors, and improve data accuracy.

This software is essential because it enables you to make more informed data-driven decisions, forecast demand accurately with data-driven insights, and reduce the risk of inventory problems.

Implement Strict Quality Control Processes

Rigorous quality control procedures that instill best practices for receiving incoming shipments, storing, picking, packing, and shipping inventory, as well as conducting quality inspections and verifying inventory accuracy ensure accurate counts of all incoming inventory. Additionally, inspecting inventory for damages or defects, and recording issues in your software for precise record-keeping is essential.

You can take corrective actions by identifying discrepancies immediately upon receipt, such as initiating investigations, contacting suppliers for resolution, or directly updating inventory records. Strict receiving and quality control processes help your teams maintain data integrity and uphold service quality standards. It also minimizes the likelihood of shipping incorrect or defective products, improving customer satisfaction and reducing potential returns or disputes.

Adopt Advanced WMS Software

A robust WMS should have features like real-time inventory tracking, barcode scanning, RFID tracking, and automated workflows with real-time visibility into stock levels, storage locations, and movement within your warehouse network and shipping partners.

When you use a WMS (especially for 3PL inventory management), you can better meet customer expectations for timely and accurate order fulfillment. Software features such as barcode scanning, automated workflows, and data analytics pinpoint discrepancies at every stage, from receiving processes to picking and shipping, minimizing manual errors and improving overall accuracy.

Train and Empower Warehouse Staff

Training your warehouse staff comprehensively on proper inventory handling techniques, accurate data entry, and adherence to standard operating procedures can equip them to perform their roles accurately and efficiently. This helps to instill a culture of accountability and attention to detail, thereby reducing errors in receiving, picking, packing, and shipping processes.

Training can help your staff maintain high-performance standards, enhance the overall service quality you provide customers, strengthen client relationships, and establish your business as a leader in supply chain management.

5 Tips to Help Brands and 3PLs Recover from Inventory Discrepancies

1. Investigate and Find the Root Cause

Whenever you find inventory discrepancies, conduct a thorough investigation to identify the root cause. You can do this by reviewing transaction records, conducting physical audits, and interviewing stakeholders involved in the inventory management process.

By understanding the underlying reasons for discrepancies, you can take targeted corrective actions to prevent future incidents. This may include improving inventory management procedures, providing better staff training, strengthening quality control measures, and implementing technology to enhance tracking and accuracy.

2. Implement Automated Inventory Reconciliation Processes

If you find inventory discrepancies, immediately reconcile recorded inventory levels with physical counts. Once you find the root causes, take corrective actions such as inventory adjustments, stock transfers, or shipment re-routing. By swiftly reconciling inventory and implementing corrective actions, you can minimize disruptions and mitigate the risk of errors or delays. This helps ensure subsequent shipments are accurate and that customers receive orders on time.

Software with automated reconciliation processes can routinely compare recorded inventory levels with physical counts to simplify processes and minimize manual effort. You can schedule these automatic checks at predetermined intervals. Implementing automated inventory reconciliation processes helps prevent discrepancies from accumulating over time and ensures inventory records are accurate and up-to-date. Both inventory management and warehouse management tools can enable automatic reconciliations, identify discrepancies early, and facilitate faster resolution. You can also automatically compare client inventory records with actual stock levels across all your warehouse locations.

Before partnering with Extensiv and employing 3PL Warehouse Manager, Verde Fulfillment USA, a global distribution company for brands, struggled to maximize inventory performance because it didn’t have actionable insight into inventory levels, making it challenging to track and reconcile stock issues. Once the company switched from paper picking lists to Extensiv’s automated tools, it increased efficiency, decreased time and labor costs to fulfill orders, and focused on attracting higher-value customers.

3. Leverage Real-Time Inventory Monitoring and Alerts

Use inventory management software equipped with real-time monitoring capabilities and customizable alerts to notify all stakeholders of potential discrepancies as they occur. Set up automated alerts for inventory levels that fall below established thresholds, unexpected stock movements, or discrepancies between expected and actual inventory counts.

By leveraging real-time inventory monitoring and alerts, you can quickly identify and address discrepancies, minimize the risk of unnoticed errors, and mitigate their impact on operations and customer satisfaction.

4. Improve Communication and Transparency

Logistics providers can benefit from open communication channels with clients and stakeholders. You can build trust and demonstrate accountability by promptly informing them of inventory discrepancies and steps you’re taking to address problems.

When you keep clients and stakeholders informed, you can more effectively manage expectations and mitigate potential impact on customer satisfaction and business relationships. Proactive communication also enables collaborative problem-solving and fosters partnerships with your clients.

You can provide customers with real-time inventory data and progress updates on identified discrepancies by using software with online portals and reporting tools. For example, Trekka Logistics, an Extensiv partner and third-party logistics provider, has successfully used 3PL Warehouse Manager’s customer portal to better communicate with and serve clients, including self-service options to check order status, track information and order changes, and get real-time automatic notifications. Real-time inventory visibility, including inventory reports and stock status with locations, helped Trekka increase its customer base by more than 80% since its adoption.

5. Enhance Employee Training and Development

Create training and development programs for warehouse staff, focusing on inventory management best practices, error prevention techniques, and using advanced technology solutions. Provide ongoing education and skills development to minimize inventory issues.

This can improve staff competency and reduce mistakes. Well-trained employees are better equipped to proactively identify and address potential issues and adhere to standard operating procedures.

Prevent Inventory Discrepancies with Extensiv

Extensiv's warehouse management solution for private warehouses and 3PL Warehouse Manager for logistics providers offer features to help you tackle inventory discrepancies, which is crucial for efficient warehouse operations.

Extensiv’s Warehouse Management Solution for Private Warehouses

Designed for ecommerce businesses and retailers managing their own warehouses and inventory, this WMS can:

• Regularly verify inventory levels
• Identify discrepancies early
• Track stock across locations
• Prevent overselling or understocking
• Use barcode scanning integration to ensure accurate data capture during receiving, picking, and packing
• Manage stock changes in real-time caused by damage, returns, or shrinkage
• Ensure consumers get the right items every time
• Reduce stockouts and overstocks
• Help avoid lost sales
• Improve customer experiences
• Improve demand forecasting based on accurate data

Related to solving inventory discrepancies, Extensiv can improve your inventory management by automatically counting high-value items on a set schedule to identify discrepancies quickly, use real-time inventory data to trigger reorder points and prevent stockouts, and leverage barcode scanning for error-free order fulfillment.

Extensiv 3PL Warehouse Manager for 3PL Warehouses

Built for logistics providers managing inventory for multiple clients, 3PL Warehouse Manager can:

• Track individual client’s stock levels separately
• Automate put-away and picking
• Minimize errors with defined processes
• Reduce manual handling
• Identify trends, optimize stock allocation, and help your clients forecast demand
• Increase efficiency and accuracy for faster fulfillment, fewer errors, and improved client satisfaction
• Optimize inventory levels while reducing storage costs and carrying charges
• Offer a scalable solution to manage complex client inventory needs

To tackle the challenge of inventory discrepancies, Extensiv can help your 3PL better manage inventory and warehouse processes with data analytics capabilities that identify slow-moving inventory and high-demand items and empower you with information to negotiate better contracts with clients.

Whether you’re a seller managing your own fulfillment or a 3PL orchestrating logistics processes for multiple clients, Extensiv offers tools and resources that align with your warehouse management needs and empower you with efficient, accurate inventory control systems.

Interested in learning more? Request a demo today!