Managing Inventory? That’s a negative!

Mark Canes

In the previous post on negative inventory we debunked the myth that some businesses "need"  their software to handle negative inventory. With appropriate inventory management business processes in place, there's never any real need. But perhaps it's more expedient to let your inventory management software go into negative quantities in the heat of the moment and correct things later - right? Well - no. Here are a couple of negative consequences of negative inventory.

Firstly, if we sell product that we've not brought into inventory, what cost of goods sold is allocated to the invoice? Is it the last cost, or the existing average cost? Well, either way, it's definitely the wrong cost. Similarly, when you later bring into inventory the quantities necessary to wipe out the negatives, and input their actual cost, how will that affect your updated average cost calculation? What if you pay sales commissions based on gross margins? Review daily sales and gross margin reports. Have margin threshold alerts or exception reports? That all falls apart under a negative inventory scenario.

Secondly, in a properly integrated ERP system, other areas of a growing business rely on inventory quantities for decision making and transaction processing - things like reorder procedures, inventory allocation on sales orders, and backorder management. By not investing a little time and effort to implement good processes, you might well lose the ability to use tools and functionality that would actually save you much more time, on an ongoing basis.