What is inventory accuracy?
Inventory accuracy is a metric that shows the difference between the amount of inventory in a warehouse and the amount entered in the inventory records.
Inventory reconciliation is done either by physically counting and matching items with inventory records or by using automated warehouse management systems. However, inventory accuracy is often below 100% for several reasons, including theft, miscalculations, and damages.
In this article, we’ll review how you can improve and maintain inventory accuracy in your warehouse and how it helps optimize supply chain operations.
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Why Inventory Accuracy is Important for Supply Chains
Inventory accuracy gives you better control over your inventory levels while enabling you to manage customer demands efficiently. Here’s how inventory accuracy helps retailers streamline their supply chain operations:
- Provides a better understanding of your business needs: When you maintain your inventory accuracy, you have access to correct information about how much product you need to meet customer orders. If you sell online, communicating accurate stock levels is essential to prevent customers from ordering products that are not available.
- Saves time and speeds up order fulfillment: When you have accurate information about stock levels, you don’t need to conduct inventory recounting to confirm product availability. You can initiate the order fulfillment process as soon as the order arrives.
- Improves productivity and efficiency: Accurate inventory systems like barcode scanning and RFID technology allow your staff to locate items in the warehouse quickly. They can simply scan an item instead of manually entering details in spreadsheets.
- Improves supply chain visibility: When you accurately manage your inventory, you can promptly respond to urgent customer requests and changing market conditions. You’ll be able to use historical and current inventory data to predict customer demands and make informed decisions about procurement, production, and delivery.
The Inventory Accuracy Formula
Here’s the formula for calculating your inventory accuracy:
Inventory accuracy rate = (Number of counted items / Number of items on record) x 100
To calculate the inventory accuracy rate, you’ll need to physically count the number of items of a specific SKU in your inventory. Next, divide that number by the number of items on record for that same SKU. Finally, multiply the resulting number by 100.
For example, if the number of counted items for an SKU is 85, and the number of items on record is 87, then the inventory accuracy rate is 97.7%.
How to Improve Inventory Accuracy
Let’s go over the tools and techniques that can improve inventory accuracy in your warehouse.
1. Conduct regular cycle counts.
According to the University of Arkansas’ RFID Lab, the average inventory accuracy rate is 65%, meaning that the average retailer is wrong about their inventory records one-third of the time.
Cycle counting is a process of counting a small portion of inventory each day at a location, with the goal to gradually count the entire inventory. This inventory control technique gives you an accurate picture of your stock levels versus recorded inventory. As a result, you can take timely action to prevent inventory inaccuracies due to human error, shortage, or shrinkage.
Unlike traditional physical inventory counting, cycle counting doesn’t require you to halt your warehouse operations while the inventory items are matched with the company’s electronic records.
It involves counting only a sample of the entire inventory on an ongoing basis. During this process, only a specific warehouse section is put on hold. For example, high-value and fast-moving inventory items are counted on a priority basis.
Inventory reconciliation is essential for product-based businesses, as inaccurate inventory records can lead to poor decisions, like overstocking items based on flawed usage numbers. Companies can improve their inventory accuracy and prevent discrepancies by adopting a cycle counting program.
2. Use the right technology.
Inventory is fluid, and manual tracking systems can’t keep up with all the moving parts. Plus, manual methods don’t allow you to easily modify or adjust records to reflect accurate inventory levels. In addition, they don’t enable communication among all affected parties involved, resulting in unexpected stockouts and incorrect customer orders.
Physical inventory counting is a time-intensive process. Manually matching actual inventory items with an inventory sheet increases the risk of discrepancies due to double counting and human error. Moreover, this method is only effective if you have a low order volume and SKU count.
Barcodes offer a faster and more accurate way to enter inventory details into your WMS (warehouse management system), eliminating the need to track inventory physically.
Pairing barcoding technology with your inventory management system can help you automate warehouse operations. A mobile scanner scans the code found on a product, allowing your inventory management system to track that specific barcode as the product moves through the warehouse. When an order picker scans the code, they’ll be able to find the location of the product during the early stages of the order fulfillment process (picking, packing, labeling, shipping, etc.). This reduces the time spent searching for items and money spent replacing items that are presumed lost.
RFID (radio frequency identification) technology enables you to deploy end-to-end supply chain visibility in your supply chain. It lets you accurately count, modify, and track individual products from the manufacturing facility where they are produced and tagged, to the distribution hubs where they are stored, and finally to the store shelves. Each item’s status is transmitted through an electromagnetic signal to a central database. From there, the WMS automatically analyzes and updates the inventory data in real-time.
RFID technology can help retailers achieve 99.9% order accuracy. While barcode scanning requires you to scan each item individually and manually, RFID allows you to scan an entire pallet of items simultaneously.
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3. Invest in an inventory management system.
Inventory management systems enable businesses to track inventory items and fulfill orders efficiently. It helps you automate manual tasks, cut inventory costs, and identify potential issues.
If your company still uses Excel spreadsheets to maintain inventory data, you’ve likely realized that inventory tracking and management technologies offer an efficient and cost-effective way to increase the accuracy of your inventory as a better alternative.
Simple spreadsheets don’t allow you to update and adjust inventory details quickly and are often prone to human error.
Without a proper inventory management system or ERP in place, you run the risk of misreporting stock levels, mislabeling labels, or delivering incorrect orders to customers. Similarly, if you store excess inventory based on outdated information, it will affect your company’s financial health.
An inventory management system allows you to forecast order demands accurately and ensures that you don’t overstock inventory at any given time. Modern inventory systems optimize picking, packing, and shipping processes by reporting stock levels, so your staff doesn’t waste time searching for inventory that isn’t actually at the warehouse.
Inventory accuracy is essential for a business that manages inventory across multiple locations. You need to know the correct amount of inventory stored at each location; otherwise, you might order too little or too much.
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4. Outsource operations to a third-party fulfillment provider.
When you outsource your inventory storage and shipping operations to a third-party logistics (3PL) company, you can utilize their warehouse management system (WMS) to improve inventory tracking and management. It also helps you accurately predict order demands and ensure that you don’t face product backorders or store too much inventory at any given time.
Similarly, 3PLs monitor stock levels in real-time and share this information with your multiple sales channels. As a result, customers can view updated stock levels, and you can determine correct delivery dates and stock up on inventory before it runs out.
Improving inventory accuracy is only the first step! Use Sifted for optimizing everything that comes after that
Inventory accuracy gives you actionable insights into your stock levels and helps you make smarter business decisions. By conducting regular cycle counts and implementing inventory technologies like barcode scanning, RFID, and WMS, you can manage your inventory without running out of stock or facing overstocking scenarios.
Identifying your shortcomings is the first step in figuring out how you can eliminate inventory inaccuracies.
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