Risk:
Business dictionary defines risk as “A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.”
Inventory Control Risk:
Whole sale and retail businesses and companies with manufacturing facilities have an enormous amount of inventory in order to ensure smooth business process. Along with that there are certain risks associated with holding so many inventories which affects all kinds of businesses regardless of the quantity of the inventory. Typically a small business has a big amount of funds tied up as inventory and to secure that every business manager has to make every effort to know and manage these risks.
Types of Inventory Control Risk:
Generally there are five basic types of risks related to inventory; Theft, Lost inventory, Damage, Life cycle and Shelf life
- Theft
- Identifying the Risk; Theft is one of the biggest risks associated with inventory control. Firms spend millions to create policies in order to prevent and safe guard theft, yet it occurs quite regularly. Theft can take place in numerous ways; a person may walk out of the store carrying goods with little or no security, also with the involvement of internal staff theft becomes much easier as they would remove all signs and records after the theft.
- Measuring the Risk; It is very hard to quantify this type of risk as this is a qualitative risk; also the scale of this type of risk varies with the size of the company. Yet we can categorize the risks associated with inventory control. In case of theft risk the risk is of medium scale provided sufficient security measures are ensured. Again this risk could be of a big one if the store or firm is careless about security and scrutiny of its inventory.
- Controlling the Risk; In order to control the risk of theft, firms need to have a strong security system, they must have a computerized data base of all the ins and outs of its inventory. Also they must ensure hiring trustworthy staff with valid identification. Installation of security cameras and proper surveillance can resolve the issue to a significant level.
- Lost Inventory
- Identifying the Risk: Loss of inventory means reduced equity to the business as it is a current asset of the firm. If the inventory is not managed properly, the goods may get lost or even if the staff is not careful enough in handling the inventory properly. Loss could be of many forms like receipt errors and physical loss of the goods.
- Measuring the Risk; This type of risk always acts like the throne in the side of the firm yet with the improvement in the technology this risk has been minimized effectively due to which we can grade this risk as a lower level risk.
- Managing the Risk; Lost inventory risk can be controlled by tight and well executed policies combined with vigilant and well trained staff that is efficient enough to keep an eye on the areas where the losses may take place.
- Inventory Wastage and Damage
- Identifying the Risk; Goods get damaged during normal business procedures and operations; these goods once damaged cannot be used and goes to waste which consequently increase the cost to the business.
- Measuring the Risk; The degree of this type of risk varies from business to business accounting for the value of the damaged items. For instance a clothing or paper business might be more prone to the damages then to those of a plastic or furniture business as cloth or paper once damaged cannot be repaired but furniture can be repaired and recondition saving some money to the business.
- Controlling the Risk; Effective strategies to combat the issue can help to control this type of risk. Firms may use high quality or technologically better packaging and handling equipment so as to avoid damage to the finished goods as well as to the transition goods.
- Life cycle
- Identifying the Risk; All products have a life cycle with four phases i.e. growth, maturity, downfall and withdrawal. The risk associated to product life cycle is mainly to the products at the withdrawal stage or with the decline stage. As the demand of such products goes down and the producers if not aware may incur losses by continuing producing such goods.
- Measuring the Risk; The products at decline stage or at the withdrawal stage are considered to be high risked products as their demand gets low and the businesses may get into serious trouble if the inventory remains unsold.
- Controlling the Risk; Firms shall implement a tightened inventory control policy for such products and reduce the production or purchasing of such products. A cautious approach on production and distribution can prove to be effective in controlling this type of risk.
- Shelf Life
- Identifying the Risk; The products with shelf life like edible items or toiletries pose another risk to the inventory. Food items like milk meat and vegetable have generally very low shelf life thus are prone to wastage. Same is the case with toiletries and other such items, once expired cannot be reused and are complete loss to the business.
- Measuring the Risk; This type of risk is a high range risk as shelf life is limited and is dependent on variable factors like temperature and light.
- Controlling the Risk; A tight inventory control policy and proper check on the expiries of the product can help controlling this type of risk.
Conclusion:
Risk is an integral part of every human activity, from the financial aspect it is the probability of realizing lower returns in comparison to the expected ones. Risk associated with inventory control can be managed with effective and well executed inventory control policies, if over looked; this risk can cause serious damages to the businesses.
References
Definition of risk. Retrieved from. http://www.businessdictionary.com/definition/risk.html
Measuring and reducing inventory exposure. Retrieved from. http://www.symphonyconsult.com/whitepapers/InventoryExposure_SymphonyConsulting.pdf
