What Is Inventory Accuracy?

Inventory accuracy is the measure of recording the difference between the actual quantity of your physical inventory and your inventory records.

In simple terms, you can define inventory accuracy as the difference between the inventory count recorded in your inventory management system and what you currently have available for sale in your store, warehouse, or other storage locations.

How to Measure and Improve Inventory Accuracy

Why Is Accurate Inventory Important?

Your inventory records must reflect the current inventory quantity to ensure an optimized inventory and smooth running of business operations. Inaccurate inventory results in incorrect customer orders, loss for your business, theft, damage, shortage of products, or even selling products through what you might have before an inventory becomes obsolete.

Furthermore, inventory inaccuracy also has implications for the accounting aspect, causing severe troubles for your business.

According to Voxware, almost 69% of your customers won’t shop with you again if their order delivery is delayed by more than two days. Thus, if your customers order a product in your records but not your warehouse, it could take considerable time to complete the project.

If you have inventory that exists on the records but is not in your warehouse, you also might have inventory items that are not present in the logs but available in your warehouse. You won’t be able to sell inventory not available on your records.

Inventory inaccuracy can lead to understocking, overstocking, and increased handling costs. Inaccurate inventory records can show you to stock up on excess inventory and pay additional carrying costs. Furthermore, excess inventory takes up valuable storage in your warehouse.

Real Inventory vs. Electronic Records

Real inventory refers to the actual quantity of merchandise you have counted. At the same time, electronic records describe what your business uses for marketing and selling its products across online and offline channels. You mainly store inventory data for electronic records in an inventory management system or ERP solution. Furthermore, electronic inventory data is also automatically updated with e-commerce solutions and integrations.

You can conduct manual counts of your physical inventory in two primary ways, including:

  • Performing a full-scale manual count of your physical inventory once every 15 days or a month
  • You can use the cycle counting method, where you count the numbers of a small subset of inventory on a particular day and move through it with a central focus on accuracy.
How to Measure and Improve Inventory Accuracy

Why Do E-commerce Shops Struggle With Inventory Accuracy?

Achieving and maintaining inventory accuracy is a challenging feat. Here are some popular reasons e-commerce stores struggle to maintain inventory accuracy.

They self-store their inventory

Most e-commerce shops self-store their inventory and self-fulfill their orders from home to maintain their independence and cost-effectiveness. When stock is not managed correctly and professionally in a warehouse, it can cause problems related to inventory accuracy. Furthermore, as their business operations grow and scale or expand their product lines, inventory management and storage only get more challenging without a dedicated and experienced staff and the right equipment.

They rely on a sub-par inventory management system

If an e-commerce store has a primary or non-existent inventory management system, they may track and record inventory either on spreadsheets, paper, or not at all. When you have an integrated inventory management technology, keeping inventory records is up-to-date and easy for accounting purposes. Furthermore, it helps you prevent stockouts and streamline your supplier inventory purchase.

When e-commerce stores introduce new sales channels, they can use multichannel inventory management to prevent understocking and overstocking issues across their stores.

How to Measure and Improve Inventory Accuracy

The Formula for Inventory Accuracy

You must manually count the number of items currently in stock, divide the number by the stock count on records and then multiply by 100 to calculate inventory accuracy. The percentage you arrive at is your company’s inventory accuracy rate.

Inventory accuracy rate = counted units / units on record * 100

However, you must ensure that you have a reliable manual count of your physical inventory for comparing your inventory records before you use it as a KPI and calculate the inventory accuracy percentage.

A manual count of your physical inventory should meet the following criteria:

  • You have the manual count checked and verified by multiple employees. It reduces the chance of human error.
  • You have meticulously done the manual count over several days, focusing on accuracy.
How to Measure and Improve Inventory Accuracy

Inventory Positioning Strategy

You can use either of the following methods for calculating inventory accuracy:

Physical inventory counting

It involves comparing the inventory units on record with the physical inventory numbers. It helps your business reduce inventory discrepancies and understand their root cause. Physical inventory counting is easier for companies with a low SKU count, number of total units, and order volume. You can make the most of this inventory accuracy method by running weekly counts and keeping a progressive track of your inventory.

Inventory valuation

It is a practice of inventory accounting and is performed by counting the value of physical inventory items you currently have on hand and dividing it by the worth of inventory you are supposed to have in your records. This inventory accuracy method is not precise since each item in your stock is not compared. You can consult your sales records and receipts to reveal discrepancies when the inventory accuracy rate is low.

How to Measure and Improve Inventory Accuracy

Example Of Inventory Accuracy Calculation

For example, if you have manually counted 950 inventory units and your records show you were supposed to have 1000 units. Your inventory accuracy is 95%.

Inventory accuracy rate = 950 / 1000 * 100 = 95%

How to Measure and Improve Inventory Accuracy

What Is A Good Inventory Accuracy Rate?

A business’s average inventory accuracy rate should range between 65% to 75%. This rate applies to firms using barcode scanning and SKUs to manage their inventory. The benchmark for most companies that want to improve their inventory management stands at 97% or higher.

How to Measure and Improve Inventory Accuracy

Top 7 Benefits Of Having Inventory Accuracy

Complete knowledge of your business operations

It gives you a better understanding of your business operations and product requirements to fulfill customer demands in the future and also ensures that you don’t face stockouts.

Saves time and money

It helps your business save a substantial amount of your time and money. When you keep a regular track of inventory, you wouldn’t have to spend time on inventory recounts. Furthermore, when you have information on which products are selling and which are slow-moving or not, you can discontinue those products to save spending on storage space, handling costs, etc.

Enhanced productivity and efficiency

An automated inventory management system makes it easier for your employees to locate a particular product in a warehouse. It eliminates unnecessary steps, increasing their efficiency and productivity.

High-quality customer service

It is compulsory to manage inventory records in case a customer tries to contact anyone regarding queries related to the inventory. If customers receive prompt answers, they will be content with the service, and the company will leave a good impact. You can lose a customer if there is a delay in answering their queries.

Cost control and savings

Controlling expenses can be managed through software to manage or track inventory. There may be a time when items or products need to be shipped immediately. In such cases, an increase in shipping costs is unavoidable. A tracking system will help control your expenses and save costs.

Up-to-date inventory data and records

Keeping track of inventory information from different locations can be challenging. You may have to constantly connect with different people to have the latest update on the inventory. Precise inventory management eliminates all issues related to the stock and keeps track of the stock at multiple locations.

Optimized and organized warehouse

Having a large inventory and various products can pose a challenge to organizing a warehouse. Items can also get misplaced if inventory management is not in place. Such products tend to never go on sale as they cannot be accounted for. A strategy to store products is as essential as having an inventory management system so that inventory is easily found at the time of need.

How to Measure and Improve Inventory Accuracy

9 Reasons You Do Not Have 100% Inventory Accuracy

Physical inventory

Doing physical inventory must be developed as a routine. You must perform physical inventory regularly, for example, every two months. Use data from before and set it as a baseline. After that, you can lay down all your transactions, including scrap, shipments, and receipts. Doing this will help you achieve maximum accuracy.

A cycle counting program

Even regularly performing a complete inventory count will not help you achieve absolute accuracy. Some amount of the inventory must be counted every day. Ideally, a different part must be counted on different days. Such a part must be crucial for customer supply and have high dollar value and volume.

Keeping a check on naming conventions

You must have a proper naming system for your inventory part. You might not be aware, but confusing numbers or letters or combinations of them can lead to misreading among staff. For example, a person might confuse the number zero (0) and the letter ‘O.’

A managing system for your warehouse

A warehouse management system or WMS can help you organize or manage your inventory. Usually, the business size determines which system must be used. Such systems can be anywhere from a simple spreadsheet to complicated software. A WMS has various benefits. It can reduce costs and errors and increase the accuracy of your inventory.

Leading WMS

Appointing a person to manage and operate the WMS is extremely important for your business. If WMS is just software at your disposal that no one ever uses, then you can never achieve inventory accuracy. A warehouse management system is a software your accounting team must use to value your inventory.

Introduce a process-driven approach

Having a process-driven approach means eliminating one-offs. This means having everything in your inventory as well as your system. For example, if a potential customer requests a sample, you must be able to pull it from the stock and the system as well. Syncing systems with the inventory can eliminate inaccuracies.

Securing your inventory

Implementing a cycle counting system is the best way to keep your inventory secure. If you have a stock that can be stolen, it must be secured at all costs. A cycle count system or doing a physical inventory can keep your merchandise safe.

Keep your unit of measure consistent

Be familiar with the measuring unit that you use. You must ensure that both the supplier and the customer of your business are also aware of the measuring unit. You must be sure that all three of you are on the same page.

How to Measure and Improve Inventory Accuracy

Ways To Improve Inventory Accuracy

Use of more professional storage methods

Instead of self-storing, you can store your inventory in a warehouse. It can help you manage your inventory more efficiently.

Employ a fulfillment partner

Fulfillment solutions specialize in picking, warehousing, inventory management, packing, and shipping. You can partner with a fulfillment center and let them (professionally) manage your inventory.

Upgrade your inventory management system

You can consider investing in a more viable inventory management system or ERP solution with advanced features suited to your business requirements.

Conduct frequent and randomized inventory checks

You can schedule frequent physical inventory counts to save time and improve overall inventory accuracy.

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Inventory accuracy is the difference between the records in your management system and what you have currently available for sale in your warehouse, store, or other storage locations.

Inventory accuracy in the supply chain is the difference between physical inventory and perpetual inventory. Inventory accuracy is crucial in supply chain management because if your business lets its inventory accuracy drop, it might have to face several significant risks.

Inventory accuracy is essential for your business to maintain because it provides a comprehensive understanding of your business, helps you keep your warehouse organized and optimized, saves time and money, improves productivity and efficiency, and creates a loyal customer base.

Warehouses make it easier for your business to store, manage, and control its stock, improving the overall inventory accuracy rate.

You can reach 99.9% inventory accuracy approximately when you track inventory using RF handheld inventory functions and barcodes. You can ensure inventory accuracy by scanning and validating product barcodes and inventory locations.

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