How can manufacturers minimise stock lossesIdentifying the causes of stock loss and implementing counter-measures can help to minimise stock loss or inventory shrinkage.

At Blackhawk Intelligence, our security specialists often say that manufacturers cannot fully prevent stock losses as there are contributing factors outside of one’s control. The best approach is to implement security measures that aim to minimise stock losses that hurt your bottom line instead.

Let’s kick-start this discussion by highlighting a few common factors that can result in stock losses.

1. Theft

Theft committed by employees or outsiders is often considered as the most common source of inventory shrinkage among manufacturers. The crime can be committed during production, in the warehouse where goods are stored, or when the goods are in transit.

Most perpetrators are opportunists; they are motivated by greed and they steal when the situation presents itself. For example, they see high-value items placed near an exit door without a guard, and they choose to take advantage of the situation by stealing the items.

Other perpetrators take time to plan. In 2016, before Sony was set to unveil the new Playstation 3 Slim consoles, some 3,000 of them went missing from the distribution centre in Wellingborough and the Felixstowe Docks in the UK. The driver of the lorry had made an unscheduled stop where his accomplices unloaded the goods for personal gains. In such cases, the perpetrators usually go the extra mile to cover their tracks, with some even falsifying records.

How to prevent theft from causing stock losses?

Accurate tracking, frequent cycle counting, restricting inventory access, installing CCTVs, using a good inventory management system and effective interviewing are some of the techniques manufacturers can use to minimise theft.

2. Employee error

Errors in the management of physical inventory or as a result of procedural mistakes in data or stock handling by employees are common. Incorrect inventory management can result in items being placed in the wrong location or being mislabelled. In some cases, materials can also be measured incorrectly, or units of measurement recorded erroneously.

Manufacturers are particularly mindful of any knock-on effect from employee errors as they can be too costly to fix. When a mistake has happened, it is crucial to identify the real source of the issues quickly and accurately, before it causes a string of other (potentially bigger) errors.

How to prevent employee errors from causing stock losses?

Reducing manual processes, using real-time alerts, stringent training programs and regular audits can help to prevent employee errors to a great extent.

We have also seen corporate policies that focus on promoting high employee engagement work exceptionally well in reducing the volume of errors and wastage. After all, engaged employees tend to take pride in the work, possessing an attitude of integrity in accordance with your company’s business standards.

3. Stock deterioration and loss

Damage is another significant threat and it can happen in a variety of ways – raw materials may perish in extreme conditions, inventory may get crushed during transit, and unpredictable natural events can wipe out a container-load of goods.

Most manufacturers rely on their accounting inventory software to calculate the value of the damage, write off the loss on their financial statements, and take a deduction on the income tax. Accurate records must be kept to satisfy the auditors.

How to prevent the damage or deterioration of stock from causing losses?

If the cause is an act of God, meaning a natural hazard that is outside of your control, then there is not much you can do. But if the cause is due to equipment failure or an operational error, then it is worth taking time to rectify or implement counter-measures.

4. Supply chain fraud

Fraud in the supply chain is fast becoming an issue for manufacturers. Supply chain fraud is far-reaching and can assume several forms, from a vendor providing inferior or counterfeit goods that will compromise the quality of your products to a “fake” vendor whose aim is to cause financial harm to your organisation. Some vendors may also work with an internal employee whereby an improper payment is made to ensure the vendor wins a contract or gains other advantages.

How to prevent supply chain fraud from causing losses?

Manufacturing companies must have a robust fraud risk assessment which is continuously updated, while regularly measuring the current and desired state of the business.

Due diligence is also essential. This process seeks to verify the legitimacy of all companies involved in your supply chain.

Blackhawk Intelligence can help manufacturers to reduce stock losses

At Blackhawk Intelligence, we work with manufacturers in the UK and abroad to minimise stock losses in several ways:

1. Due diligence

Most companies undertake due diligence before signing a contract, forming a partnership or purchasing a business. In manufacturing, our due diligence experts tend to help manufacturers making sure that financial due diligence, legal due diligence, and intellectual due diligence are thoroughly conducted to verify the other party’s business practises, assets and financial performances. In some cases, we also conduct environmental due diligence on behalf of manufacturers.

2. Background checks

Even if you have automated the manufacturing process to a large extent, there are areas where humans are involved. It is worth remembering that ambition is an innate part of human nature and in some instances, this instinct can lead to a misuse of power that is illegal and can cause significant damage to your organisation. To reduce the risks of fraud and internal threat, conducting rigorous background checks on your employees are essential. Contact the background check specialists at Blackhawk Intelligence and we will gladly discuss how we can assist you.

3. Risk management

Every business is inherently risky and for a manufacturer, operation risk can stem from inadequate internal processes, a breakdown in supply chain, or external events that disrupt the day-to-day running of your company. At Blackhawk Intelligence, our risk management team takes a systematic approach to identify risks before developing a framework that can help to reduce an operation risk that is specific to your organisation.

With years of experience in assisting manufacturers in reducing stock losses, our teams are experts you can count on. Give us a call today on +44 (0)20 8108 9317 to kick-start a discussion.

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This article was originally published on 29/11/2017 and updated on 13/11/19.

This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.