Negative Inventory- The deceptive functional feature- by Tom White Certified NetSuite ERP Consultant

Some accounting software allow inventory to go negative. Selling items where the inventory system shows a zero on hand creates a negative on hand in inventory. However, even though it is possible to do, should you use this feature?

The Case for Over-shipping

Twenty years ago the concept of Omnichannel didn’t exist. The supply chain process was mostly manual. Orders and receipts were written down by hand. There was a delay entering these into the accounting system. It was often the case that inventory was received and sitting on the shelf hours or even days before the item quantities made their way into inventory.
Another problem was inventory discrepancies. Physical inventories were such a tedious and time consuming task that they were seldom performed or performed properly. Discrepancies could be caused by miss-shipping, errors in inventory counts, and PO receiving errors to name a few.
An “over shipping” feature allowed for companies to sell product that they actually had on hand but had yet to create the receipt or the adjustment in their accounting system. The quantity on hand would go negative (and continue to get more negative) until the receipt was processed or the inventory adjusted. After that, the quantities would be correct. What could be better?

Two Major Problems

Accounting for Negative Inventory

Accountants tend to have a dim view of negative inventory. How can the inventory amount on the balance sheet be accurate if it is backed up by an inventory on hand report that has negative quantities and amounts? The only way to resolve this is to incorporate posting the adjustments in the monthly close procedures.

Mistrust of the Inventory System

I feel that the operational problem is more significant. The accounting problem, while serious, can be fixed by extra work during the monthly closing process. However once confidence is lost in the inventory quantities in the accounting system, it affects the entire supply chain. No one knows what the real item quantity is. How does the Purchasing Manager order? How does the Sales Rep know there is quantity to sell? How do pickers know where the items are since zero or negative quantities can’t be assigned to bins?
You know you have this problem if there are constant calls or visits to the warehouse to check quantity on items.

Some Solutions Create More Problems

Not allowing over shipping solves the accounting problem but ignores the operational issues. There is still a delay in processing paper transactions. The inventory is still not equal to what is in your accounting system. You just can’t sell any overage that happens to be on the shelf!
Inventory can be counted more often. This increases workload on warehouse and clerical staff. The items from unreceived purchase orders still have to be taken into account. The result is a more accurate inventory, but only at the time right after the count. Soon it will revert to the previous mismatched situation.
Now you not only still have the inventory discrepancies but you may have internal frustrations. Sales reps can create orders but they can’t be shipped. Delays in fulfillment and delivery increase. Fingers are pointed at warehouse and purchasing.

A Better Solution: Real Time Inventory

Manual inventory control can work fine in some environments. If the number of items (SKUs) is small or if sales volume is low, real-time inventory may not be needed. However today many businesses are selling through multiple channels: Telephone Sales, EDI, Website, and Retail Stores to name a few. It is what we now call Omnichannel. This puts a greater demand on proper inventory management.
Real-time inventory using mobile devices is the answer. Depending on your needs it could be only the automation of data collection or a full-fledged warehouse management system.
In a Real-time system, purchase orders are received on the receiving dock of the warehouse. Items are put away in their proper locations and are immediately available for sale through any of your channels. Sales orders that are picked by warehouse personnel immediately affect inventory. Those items are no longer available for sale. Cycle counts replace onerous wall to wall physical inventories. Cycle counts can be done at any time – even while others are picking orders!
Soon you will have a 99% accurate inventory and never have to worry about negative quantities or over shipping again.