Inventory accuracy is a critical aspect of any business that deals with physical products, and it involves tracking, calculating, and improving stock levels of merchandise. Whether you’re running a small boutique or a large warehouse, having a precise understanding of your inventory is essential for maintaining a profitable and efficient operation. Inventory inaccuracies can lead to stock discrepancies, slow fulfillment operations, and customer dissatisfaction.
What Is Inventory Accuracy?
Inventory accuracy refers to the precision and correctness of a company’s inventory records. It is the ability to match the physical inventory levels of a product with what the company’s records indicate. Accuracy is a common problem many companies face, and there are several methods utilized to raise accuracy rates. Businesses use inventory control methods such as regular count of stock levels, implementing an inventory management system, and using barcodes or RFID technology to track inventory items, SKUs, and bins.
Why Is Inventory Accuracy Important?
Ensures Accurate Inventory Valuation
One of the most significant benefits of inventory accuracy is that it ensures accurate inventory valuation. The inventory valuation process is crucial to a company’s financial statements, as it affects the calculation of cost of goods sold, gross profit, and net income. When a business has accurate inventory records, they can calculate their inventory value correctly, which leads to more accurate financial statements. Accurate inventory valuation also helps companies to understand the implications of their inventory management practices on their bottom line.
Avoids Over or Understocking
Overstocking and understocking are significant issues for businesses. Overstocking means a company has too much inventory on hand, which can lead to increased carrying costs and decreased profitability. On the other hand, understocking can result in stockouts, leading to lost sales, decreased customer satisfaction, and reduced revenue. When a business has accurate inventory records, they can make informed decisions about when to reorder products, how much to reorder, and when to discount slow-moving items. This improves their control over inventory volume and space utilization.
Reduces Dead Stock
Dead stock refers to products a business has in inventory they can’t sell. This is caused by overstocking, poor inventory management, or changes in consumer preferences. Dead stock ties up working capital, occupies valuable space, and increases carrying costs. Accurate inventory management reduces dead stock by identifying slow-moving products, allowing businesses to take action, such as discounting or returning to suppliers. This also helps in planning for inventory forecasting and understanding customer demand.
Prevents Order Delays
Inaccurate inventory records can lead to errors in order fulfillment, resulting in backorders and delayed shipments. This can lead to customer dissatisfaction and lost sales, which can ultimately damage the customer experience and brand name. Inventory accuracy ensures that businesses have enough stock to fulfill customer orders and avoid order delays, providing a better customer experience.
Inventory Accuracy Challenges
Maintaining inventory accuracy can be a challenging task for businesses of all sizes and industries. Some of the most common inventory accuracy challenges include manual data entry errors, inadequate inventory tracking systems, poor warehouse organization, inefficient replenishment processes, and lack of training for employees. However, solutions exist to tackle these challenges, such as implementing warehouse management software, using barcode or RFID technology, conducting regular physical inventory counts, improving warehouse organization, and providing high-quality staff training. Following best practices in inventory reconciliation and understanding the importance of accounting and reporting in inventory valuation can help companies to maintain inventory accuracy and prevent losses.
Are you currently making one or more of these mistakes? At ShipHero, we can help. Our warehouse fulfillment services are designed to provide visibility and control over inventory execution and planning, as well as utilize best practices to reduce inaccuracies and improve inventory accuracy.
How to Calculate Inventory Accuracy
The Inventory Accuracy Formula
Calculating inventory accuracy involves comparing the actual physical inventory levels of a product with what the company’s records indicate. This comparison allows a business to determine the accuracy of their inventory records and identify any discrepancies that need to be addressed. Here are the steps to calculate inventory accuracy:
- Decide on a time period to calculate inventory accuracy. This can be weekly, monthly, or quarterly, depending on the needs of the business.
- Conduct a physical inventory count by counting all the items in stock for the chosen time period. This count should be conducted at the same time the inventory records are updated.
- Compare the physical count to the inventory records to determine the accuracy of the records. Subtract the physical count from the recorded count to determine the variance.
- Calculate inventory accuracy using the following formula: Inventory accuracy = (1 – (variance / recorded inventory)) x 100. For example, if the recorded inventory count is 500 units, and the physical count is 480 units, the variance is 20 units. The inventory accuracy would be calculated as follows: (1 – (20 / 500)) x 100 = 96% inventory accuracy. An inventory accuracy of 96% indicates that the company’s inventory records are accurate for 96% of the items in stock.
- Analyze the results of the inventory accuracy calculation and take action to address any discrepancies found. This may include adjusting inventory records, investigating the cause of discrepancies, or implementing new inventory management strategies to improve accuracy.
What Is a Good Inventory Accuracy Rate?
A good inventory accuracy rate depends on the industry, type of products, and the specific business needs. Generally, an inventory accuracy rate of 95% or higher is considered good. However, some industries, such as pharmaceuticals or electronics, require even higher accuracy rates due to the high value and strict regulatory requirements. By regularly monitoring inventory accuracy and taking corrective actions when necessary, businesses can continue to improve their accuracy rate and optimize their inventory management processes.
How to Improve Inventory Accuracy
Inventory counting is an essential task for any business that deals with physical goods. However, inventory counting can be a challenging process, especially when dealing with large quantities of merchandise or pallets of goods. Inventory shrinkage, the difference between the recorded and actual inventory levels, can cause significant issues for companies’ bottom line. Delays in order fulfillment, shortages, and overstocking can all be traced back to inventory shrinkage. Identifying the root cause of inventory shrinkage is essential to resolving these issues and optimizing inventory management processes.
One of the primary reasons for inventory shrinkage is human error, such as incorrect data entry or mislabeling. Another reason is poor inventory management practices, such as inadequate tracking systems or inefficient replenishment processes. Technology, such as RFID and barcode scanning, can help address these issues by reducing manual errors and providing real-time tracking and inventory visibility.
Proper inventory management practices, including accurate inventory counting and tracking, are critical for businesses to succeed. By implementing an inventory management system, such as an ERP, companies can automate inventory tracking, reduce manual errors, and provide real-time visibility into inventory levels. This can help prevent inventory shrinkage and improve order fulfillment accuracy. Warehousing and supply chain management can also benefit from accurate inventory tracking and efficient order fulfillment processes.
You can also turn to cycle counting to help you. Cycle counting is a method of regularly checking inventory accuracy by conducting partial counts of inventory at different times throughout the year. This approach provides a more accurate and efficient way of inventory counting, as opposed to performing a full inventory count at the end of the year. By implementing a cycle counting program, businesses can better understand their inventory reconciliation task and identify inventory discrepancies in a timely manner. Employees should always double-check their work during the cycle count to minimize errors. This process helps ensure that inventory records remain accurate and up-to-date. Cycle counting also helps to reduce the workload associated with performing a full inventory count, saving time and resources for both the business and its people. By implementing a cycle counting program in their warehouses, businesses can improve their inventory accuracy, reduce inventory shrinkage, and optimize their inventory management processes.
Let’s face it, inventory accuracy is not without its challenges, from manual data entry errors to inefficient replenishment processes. So how do we solve these challenges and improve our inventory accuracy? Well, we could always hire a psychic to predict our inventory levels, but that might be a little too expensive. Instead, we can implement inventory management software, conduct regular physical inventory counts, use barcode or RFID technology, improve warehouse organization, and provide high-quality staff training.
So, let’s raise a glass to all the accurate inventory trackers out there, and may your inventory levels always be precise and your backorders nonexistent!
Inventory Accuracy FAQs
What Causes Inventory Inaccuracy?
Inventory inaccuracy can have a significant impact on a business’s bottom line. Manual data entry errors can lead to incorrect inventory levels, resulting in over or understocking, lost sales, and increased carrying costs. Inadequate inventory tracking systems and poor warehouse organization can also contribute to inventory inaccuracy, making it difficult to find items when needed, and leading to delayed order fulfillment. Additionally, inefficient replenishment processes and a lack of training can lead to inaccurate inventory levels, which can negatively affect a business’s profitability and customer satisfaction.
What is Inventory Accuracy Percentage?
Inventory accuracy percentage is a measure of how closely a company’s recorded inventory levels match the actual physical inventory levels. It is calculated by subtracting the actual physical inventory count from the recorded inventory count, dividing the result by the recorded inventory count, and then multiplying the result by 100 to get a percentage. For example, if a company’s recorded inventory count is 1,000 units and the actual physical count is 950 units, the inventory accuracy percentage would be calculated as follows:
(1 – (950 / 1,000)) x 100 = 5% inventory accuracy percentage. This means that the company’s inventory records are accurate for 95% of the items in stock.
What is the Average Inventory Accuracy?
The average inventory accuracy can vary widely depending on the industry, business size, and the specific inventory management practices of a company. However, studies have shown that the average inventory accuracy rate for most businesses typically ranges around 65%. This means that many businesses have room for improvement in their inventory management processes to achieve higher levels of accuracy. By implementing best practices and regularly monitoring inventory accuracy, businesses can continue to improve their accuracy rates over time.