In supply chain management, “negative inventory” is often mistaken for a system error or anomaly. However, there may be complex business logic and strategic choices hidden behind it. This article will systematically dismantle the concept of “negative inventory” from the perspective of a product manager, its causes, how it is handled in different systems, and its impact on financial accounting.
Recently, some friends often consult me about some knowledge about “negative inventory” in product exchange groups or private chats, and I have not written about this piece before, so I will take this opportunity to write an article to dismantle “negative inventory”, talk about some of my understanding of it, and also answer some friends’ doubts by the way.
In the early days, when I first entered the industry, I would think that “negative inventory” was a very outrageous and unbelievable thing, how could inventory be negative? Therefore, my first impression at that time was: try to avoid it, and the inventory quantity must not be 0.
However, as I work longer and more and more business scenarios and models, I gradually understand and agree with the matter of “negative inventory”, and will not regard it as a problem that must be solved in time. Because its appearance has a certain reason, there are reasonable business demands and scenarios, and it is not a “BUG” or “abnormality” in everyone’s first impression.
The phenomenon of negative inventory is far more complex than everyone thinks, and it involves not only technical problems, but also business logic and business strategy choices. In this article, I will start from the perspective of a product manager, starting from the most basic concept, and gradually go deeper into the causes of negative inventory, the corresponding financial treatment mechanism, and the differentiated treatment methods between different systems, and systematically dismantle the topic of negative inventory.
What is negative inventory?
To put it simply, negative inventory means that the inventory quantity of a certain product in the system is displayed as a negative number, generally because the sales quantity is greater than the inventory quantity of the system when selling, so the remaining inventory is negative.
Negative inventory actually reflects that at a certain point in time, the demand for inventory of a specific commodity exceeds the existing inventory, and at the same time, it must meet the demand to avoid blocking the business.
This definition sounds abstract, let me give you an example of one of the highest frequencies that cause negative inventory.
For example, in the business field of an offline entity, a customer wants to buy a certain product, but the current inventory of the product in inventory is 0, you first go to a nearby peer or supplier to borrow some goods, and then first open a sales outbound order to the customer (the sales quantity is 10 pieces), and the system inventory becomes -10 pieces. After sending off the customer, you have time to come back to your senses and enter the purchase warehousing list (the purchase quantity is 15 pieces), and the inventory in stock becomes 5 pieces at this time.
After 10 years of interaction design, why did I transfer to product manager?
After the real job transfer, I found that many jobs were still beyond my imagination. The work of a product manager is indeed more complicated. Theoretically, the work of a product manager includes all aspects of the product, from market research, user research, data analysis…
View details >
From this scenario, “-10 pieces” is negative inventory, which represents not only a negative number, but also the company’s sales commitment to these 10 items and future replenishment needs.
If the enterprise strictly follows the rule of warehousing first and then out, it will theoretically not produce negative inventory. However, in actual business scenarios, this kind of scene of first going out and then putting in is also more common, because for various reasons, it is necessary to complete the sales first, and then do the purchase and warehousing. Therefore, many purchase, sales and inventory systems, ERP systems, etc. will support this business model, so “negative inventory” has become more common and not abnormal.
Causes of negative inventory
Understanding the causes of negative inventory is a prerequisite for designing effective solutions, which can be divided into two categories: active business strategies and reactive management problems. I’ve sorted these reasons based on frequency, hoping to help you quickly prioritize your issues.
1. Sales business-oriented “sales first and then procurement” model
This is the most common reason for negative inventory, and it is also a certain business rationality. In some special business models, negative inventory scenarios are very frequent.
Typical scenarios include:
- Trading company consignment: Confirm immediately after receiving customer orders, and then purchase from upstream suppliers.
- Manufacturing production to order: After receiving the order, we start to purchase raw materials and organize production.
- Dealer emergency transfer: In order to meet customer demand, sell first, and then transfer goods from other warehouses.
A clothing trading company acts as an agent for multiple brands, and when a major customer places an order to buy 100 pieces of a certain winter coat, the company’s inventory may only be 30 pieces. However, in order to meet customer needs and maintain cooperative relationships, they will first take orders, and the system will deduct 100 pieces of inventory, resulting in a negative inventory of -70 pieces, and then urgently purchase 70 pieces from the brand to replenish the goods. This model is very common in clothing, 3C digital, home furnishing and other industries.
2. Data synchronization between systems is delayed or failed
This is a problem caused by the technical level, in the business scenario of multi-supply chain system collaboration, due to concurrency problems or data synchronization failures, similar “negative inventory” problems often occur.
Common sync issues:
- Multi-channel sales synchronization delay: Online malls and store POS sales at the same time, and there is a time lag in the synchronization of inventory deduction information.
- Data loss due to network failure: API calls time out or fail, resulting in inventory changes not being reflected in a timely manner.
- WMS inventory change back to ERP: WMS has an inventory change, and the result of the change needs to be returned to ERP, but because there is a difference between ERP and WMS inventory (ERP inventory is insufficient), resulting in negative inventory.
3. The order of processing business documents is wrong, and human operation errors are made
In actual business, physical operations and system document processing are often out of sync, and this time difference can easily lead to negative inventory. At the same time, human errors, such as filling in the wrong quantity, shipping according to physical goods instead of documents, etc., can also lead to negative inventory.
Frequently Asked Questions:
- Physical goods before documents: The goods have been shipped out of the warehouse, but the outbound documents are still in the approval process, and the system inventory has not been deducted.
- Delay in return processing: The customer’s return has arrived at the warehouse, but the processing of the return inbound document is delayed, and the physical goods have been added, but the system has not increased the inventory.
- Time difference between the transfer business: Warehouse A has shipped the goods and Warehouse B has received the goods, but the transfer documents have not been fully processed in the system.
- Human operation problem: When the procurement is put into the warehouse, the quantity is filled in less (there are more physical objects than the system), but when the warehouse is out of the warehouse according to the actual quantity, there will be negative inventory.
Store allocation scenario of a garment company: at 10 a.m., the headquarters ERP generates a transfer outbound order, and the inventory of store A is deducted by 100 pieces; At 2 p.m., the goods were transported to store B; At 5 p.m., store B confirmed the receipt, but due to system maintenance, the warehousing order was not processed in time. At this time, if store A has another customer buying (the physical product has arrived in the store, but it has not been entered into the system), it may lead to negative inventory.
4. System bugs or program errors
If the system logic itself has bugs or errors, then it will lead to inaccurate inventory, and it is normal for negative inventory to occur.
Common BUGs or bugs:
- Inventory calculation logic error: A code logic bug causes inaccurate inventory calculation
- Repeated execution: The same outbound order is processed repeatedly in the database
- Transaction Exceptions: Incomplete transaction rollbacks or deadlock issues
The meaning and handling of negative inventory in different systems
In different supply chain systems, the manifestation and meaning of negative inventory will be very different, we must first understand which systems have negative inventory is reasonable and which systems are unreasonable, so as to better understand why some systems should resolutely control negative inventory, while some systems should support negative inventory.
In the modern supply chain system, different systems such as purchase, sales and inventory, ERP, WMS, POS and other systems have different responsibilities, and their handling strategies and tolerances for negative inventory are also very different.
1. ERP system: conditional support, flexible strategy
ERP systems are relatively inclusive of negative inventory, mainly because they manage book inventory and business processes rather than specific physical objects. When negative inventory occurs in ERP, it often reflects the company’s business strategy choices, such as pre-sale model, consignment business, first sales and later procurement, etc.
ERP will control negative inventory through a flexible rule engine: set different policies according to product categories (pre-sale products are allowed to have a large negative inventory), set different policies according to the type of logical warehouse (warehouse A supports negative inventory, warehouse B does not support negative inventory), and ERP will also be equipped with a relatively complete costing mechanism to deal with financial problems caused by negative inventory.
2. Purchase, sales and inventory system: conditional support, document-oriented
The inventory, inventory, and inventory system also supports negative inventory, but focuses on the circulation of business documents. Its core value is to record business activities such as procurement, sales, and inventory changes, which is especially suitable for the operation habit of small and medium-sized enterprises to “sell first and then purchase”.
The control strategy of purchase, sale and inventory is relatively simple and direct, generally to enable negative inventory globally, or to control whether negative inventory is enabled by warehouse and commodity, and then you can configure some documents to support negative inventory, and some documents do not support negative inventory. In terms of cost accounting, it is generally used to use first-in, first-out or moving weighted average, and if you want to accurately account for the cost of negative inventory, you need to do some special treatment in this area.
Seven colors of rice: global control of negative inventory
Kingdee Xingchen: Control negative inventory according to warehouse
3. WMS system: strict control, zero tolerance
WMS has a “zero tolerance” approach to negative inventory because it directly manages physical inventory. In the logic of WMS, every outbound warehouse must be supported by real goods, and each warehouse must truly reflect the physical state.
Therefore, when the program calculates the inventory, if it is found that the inventory will be “negative”, then it should directly report an error to intercept this situation, and negative inventory is not allowed.
4. POS system: strict control, moderately flexible
POS systems are somewhere between tight control and flexible support, requiring a balance between risk control and customer experience. Because POS is directly facing end customers, random negative inventory sales may lead to online O2O customers buying goods but not getting the goods, affecting the brand image. However, in some cases, at the cash register, if the customer has already taken the physical goods to checkout, then even if there is no inventory in the system, negative inventory should be supported for billing sales.
For example, the billing on the cash register side supports negative inventory, while other business scenarios such as outbound, allocated outbound, and O2O outbound do not support negative inventory operations.
Youzan: The cashier opens negative inventory sales
In general, to judge whether a supply chain system supports “negative inventory”, we can follow the principle that the closer the system is to physical operation, the lower the tolerance for negative inventory; The more business-oriented the system, the higher the level of support. The system responsibility positioning determines the handling strategy of negative inventory.
Costing problems caused by negative inventory
Many product managers often focus on changes in inventory quantities when designing negative inventory functions, ignoring the financial impact behind them. But in reality, negative inventory may have a bigger impact on the financial module (costing) than you think.
1. The complexity of costing
When a company has negative inventory sales, the biggest challenge for the financial system is not knowing what the actual cost of selling outbound goods is. This may seem like a simple problem, but in practice it is quite complicated.
Suppose the current inventory of a mobile phone case in your current store POS is 0 pieces, and due to the opening of negative inventory sales, a customer buys 100 pieces, and the system deducts the inventory and displays it as -100 pieces. Now the question arises: how should the cost of sales of these 100 cases be calculated?
Many retail companies use the moving weighted average method to handle the costing of negative inventory. The specific method is that when there is a negative inventory sales, the system uses the historical weighted average cost (the most recent sales cost without negative inventory) as the temporary sales cost, and then adjusts the difference according to the actual purchase cost after the subsequent purchase is put into storage. This method is relatively scientific, which not only meets the requirements of accounting standards, but also ensures the continuity of daily business.
2. Mechanism for handling cost differences
Another financial challenge posed by negative inventory is the handling of cost variances. When an enterprise uses estimated cost for negative inventory sales, and finds a difference in cost during subsequent actual purchases, how should this difference be dealt with?
In practice, there are usually two ways to deal with it: one is to directly adjust the cost of sales and include the difference in the current profit and loss; The second is to set up a special cost difference account, regularly analyze the reasons for the difference and optimize management. Which method to choose depends mainly on the accounting policy of the enterprise and the size of the difference amount.
The financial treatment of negative inventory must be fully communicated with the company’s finance team to ensure compliance with accounting standards and audit requirements. I have seen some product managers who are not sensitive to financial logic when designing the negative inventory function without considering the financial impact at all, and as a result, it caused a lot of financial data problems after the system was launched, which was particularly uncomfortable.
Summary of common misconceptions and solutions to negative inventory
After the above dismantling of negative inventory, I believe everyone has a certain understanding of the concept and business scenarios of negative inventory, as well as the details that should be paid attention to in the corresponding product plan.
Finally, I would like to summarize the most common misunderstandings about “negative inventory”, hoping to help you avoid stepping on the pit.
Myth 1: Treat negative inventory as a purely technical problem
Many novice PMs’ first reaction when they see negative inventory is “this must be a program bug, hurry up and let the development fix it”. This perception is completely wrong.
Correct understanding: negative inventory is first a business problem, and then a technical problem. You need to understand the business scenario and determine whether this negative inventory is a reasonable business need or an abnormal management problem before deciding on a technical solution.
Myth 2: Thinking that the processing strategy of all systems should be the same
Another common misconception is that systems such as ERP, WMS, and POS should maintain consistent strategies for handling negative inventory.
Correct cognition: Different systems have different responsibilities and positioning. ERP focuses on business processes and financial accounting, and can conditionally support negative inventory; WMS pays attention to physical management and should strictly control negative inventory; POS focuses on customer experience and needs to find a balance between controlling risk and improving experience.
Myth 3: Ignoring the financial impact
Many product managers only focus on changes in inventory quantities and do not consider the impact of negative inventory on the financial system at all.
Correct understanding: Negative inventory will directly affect financial indicators such as cost accounting, gross profit calculation, and cash flow forecasting. When designing a negative inventory function, it is important to fully communicate with the finance team to ensure compliance with accounting standards.
Myth 4: The theory of technology omnipotence
They believe that all negative inventory problems can be solved by writing code well, ignoring the importance of management processes and business specifications.
Correct cognition: negative inventory management requires a combination of technical means and management mechanisms. Technology can provide tools and platforms, but specific business rules, processing processes, risk controls, etc. still need management support.
Myth 5: Insufficient user experience consideration
When designing the negative inventory control function, only the business logic is taken into account and the user experience is not fully considered.
Correct cognition: When users encounter insufficient inventory, they should not simply prompt “insufficient inventory”, but should provide intelligent solutions, such as recommending alternative products, providing arrival notifications, displaying estimated arrival times, etc.
The key to avoiding these misunderstandings is to always think about problems from a business perspective and use technical means to solve business needs, rather than replacing business logic with technical logic.
As a supply chain product manager, understanding and dealing with negative inventory is one of your basic skills.
I hope this article can help you establish the right cognition and methodology in this complex field.
