How to Minimise Stock Variances

What is a stock variance?

To minimise stock variances you need to know what they are. A stock variance occurs when the inventory management system has a recorded quantity of stock items that is incorrect to what is physically available. 

A variance will usually be found when a stocktake is performed, when all stock items are individually counted. This is done to balance the stock levels and determine the value of stock that a business owns. 

Most of the time, a stock variance during stocktake is not easily explained and needs to be recorded. 

Types of Variances

There’s only two types of variances that can occur when you count stock on hand: 

• The quantity of stock on hand is higher than you should have
• The quantity of stock on hand is less than you should have

It’s important to eliminate and minimise stock variances in your business as that’s a cost your business pays for. Both types of variances can occur because of business processes where recording of information is inaccurate. 

Let’s go through some examples below.

How to Minimise Stock Variances & Examples

Non-Invoiced Stock

This is stock that your business has received but is unaccounted for in your inventory management system. 

There could be a number of reasons why this has occurred, and it could be as simple as needing to change your processes when you receive stock. 

Any stock that you have received into your inventory but which has not been invoiced may be incorrect in either its quantity or its value.

How to minimise non-invoiced stock variances:

• Ask suppliers to send e-invoices to ensure that you have accurate information as quickly as possible
• Have a standard procedure to remove the invoice from the box/container and hand it to the store person to action
• Allocate an area of the warehouse for received stock that has not yet been processed into inventory so that you don’t count it by mistake

Incorrect Warehousing Processes

In some instances, a negative and positive variance can cancel each other out. This can occur if stock has been sold under the wrong code. When this happens, it’s usually human error or a label that’s been printed incorrectly. 

The warehousing process is the main area in your business where stock is removed from your inventory list, therefore, it’s important to ensure the processes are locked down and there are no gaps. 

How to minimise incorrect warehousing processes

• Make sure the description of the item is sufficient to separate it from others that are similar. “Black t-shirt size 12” might not be enough to distinguish it from other black shirts 
• When selling items, make sure the description on the label or stock item matches the what’s being sold. Train staff to check the description of the item when it is being sold, either through the Point of Sale (POS) or to customer accounts
• When delivering or selling items, make sure that all items are scanned or entered correctly. Items within other items can be missed
• Make it easy for staff to process transactions correctly, especially if using staff accounts to perform sales. If it’s difficult or laborious to record when a staff takes some inventory to assemble a product, that stock will be a variance. Minimise the roadblocks that cause staff to baulk at keeping records

Stock Transfers

An often overlooked process is when stock has to be transferred within the business, and does not get removed from stock at all. 

Businesses will perform stock transfers to keep stock in inventory, usually in different locations. This can be a franchise that has multiple sales outlets, or a large warehouse that is divided into different storage locations. 

A business can transfer items back and forth between locations, and sometimes into other items in unique circumstances, depending on the inventory software used. 

When conducting a stocktake, stock transfer variances can be easily explained when the quantities involved are easily matched. 

How to minimise stock transfer variances

• It’s common to use stock transfer sheets in each location, usually where the stock that has been transferred out is recorded and the location where it is being sent. These can be manually balanced, or entered into the inventory software
• In the inventory management system, the sending location transfers the goods out and prints a stock transfer docket. Similar to an invoice, the receiving location will receive the stock into their inventory, balancing out the transaction
• Don’t allow staff to move stock between locations without the proper paperwork and data entry processes

Wastage

Production businesses, retail, wholesalers and more will all deal with wastage to varying degrees. It might only be from packaging, but can also be a result of the manufacturing process with materials wasted unnecessarily. 

Unlike the other variance issues, wastage is usually a by-product that can’t be used to make something else, or only used once before being discarded. 

Think of a restaurant that uses the off-cuts of many different products to make soups and stocks for other dishes on the menu. They’re minimising their wastage as best as possible. 

In manufacturing, a good inventory solution such as Accentis Enterprise, has a solid manufacturing MRP module to ensure you use as much product as is available. 

How to minimise wastage variances

• Record any wastage from materials that cannot be reused
• If in a manufacturing environment, use an MRP system to allocate resources based on what materials are needed for a specific work order
• Train staff on the correct use of tools and material handling

Theft

This is one of the hardest variances to control in any business. By using all the other variance tracking methods however, should help these to stand out when it’s taking place.

How to minimise theft variances

• Performing regular stocktakes will allow you to keep track of which products are being removed more often. 
• Inventory security should be top of mind. Keep store rooms or warehouses locked, or require authorisation to access. Preventative measures are usually what stops most thieves

Record Stock Movement

You might have noticed, but all of the other examples above mention record keeping. Without solid records of where stock has been appropriated, you have no idea what’s going on. 

The more records that you keep, the easier it is to find and explain any stock variance. 

Records can be kept in any number of ways, from manual entry written on a piece of paper, to automated allocation from a work order in your MRP system. 

Having records that you can go back and reference to explain a variance can save a large amount of time and expense. If you have to recount a location’s inventory to find where the variances are, it’s a waste of your company’s resources. 

Do it right from the start, and you eliminate excess costs. 

How to minimise variances through recording stock movement

• Train staff and inform them of why you need to record all stock movements. Explain that stock movement means anything to do with the utilisation of stock, from transfers to sales, to production to wastage. If they’re scared to report wastage for fear of being in trouble rather than record what happened to the stock, you’ve already lost money
• Keep records up to date and as consolidated as possible. It’s no good having an inbox tray full of invoices if you’re not receiving them into your inventory. You might physically have the stock available, but you have no idea what value of stock you’re holding, or what quantities you have available to sell
• Use automation software such as an ERP system for complete business management of all your records. An ERP solution is a fully integrated piece of software that shares information between all your business requirements

Conclusion

We’ve highlighted some of the more common processes that result in stocktake variances. These are: 

1. Non Invoiced Stock
2. Incorrect Warehousing Processes
3. Stock Transfers
4. Wastage
5. Theft
6. Recording Stock Movement

A stocktake is a single snapshot of your business’ inventory valuation. It’s in your best interests to know how to gain the clearest picture of what that is. 

When you start recording inventory movement properly through stocktakes, it can take at least three stocktakes before your figures will usually settle down. This is because your variances and learning how to control them can take a bit to get used to. 

When you minimise stock variances, the benefits to your business increase. You can make more money, order more efficiently, and run your business better. 

Accentis Enterprise is more than just a powerful inventory management system. It’s a fully-integrated business management solution that helps plug these variances up, and much more. 

For a better picture of what Accentis Enterprise can do for your business, download our free eBook!

If you think you could benefit from an ERP solution to help manage your business, contact us so we can organise more relevant information for you.