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Inventory Planning Systems Negative Inventory
The concept of negative inventory may seem preposterous, but is actually a fairly common phenomenon and even occurs as a regular part of some business operations. There are a number of reasons why a negative inventory balance may show up on the books including a simple transaction balance that occurs when shipment transactions and production runs cross each other in the system. However, the difference between location-level negative balances and item-level negative balances is a noteworthy one and should be further explored.

When a transaction is processed from an incorrect location, a location-level negative balance occurs. An item-level negative balance, on the other hand, is a somewhat more serious error and generally results from transactional mistakes. Using widgets as an example, assume that there are 200 of them in location a and 100 more in location b. A shipping order is routed designating that 100 widgets are to be picked up from location a and shipped out immediately. When the order is processed through the warehouse, the widgets are mistakenly taken from location b instead of location a. Thus, the location-level inventory would show a deficit at location b since there are supposed to be 100 widgets stored there. On the other hand, the item-level inventory balance would be just fine -- there are still 200 widgets on hand just at a different location than anticipated.

Why is the difference between a location-level deficit and an item-level deficit important? Not because there is any real difference in the number of items available, but largely because of the steps that might be taken to remedy a perceived deficit. If there are no widgets in location b and that is perceived as a shortage, someone is likely to order 100 more to fill the negative balance a move that, in actuality, now creates an inventory overstock, since, at this point in time, the company only really desires to have a total of 200 in stock and that number has now been boosted back to 300 by the undesired order.

The difference between the two types of transactions and the difficulties that can be caused by mistaking one for the other necessitate that a careful look be taken at the total inventory whenever any negative balance occurs. It is generally not difficult to track down the source of a negative inventory balance and it is always prudent to do so. Otherwise, one error can create another and so on until the whole system spirals out of control.

Part of the impact of an uncontrolled negative inventory balance is the effect it has on other systems like planning. In other systems, a negative item-level inventory will be perceived as a positive demand, triggering an automated system to either buy or manufacture more of a particular product, when it is not really necessary or even desirable. In a marketplace where products are rapidly changing and too much inventory in a particular item category can be devastating, it is important to watch any negative inventory situations carefully and determine exactly which actions are absolutely necessary to cure the deficit. When the problem is location related, it can be quickly and easily cured with a product location transfer. If, in fact, the problem is really an item-level deficit, then a production run or purchase of more product may be necessary.

The best remedy for negative balances is avoiding them in the first place. By the same token, that may not always be possible and, in many cases, negative inventory is simply a part of doing business and no particular reason for panic. What is important is planning for positive ways to deal with a negative inventory balance and investigating them carefully before taking action, when they do occur.
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