Your system says 100, but your stock says 90. Now you have 10 customers waiting to get that order you don’t have.
On the customer side – she placed an order, she is excited about getting her fav shoe within 3-5 days and then she received an email saying “Sorry we have to cancel your order”.
How do you think your customer will feel? Yes, she might lose trust and you might lose finance and in addition have an unhappy customer.
All this happened due to inventory discrepancy. Inventory discrepancy is a situation created where there is a mismatch between the recorded inventory and the actual inventory you physically have. These discrepancies could be small or big, but the outcomes might be serious. Even a slight discrepancy can cause you financial loss, operational distortion, and unhappy customers.
No, let’s see how we can identify these discrepancies beforehand and mitigate them.
What is an inventory discrepancy?
Inventory discrepancy is a mismatch between the actual inventory physically available in a storage/warehouse and the recorded inventory, either in books or the system.
Inventory discrepancy is one of the major problems in overall inventory management that results in either a shortage of stock or surplus stock.
How to calculate an inventory discrepancy
By subtracting the physical inventory available in the storage from the recorded inventory.
Core method
Inventory Discrepancy = Physical Count − System Count
If the number you get after subtraction is positive, that means the physical inventory is surplus and it’s a positive inventory discrepancy; if the number that comes is negative, that means a shortage in on-hand inventory.
- Positive result (+) → surplus (you have more on the shelf than the system shows).
- Negative result (−) → shortage (you have fewer on the shelf than the system shows).
Other methods:
- Absolute variance (just drop the sign) to see total units off.
- Percentage variance = (Physical − System) ÷ System × 100 % to see how big the miss is relative to stock on hand.
- Value variance = (Physical − System) × Unit Cost to know the dollar impact.
Why should you care about an inventory discrepancy?
As we discussed earlier, a simple mismatch between the physical and recorded inventory can cause financial loss, operational distortion, and uneven stocks (short or surplus). According to the research conducted by the IHL group, inventory distortion (a result of discrepancies) costs businesses worldwide an estimated $1.8 trillion annually. That’s a big number.
Another reason to consider why you should care about discrepancies is to look at the graph below. Discrepancies don’t happen equally in all product categories. There are some categories where discrepancies happen more often than others.
Take this – across grocery/general‐merchandise retailers, just 19 % of SKUs (the “A-items”) generate 70 % of sales and almost half (49 %) of all discrepancy value sits inside this small group. Put simply, the products that turn fastest and contribute the most revenue are also where inaccurate counts do the most damage.
These are just a few examples that we put together. According to the research by ResearchGate (discussed in the previous section), businesses that prevent inventory discrepancies could potentially grow their sales by 4-8%.
What are the possible causes of an inventory discrepancy?
Now we know how discrepancies can impact our sales, customer trust, and overall business health. Next, we will identify the primary reasons for these discrepancies.
1- Human error
Fat-finger counts occur when multiple individuals are responsible for tasks such as receiving, labeling, storing, and moving. Or if we have just a single person responsible for multiple tasks. If not done correctly, a visible mismatch may occur between the physical stock and the recorded stock. Now you have two options: either repeat the stock counts to correct the number or discard the old stock sheet and create a new one.
2- Software sync lags
Another reason for an inventory discrepancy is occasional software sync lags. This means you might have added the new shipment in the software, but it doesn’t show up in the software. Or, your already recorded inventory gets delayed or sent back for some reason, but you fail to delete it due to a lag. This lag results in phantom inventory (inventory that is recorded but not physically present) that can cause missed sales, inaccurate forecasting, and inefficient operations.
3- Returns, damages, write-offs posted late
Another reason is the improper management of returned and damaged inventory. You have a physical inventory record, but a quarter of the stock is damaged for any reason (such as water leakage), and you remove that inventory from the physical counter without updating the recorded data.
Another reason is that inventory returned to your warehouse, but you forgot to update the record in the log book. Or you did record the return, but after days or months. This way, late write-offs can again cause significant problems.
4- Theft and shrink
In case of unauthorized moving or theft, this mismatch in the stock can happen.
5- No tracking system
If your inventory management system relies solely on log books and sheets, without proper tracking using barcodes or RFID (radio frequency identification) to keep track of SKUs. In that case, you may experience inventory discrepancies due to human error or other reasons.
6- No inventory management system
No matter how small or big your business is, inventory management always comes as a priority. And for this, you might be using spreadsheets, a logbook, or an inventory management system. But with spreadsheets and books, there are chances for frequent errors. If you are not using inventory management software to automate stock counts, reorder points, and lot tracking, and you’re not receiving regular inventory updates, you may experience frequent inventory discrepancies.
How to prevent inventory discrepancy
We have the most common reason behind the inventory discrepancy, and the next step is to mitigate it.
1- Use an inventory management software/tool
The first step to mitigating inventory discrepancies is to switch to inventory management software if you are not already using it. With an IMS, you will have complete visibility into your inventory. You can easily track stock quantities, set reorder points, view fast-moving goods, trace inventory flow, and more. With an eye on every step, you can prevent shortage or wastage of stocks and maintain a consistent supply chain.
2- Cycle counts
Instead of doing stock counts once in a while, do cycle counts to make sure the physical stock matches the records and mitigate the chances for a mismatch to a certain extent. You can use an ABC cycle method to keep an accurate count of fast-moving items that can significantly impact your revenue if a discrepancy occurs. Make two people do the cycle counts to eliminate any chance of mismatch; this is what we call a 2-person verification method.
3- Standardize receiving
You can also count it as proper employee training. Establish a standardized receiving method, such as an SOP page and a short training video, to provide to every new hire. This ensures that inventory management follows the same protocols without discrepancy.
4- Barcode/ mobile-scanner rollout
Always use a proper tracking method. The most commonly used ones are Barcode scanning and mobile scanning. You can easily find barcodes, and with a simple setup (barcode and UPC – universal product code), you can keep track of your SKUs. There are multiple types of barcodes available in the market. You have to choose one that fulfills your unique requirements.
5- Kaizen review
Do a monthly or weekly review of your inventory to check for any discrepancies; this is what we call a Kaizen review. Where you look for any improvement or betterment of the whole system to foster a progress culture and eliminate any variance before it could cause any defect.
When the numbers still don’t match, use this reconciliation playbook
1- Isolate the SKU & freeze movements
As soon as a variance pops up, quarantine that item in the IMS so nobody can sell, pick, or receive more of it while you investigate. This stops the numbers from drifting further.
2- Re-count with a second person
A fresh set of eyes reduces confirmation bias. The second counter starts from zero, follows the bin-location layout, and verifies packaging units (each, case, pallet) so you know the physical count is solid.
3- Trace the last five transactions
Pull the SKU’s activity log: receipts, picks, returns, transfers, and adjustments. If there is any error, a mis-scan, mis-pick, or paperwork gap, these five touch-points are enough to reveal it, without drowning you in data.
4- Adjust inventory, capture root cause, sign off
Once you confirm the correct on-hand quantity, post an adjustment in the system. In the same screen (don’t skip this), record the cause code (e.g., “receiving error,” “damaged-in-bin”). A supervisor initials it so there’s accountability.
5- Feed the insight into your variance log
Log every discrepancy and its cause in a central spreadsheet or dashboard. Over time, you’ll spot patterns, like one shift, one vendor, or one product family, that tell you where to focus, like we mentioned earlier about the Kaizen review and prevent repeats.
How Seebiz Inventory Software can help
Inventory discrepancy is a major issue that requires immediate attention in any business. Because if you keep on doing business without taking into account the missing, damaged, stolen, or returned stock, then in the end you will see a significant gap in your revenue sheet that again with no further explanation, and that will hurt your business in terms of finances and stock shortage or wastage.
Seebiz can help you prevent such scenarios by providing a solution – a multi-functional inventory management software, with;
- A dashboard with live updates
- Reorder points to prevent delays
- Reorder Level & Alerts
- End-to-end SKU tracking
- Vendor managemnt
- Inventory Control
- SKU Generator
- Transaction History
- Analytics & Reports
Now it’s just the tip of the iceberg. You can manage your whole warehouse or even multiple warehouses and vendor management using this single software and what more.
Here is a user manual to find how it can be a great fit for your business.
FAQs
1- How do you calculate inventory discrepancy?
By subtracting the physical inventory available in the storage from the recorded inventory.
If the number you get is positive, that means the physical inventory is surplus and it’s a positive inventory discrepancy; if the number that comes is negative, that means a shortage in on-hand inventory.
2- How to record an inventory discrepancy?
Suppose you notice a discrepancy between the physical stock and the recorded stock. In that case, you will check all vendor invoices, purchase orders, sale orders, and damaged or returned goods to identify the gap. Once found, record the data, item name, label, code, gap in the quantities, along with physical and recorded numbers.
3- How to reconcile inventory discrepancies?
To reconcile the inventory, first count your physical inventory, then compare it with the recorded stock to check the variance. Once you get the number, check the missing stock. Check vendor invoices, purchase orders, sale orders, and returns to identify missing goods and reconcile the original quantity.
