A customer orders a pair of sneakers from your ecommerce shoe store. Your website says the item is out of stock, but more than a dozen pairs are in your warehouse. This is an inventory discrepancy, and it’s costing you the sale when the shopper leaves your site to buy from a competitor.
This incorrect information can lead to more than just lost sales. Without an accurate picture of your inventory, you can’t trust your financial reports or make informed decisions about your supply chain. This guide shows you how to spot, fix, and prevent inventory discrepancies, ensuring your business runs on accurate data, not guesswork.
What is an inventory discrepancy?
An inventory discrepancy is a mismatch between records in your inventory management system and the amount of physical inventory you have on hand. It means your digital count of a product doesn’t match the physical count. For your business, this could be a few lost items or a systematic problem that undermines your entire supply chain.
You’ll typically discover inventory discrepancies during a physical count—a scheduled or unscheduled audit where someone manually counts your stock. But discrepancies also surface in daily operations; a warehouse worker performing order fulfillment discovers the item quantity doesn’t match the system’s record, or an accountant spots something off during an inventory reconciliation, when you square up the difference between physical inventory and your records.
Every inventory discrepancy undermines your data reliability, creating problems that cascade through your company. Overstating or understating inventory values distorts your company’s financial health and erodes your brand’s reputation when you can’t deliver what customers order.
5 causes of inventory discrepancy
- Human error
- Inventory shrinkage
- Incorrect location or misplaced stock
- Order picking and packing errors
- Supply chain and vendor mistakes
Understanding the causes of inventory discrepancies helps you build stronger inventory control procedures. While the causes of inventory problems vary, they typically stem from these five issues:
1. Human error
Human error is one of the most common causes of inventory errors. This includes simple data entry errors when receiving new shipments (i.e., someone enters an incorrect item quantity into the system). A worker might scan the wrong barcode or forget to scan one altogether during a sale or transfer. Manual data entry can contribute to these mistakes, as the potential for typographical errors and oversights is high.
2. Inventory shrinkage
Shrinkage happens when inventory disappears for reasons other than sales. The most common form of shrinkage is employee theft or shoplifting. But shrinkage also includes administrative errors, product damage, or items vanishing in transit or within the warehouse. For example, someone might damage a box during shipping, rendering the products inside unsellable, yet the system still shows them as available for sale.
3. Incorrect location or misplaced stock
Misplaced inventory stems from poor organization or missing procedures, whether you’re managing a warehouse or a physical store. When an item is put in the wrong location on a shelf or doesn’t get returned to its proper home after being displayed, it becomes nearly impossible to find during a physical count.
4. Order picking and packing errors
During the order fulfillment process, a worker may accidentally pick the wrong item or forget to scan before packing. These picking errors mean what you ship to the customer won’t match your system’s inventory records, creating a discrepancy.
5. Supply chain and vendor mistakes
Inventory discrepancies sometimes start before items even reach you. A supplier might send the wrong item quantity or a different product than what is on the purchase order. If your receiving team doesn’t verify shipments against the purchase order, the error carries over into the business’s inventory management system, creating a mismatch from the moment the goods are logged.
How do you resolve an inventory discrepancy?
- Stop and assess
- Conduct a focused audit
- Find the root cause
- Adjust inventory records
- Document and report
Finding an inventory discrepancy requires immediate action. You’ll need to perform an inventory reconciliation to align your inventory levels with the reality of your stock. Follow these steps to address an inventory discrepancy:
1. Stop and assess
When you identify a discrepancy, pause the specific inventory operation immediately, whether you’re receiving, order picking, or cycle counting. Isolate the product and its location, then do a quick visual check. Is the item in the wrong location, damaged, or missing?
2. Conduct a focused audit
Instead of conducting a full-scale physical inventory count, perform a targeted audit of the product. Be sure to count the physical stock of the item, any misidentified variants in the immediate area, and any other potential stock locations.
3. Find the root cause
It is important to determine the error’s root cause. Review recent transactions for the item. Was there a recent sale, return, or transfer? Check the purchase order and receiving logs to verify proper shipping and receiving. Look for signs of human error or potential employee theft. This investigation is essential to prevent inventory discrepancies from recurring.
4. Adjust inventory records
Once you confirm the physical count and understand the discrepancy’s source, manually adjust the inventory levels in your inventory management system and accounting software. This ensures your inventory data is accurate and up to date.
5. Document and report
Record everything, including the root cause of the original discrepancy and the final adjustment. This documentation becomes crucial for future analysis and for building stronger quality control measures to prevent similar errors.
Best practices for preventing inventory discrepancies
- Implement inventory control procedures
- Conduct cycle counts on a regular basis
- Leverage technology and automation
- Emphasize employee training
Although resolving a discrepancy is important, the goal for any business is to prevent inventory discrepancies from happening in the first place. These strategies help you maintain accurate inventory:
Implement inventory control procedures
Establish documented inventory control procedures for every part of your supply chain you directly control—from receiving goods and storing them to picking orders, and processing returns. The more standardized and well-defined your processes become, the less human error will be a major contributor to your inventory problems. Consistent employee training ensures every team member understands and can follow these procedures.
Conduct cycle counts on a regular basis
Rather than wait for a single, annual physical inventory count, implement cycle counting—counting predetermined portions of your inventory regularly (daily, weekly, or monthly). These portions get selected by location, item value, or other criteria.
Cycle counts let you identify discrepancies early. They also reveal where stock discrepancies occur, letting you focus efforts on problem areas. This increased count frequency helps keep your inventory levels accurate while holding your team accountable.
Leverage technology and automation
The most effective way to prevent inventory discrepancies is to use an inventory management system that automates many of the manual tasks that can cause inventory errors. Tools like barcode scanning instantly log products and track sales, delivering real-time data and can eliminate data entry errors.
For ecommerce businesses with physical stores, unified sales channels solve cross-channel discrepancies. A tool like Shopify POS is one example, syncing inventory between retail and ecommerce sales. When you sell an item in-store, the system automatically updates your online inventory levels as well. The Shopify app store offers numerous inventory tools with advanced features like demand forecasting, multilocation tracking, and automated purchase order creation.
Emphasize employee training
No inventory management system or procedure is effective without well-trained employees. Invest in proper employee training that shows workers how errors happen and how they can prevent them. You can help your team understand the impact of inventory problems on the entire business, from lost sales to poor customer service. Build a culture of accountability where team members feel confident reporting errors and proposing improvements.
Inventory discrepancy FAQ
What is a discrepancy in inventory?
A discrepancy in inventory occurs when your physical stock doesn’t align with the quantity listed in your inventory records. Human error, inventory shrinkage, or administrative mistakes can cause these inventory errors.
How do you calculate inventory discrepancy?
The formula is straightforward:
Inventory discrepancy = System count - Physical count
This gives you the number of units that are missing or extra. If your system says you have 200 units but a physical count reveals only 195, your inventory discrepancy is five units. A negative number indicates you have more stock than your system shows.
How do you record an inventory discrepancy?
When you discover a discrepancy, make a manual adjustment. Most inventory management software has a feature for this. The adjustment should include the discovery date, the person making the adjustment, the reason for the discrepancy (if known), and the number of units added or removed. This updates your inventory records while creating an audit trail for future analysis.
