Inventory accuracy is vital to an organisation’s long-term success. Profits depend on the sale of inventory stock and if you don’t know what or how much you are selling then you could be missing an opportunity to maximise sales.
Having poor and inaccurate inventory control can be costly because it causes issues such as unplanned stock-outs, the shipping of wrong products to customers, wasted resources trying to locate misplaced items and inventory shrinkage.
What is inventory accuracy?
Inventory accuracy is a metric that measures the difference between how much stock is recorded and how much a business actually has in its storage facilities.
For example, if there are 800 items in your warehouse but only 400 recorded in your inventory management system, your inventory accuracy would be 50%.
Why inventory accuracy matters
Inventory accuracy is one of the most important aspects of supply chain management. Knowing exactly what you have and where it’s located is critical to managing stock, avoiding high carrying cost and shipping orders to customers efficiently and on time.
Here are 5 more benefits of accurate inventory:
1. Avoid understocking
Understocking has an immediate impact on your business; a missed sale equates to lost income without a corresponding reduction in cost.
But the cost of a missed sale extends beyond the immediate, financial impact.
Regularly running out of stock signals unreliability, and an inability to quickly meet customer needs. This translates to loss of customer support and, ultimately, to a permanent loss of revenue.
2. Avoid overstocking
Equally, accurate inventory is valuable because it prevents overstocking.
Although, on its face, overstocking does not seem like as much of an issue as understocking, persistently having too much inventory can seriously hamper your business’ performance.
A growing business typically needs all the capital it can get, so tying up money in excess stock can limit opportunities for growth by investing elsewhere in the business.
Moreover, the cost of inventory is not limited to the purchase price – storing, securing, handling and ensuring unnecessary stock can be a big drain on a business’ resources.
3. Prevent loss
When a business is in its infancy, loss and stock shrinkage may be a minimal problem. But as the size of an operation grows, so too does the risk posed by theft, fraud, staff carelessness and damage.
Without real-time inventory control, it can be difficult to keep tabs on stock shrinkage – leading to an unpleasant surprise at stock take time.
Accurate inventory doesn’t eliminate the risk but makes it easier to monitor and reduce shrinkage.
4. Understand trends with accurate data
Although periodic stocktakes and intuition can be used to predict some inventory trends, they are no match for actual data. Keeping real-time, always accurate inventory records can help managers identify subtle inventory trends that would otherwise be missed.
For example, a quarterly stocktake might identify that a particular product sells well over summer as a whole, but perpetually captured data may be able to identify particular days or events that lead to spikes in demand.
5. Make your warehouse management easy
Regardless of the size of your stock, whether it’s a back room in your retail store or a large-scale industrial wardrobe, implementing certain procedures means everyone’s lives get a little easier.
No matter what those processes are, if they help your staff to know exactly what’s in-stock then they don’t have to worry about finding stock the computer says should be there or ordering more only to find they had plenty in the first place. They can focus on getting deliveries out quickly, helping customers even more and generally ensuring your sales and delivery funnel are running as streamlined as possible.
3 ways inaccurate inventory affects business health
A healthy business is one that exercises accurate and effective inventory management in much the same way that a healthy individual exercises a disciplined and wholesome lifestyle.
And much like an individual, when a business begins to suffer – due to ineffective inventory management practices – three important steps are required in order to bounce back to optimal health: diagnosis, prescription and implementation.
Disease #1 – No clearly defined categories for operating inventory
Diagnosis: When process managers do not have a clear appreciation of exactly how much safety, replenishment and excess or obsolete stock is on hand then any forecasting, planning and purchasing will be off, and send the business out of alignment.
Inaccurate inventory levels contribute to one of two major costly issues businesses encounter – overstock and under stock.
When a business over compensates due to a fear of running out of buffer stock and failing to be able to meet future demand, it purchases and carries more stock than is really necessary.
Conversely, if purchasing managers are unaware that a stock shortage is about to take place due to a reliance on out-of-sync, inaccurate inventory reporting, they will fail to re-order necessary stock in time. This will result in a stock-out and revenues will be lost due to lost sales and overall profitability will shrink as customers move over to competitors.
The prescription: A business needs to immediately conduct a thorough appreciation of its inventory and classify all operating inventory into their respective categories – safety stock, replenishment stock and excess/obsolete inventory.
Implementation and cure: Investing in a powerful, integrated inventory management software system will allow for accurate tracking, tracing and accounting of all inventory. This will make the job of accurately categorizing and maintaining accurate inventory levels far easier.
Disease #2 – Inaccurate profit reporting
Diagnosis: The value of inventory on stock is dramatically underestimated, and profit reports display Net Profit margins that are over-inflated. In effect, accounting is totally out of touch with the reality of the situation ‘on the ground.’
The prescription: Every piece of inventory bought will be reflected on the balance sheet with an asset value. This makes it critical for inventory processes to be accurate. It is essential to utilize the correct statistical formulas and inventory valuation methods (FIFO, LIFO or Average Landed Cost) informed by real-time, data-driven inventory management.
Implementation and cure: Use up-to-date, real-time data to help you calculate your inventory levels. Again, investing in an effective inventory management software solution will help you ensure that your inventory is accurate. When inventory is accurate and your valuation system is the correct one, then your accounting will naturally be accurate too.
Disease #3 – Communication breakdown
Symptoms and diagnosis: Different departments operate totally out of alignment and chaos reigns supreme. Purchasing bases orders off of outdated data, while sales is left scrambling to locate orders that storage and warehousing says are in stock, but in reality are nowhere to be found.
This is because the staff has no way to access or input reliable, real-time data that can be seen and shared by everyone along the supply chain. The result manifests as a service delivery nosedive, panic purchasing and an overall breakdown in communication.
The prescription: Accurate information needs to be made accessible and shareable through an integrated inventory management system. This will ensure that staff will know that inventory levels are always accurate and up-to-date, thereby fostering enhanced inter-departmental communication, and a greater confidence and reliance upon the information systems in place.
Implementation and cure: Install a cloud-based inventory management solution and train staff how to use it.
8 strategies to improve inventory accuracy
In essence, as with physical health and vitality, the health and vitality of an inventory-based business hinges on the tried and true principle of ‘prevention is better than cure.’
While inventory management software is no panacea for all the inventory ills a business will face, it will definitely go a long way to helping prevent many of the diseases mentioned above.
Here are 8 methods for improving inventory accuracy:
1. Reflect on your entire supply chain
Part of inventory management is everything that happens before and after the process of stocking and processing inventory in production. This refers to your supply chain and comprises everything from your suppliers to your freight forwarders and eventually, your customers.
Supply chains are vulnerable to risks and challenges. If one party falters, it can impact your company’s inventory and its ability to fulfil customer demand. Therefore, scrutinising your whole supply chain to mitigate risk as part of your inventory management role will facilitate a far more accurate warehouse.
2. Use RFID tags
RFID tags are attached to inventory units so that if any item is receipted in or moved about the warehouse, the data pertaining to this can be recorded by warehouse inventory software and summarised for the manager.
This not only facilitates moving and using products in an efficient manner, but it also allows erroneous, misplaced products to be located without having to rifle through every box in the warehouse.
If RFIDs seem too advanced, consider using barcode scanning technology first.
3. Consolidate with a sensible software system
If you are a multichannel retailer, it is imperative for inventory management accuracy to keep track of all your stock and transactions across all your channels.
However, this is far easier said than done.
In reality, it can cause major issues if not approached sensibly. Inventory management software can give you a bird’s-eye view of stock across all your channels in one platform so that you can view and make informed decisions for each of your outlets simultaneously.
This also means you can optimise your inventory in terms of pushing sales in high-turnover stores that could deal with accumulating inventory from slower stores.
4. Try different inventory control strategies
There are various programmes of quality inventory control available for companies to adopt such as JIT, Lean Manufacturing, Six Sigma and Total Quality Management. Know your current inventory accuracy rate so that you are aware of what you are working with.
Weigh up the pros and cons of each method to understand the system that will work best for your business and stick with it. Ensure that everyone in the company takes ownership of inventory accuracy and that they receive the necessary training to support and implement inventory control programmes. This also means that individual business units need to understand how their functional area directly or indirectly impacts inventory accuracy.
Check your results regularly to make sure you are achieving and sustaining continuous improvement and inventory accuracy.
5. Get automated
Inventory management software saves time and resources, it enables greater visibility, better inventory accuracy, speeds up processes and removes the scope for human error.
Technology such as wireless RFID tags and sensors can greatly improve inventory accuracy and RFID devices will integrate with a warehouse management or inventory control systems, updating data to provide accurate details of the movement and location of stocked items.
With numerous inventory management systems to choose from, it is important to select a method that is right for your specific needs, one that will adapt and grow with your business.
6. Get tracing
Traceability is the capacity to track items back to their original source, together with information on each place the stock moved, or any time it was handled. Establish product traceability throughout your entire inventory channels by choosing supply chain partners who offer systems that are compatible with your inventory systems, vastly improving end-user delivery accuracy and customer service satisfaction.
Traceability also helps companies to effectively prevent costly waste by pinpointing the processes where waste occurs. Improving traceability is a major step in reducing waste. Ensure that no product is ever moved unless the movement is authorised and recorded.
Without reliable traceability, it’s difficult for businesses to locate the source of inventory discrepancies, meaning it is impossible to implement the right solutions.
7. Get counting
Using cycle counting is one of the best ways to identify problem areas and to maintain high levels of inventory accuracy. An effective cycle counting program is a valuable way to improve accuracy because you are undertaking partial physical counts every day until you have cycled through your entire inventory stock.
Cycle counting is continuous, when you finish one cycle, you start the next. With cycle counting, you can potentially eliminate the need for full physical inventory counts that disrupts operations and take employees away from their primary duties. Cycle counting can be integrated into normal daily operations.
8. Think about a product’s name and home
A large part of inventory management lies in the warehouse. Pay special attention to the name convention used to label products and the location where the products are stored. The reason why this affects inventory accuracy is that if products are labelled illogically, they may be mistaken for other product, resulting in inaccurate ordering for their supposed replacement, or even inaccurate order fulfilment.
If products are not properly organised in the warehouse, they can get lost among all the stock. Then they may not be used within their expiration date, leading to obsolescence. If products aren’t stored properly, warehouse staff might spend more time looking for and retrieving stock for order fulfilment. It all comes down to two things: to reduce the amount of time spent on maintaining and retrieving products and to reduce the likelihood of mistakes deriving from confusing labels and locations.
How stock management software can improve inventory accuracy
One of the greatest benefits inventory management software imparts is its capacity to keep stock levels accurate and in constant alignment with the all the other functions of your business.
Multi-functional software systems provide a range of operations to assist the various functions of your organization. Accounting functions allow for transactions in multiple currencies ensuring costing and sales are accurately converted.
Whether ordering, reporting or auditing, you get real-time information and solutions, anywhere, any time and on any device. No more out-of-date reports. Easy to access information is on hand, giving a true picture of what is happening, to achieve consistent planning, reporting and analysis.
Software tracks inventory performance across the entire network, improving accuracy throughout the supply chain and maintaining consistent units of measure between you, your suppliers and your customers.
Utilizing digital technology for purchasing and procurement activities can transform service delivery and reduce errors. The once manual task of inventory replenishment becomes automated, and the reordering process is optimized so that stock levels are kept at the ideal level for maximum efficiency.
Accurate inventory levels provide staff with what they need to get the job done, and intelligent monitoring of stock enables accurate stock procurement, eliminating waste and obsolescence.
Software integrates seamlessly with other systems to complement and optimize resource management, providing accurate and current information to all areas of your organization.
Timeliness, accuracy and transparency are critical. With increasing demand for transparency and pressure on companies to provide accurate and reliable information faster and more efficiently, software provides the necessary solution to meet these demands.
Linking information systems with suppliers will optimize your supply chain and help maintain inventory accuracy through improved communication.
Landed costs are the true cost associated with acquiring goods including material costs, freight and handling fees, excise and tax. Pretty much all of the costs of getting items into stock. Software enables you to accurately calculate the value of your inventory by including these associated costs.
Track your product(s) throughout the distribution lifecycle. A centralized system enables inventory to be monitored across the business, letting you know what inventory you have on hand, where it is and how much is allocated.
Software tracks inwards and outwards stock movement, so any goods sitting in the loading dock or other parts of the warehouse can be redistributed as necessary between stocking locations.
When a business is not able to ensure its stock levels are accurate it could also face the problem of having their sales team watch customer after customer turn around and walk away empty handed as a result of not being able to buy the product they are after simply because it is not in stock.
Lost revenue as a result of lost sales can have a significant negative impact on a business’ bottom line and is one of the most frustrating and unnecessary issues a sales team has to deal with.