For your business to run efficiently with the optimal inventory, the inventory system must show the actual inventory. If this is not the case, there are a number of potential consequences:
Extra holding costs and overstocking
If records are not accurate, it often leads to poor decisions, such as purchasing too many inventory items.
That would result in extra carrying costs, excess inventory, and lead to your warehouses filling with unsellable stock.
It is not possible to manage your stock levels efficiently without maintaining accurate digital records.
Inventory that is not registered won’t be sold
If you have inventory that does not show in the inventory system, you won’t be able to move this inventory or sell it.
That could slow down sales of a product considerably, and might also be counter-productive to inventory control efforts by leading to goods that spoil or expire. Inventory inaccuracies can also disrupt inventory forecasting, a critical process, which will then result in further replenishment and order fulfillment problems.
Delayed product orders can lose customers
Research shows that as much as 69% of customers won’t shop with a company again if their delivery had been more than two days late.
If a customer orders a product that shows as being in stock on the system but is not actually in the warehouse, it may take weeks before the product is procured and shipped.
If a two-day delay can cause you to lose their business, imagine what the consequences would be for a much longer delay. Keeping an inventory system accurate will prevent unexpected stockouts.
Inventory accuracy is a measure of the difference between your actual inventory and what your records show. Inventory accuracy is crucial to prevent shortages, stock-outs, shrinkage, maintain a positive customer experience, and control inventory quality.
Inaccurate data can cause many problems throughout the supply chain. A product that is registered but doesn’t exist may get sold. Your records may show enough stock available when you’re down to a single unit.
These are some of the reasons why preventing inaccurate inventory is critical.
Electronic records versus Real inventory
To get an idea of how accurate your inventory records really are, you have to physically count inventory regularly and then reconcile the data on your system.
Compare the following:
- Paper of electronic records the company uses to keep track of the inventory bought and sold. This inventory data is often normally in an inventory management system or ERP solution.
- Physical inventory count numbers.
Manual counts of inventory can be done in one of two ways.
- A total manual inventory count done every month or two weeks.
- Cycle counting. This method is done by counting a small subset of inventory on a specific day and cycling through the complete inventory slowly while focusing on accuracy.
You won’t be able to measure the accuracy of your records if you don’t have the inventory count that has been confirmed manually.
Calculating Inventory Accuracy
As mentioned before, you need to manually count the number of items currently in stock before you can calculate inventory accuracy. Your inventory accuracy rate percentage is calculated by dividing the actual stock count number by the stock count on your system and then multiplying the answer by 100.
For this calculation to be meaningful, your manual count information should be reliable.
The manual count should meet the following criteria as a minimum:
- The count should be done meticulously over multiple days while focusing on accuracy.
- To reduce the likelihood of human error, the count should be done and confirmed by multiple employees.
What Should Your Inventory Accuracy Rate Be?
A study done by the RFID Lab at Auburn University has revealed that the average inventory accuracy for companies is between 65% and 75%. This includes companies that use barcode scanning and SKUs to manage inventory.
This percentage is shockingly low and can’t be good for business.
Companies that take their inventory management seriously or want to improve it, use a benchmark of 97% or higher.
Steps to improve your inventory accuracy
1. Count your inventory as often as is required
The frequency of manual inventory counts will be determined by how much inventory you have and how good your accuracy is. Companies with a relatively small inventory will likely not have to count as often as companies with huge numbers.
How good your accuracy is will also determine how often you need to count. If you for example have managed to improve your accuracy to better than 97% and that number does not change much when doing monthly manual counts, you may consider only doing a manual count every two months or even every quarter.
The reduce the need for having to count your complete inventory often, you may want to consider segmenting your inventory to focus on critical and/or problematic areas.
- High-value count: This is a group of products that has the highest potential sales value or cost. It’s critical to track these accurately due to them being the most valuable.
- High-risk count: This is a group of products that has historically had the most inventory write-offs, are prone to errors, or has had the biggest inventory discrepancies.
2. Use appropriate technology
Using some type of scanner to track inventory is crucial the keep track of your numbers.
Barcode scanners are often to track inventory, and scanned information is loaded into inventory management software to prevent recounts and double counting. Although this is an advanced process, it is still manual.
RFID (radio frequency identification) uses radio waves to track inventory. Unlike barcode scanners which require the barcode to be in line of sight, RFID doesn’t. This enables an entire pallet of items to be scanned in one go.
This could reduce manual tasks like the re-orientation of boxes. It will also help you reduce labor costs.
3. Inventory management system
Using a reliable inventory management system (IMS) is critical if you want to scale your business sustainably. Traditional, older inventory management systems only provide the basics, are prone to errors, and don’t have the features you may require to thrive in the modern business landscape.