For better inventory control, businesses need to identify the mistake in the production process. A negative balance can also occur when the same types of inventory are located in different warehouses. A negative balance can easily occur here when an order is made for goods from the wrong location, resulting in inaccurate inventory records.
This is called a location-level negative balance. A more serious type of negative balance is an item-level negative balance, which is primarily the result of transactional error. To add to the confusion, the item-level inventory is accurate given that there are still units; units are simply are in the wrong location. This type of transactional error can have huge knock-on effects.
If staff do not identify the error, they may order extra stock to make up for the perceived lack of inventory. This can result in overstocking, which has obvious financial consequences for the firm.
Due to the far-reaching impact of negative inventory errors, whenever a negative balance appears it is essential that the firm looks closely at the problem in order to identify the source. These types of errors are often easy to rectify if taken care of immediately, before one error leads to significant understocking or overstocking , which can have adverse effects on inventory control.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. For example, if materials are coming right out of manufacturing and into an outbound shipment, the shipment transaction may be completed before the production-reporting transaction if the production run is still in process. This will result in a temporary negative balance until the production quantity is reported.
While it would be nice to have had the production quantity reported prior to the materials being moved to shipping, there is no real harm being done here. When the production is finally reported hopefully later that same day the quantities will all be fine. Transaction timing is certainly not the only cause for negative inventory balances.
Any transaction that affects on-hand balances can create a negative inventory balance if the transaction is incorrectly executed. It's important to be able to make a distinction between negative balances caused by timing issues and those caused by transaction errors. It's also important to make a distinction between location-level negative balances and item-level negative balances.
A location-level negative balance occurs when an incorrect location is used in a transaction or when an incorrect quantity is transferred in a location transfer transaction. For example, if I had pieces of an item stored in location "X" and picked 50 pieces for a shipping order but mistakenly issued the material from location "Y"; the end result would be still showing in location "X" and showing in location "Y.
A similar situation occurs when you transfer inventory from one location to another and enter an incorrect "from location" or enter a quantity greater than was actually moved. For example, if I had pieces of an item stored in location "X" and moved the entire pieces to location "Z," but mistakenly entered a quantity of 1,, the end result would be 1, showing in location "Z" and showing in location "X. Though these location-level balances will create problems in the warehouse, they should not be causing problems with planning systems.
Item-level negative balances, on the other hand, may be affecting planning system. These can occur from a variety of transactional mistakes.
Previous Next. About the Author: Samantha Hornby. When not working she can be found at the gym, exploring the great outdoors and getting creative with DIY projects. Related Posts. Inventory Management Myths and Software. So how much does Inventory Management Software cost? You want to find ways to avoid and prevent negative inventory issues from cropping up in the first place. Negative inventory could be caused by a range of factors , and there is no single issue that will affect every company.
One of the problems could be timing. This can occur when a shipment of inventory has been recorded as complete even though it might still be in production. The negative balance could be caused because there is a delay in getting the products processed and on the warehouse shelves.
There could also be issues in production that cause less of a product to be produced than is needed. This could happen when the invoices were not clear, for example. If you have multiple warehouses that have the same type of inventory, it could cause a negative balance.
If there is an order of goods made from the wrong location, it could result in inaccurate inventory records. How serious are negative inventory issues? There is a chance that the next order for the item will be wrong or unable to be completed. It means that they will have to wait until your inventory is filled again.
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