How much does poor inventory accuracy cost? According to the latest research, 53% of all non grocery markdowns are a result from bad inventory decisions. 50% of US retail decision makers cite inventory misjudgments as their primary barrier to full-price sales.
So, poor inventory accuracy cuts into your bottomline. But how can improving your inventory accuracy help your business?
- Maximize sales opportunities by always having products on hand when customers arrive to your site ready to make a purchase
- Free up resources by identifying slow-moving products, putting them on sale, and diverting staff and money to popular products
- Build customer loyalty by providing accurate, real-time information about stock availability
- Eliminate “motion waste” by ensuring staff aren’t spending time looking for products that are electronically in stock, but physically not in storage
- Allocate employees to other activities by eliminating manual quarterly/annual stock counts by simply taking a snapshot from your inventory management system (IMS)
By making a strategic investment in inventory processes, best practices, and technology, your business can enjoy these benefits.
In our guide to improving inventory accuracy, you’ll find:
BONUS: Before you read further, download our Inventory Management Software Whitepaper to see how Logiwa uses real-time tracking to help customers get up to 100% inventory accuracy and increase shipments by 2.5x.
What is Inventory Accuracy?
How close do your inventory records and your actual physical inventory match up? That’s your inventory accuracy. The constant movement of goods makes inventory discrepancies nearly unavoidable. While every business owner would like their inventory accuracy to hit 100%, this is challenging. You can assess your inventory accuracy and identify the source of discrepancies.
Want to calculate your inventory accuracy? Here’s the basic formula to calculate inventory accuracy by units:
[1 – (the sum of the absolute variance in units or dollars/the sum of the total inventory in units or dollars)] * 100%
For example, if you physically counted 150 product units, and your records say you have 160, you would calculate the accuracy like this:
Inventory Accuracy Formula
[1- (10/160)] * 100 = 93.75%
Take Stock of Your Current Inventory Accuracy Situation
First, your company has to know where it stands with its daily operations. What is your current inventory accuracy, and how do you assess it?
Conduct an Inventory Reconciliation Exercise
Conduct an inventory reconciliation exercise. Shut down your shop for a few days to count stock. Some retailers conduct counts over several days by paying employees overtime to work off-hours. Ensure multiple employees count the stock to avoid human error or dishonesty.
Compare your count to your records. If the numbers don’t match, the first step is to check your sales records and sales receipts. Oftentimes, this addresses any discrepancy: You simply sold the missing stock.
If you can’t find any sales receipts that account for the missing inventory, you likely have one of two problems: employer theft or supplier fraud.
This discrepancy is called shrinkage and you can calculate this using the following formula:
[(Recorded Inventory Value – Actual Inventory Value) / Sales] * 100
According to the National Retail Federation, the average inventory shrinkage in 2018 was 1.33%. The majority of respondents reporting shrinkage of 1 percent or higher.
Once you have the correct figures, conduct an investigation to find the cause of your shrinkage. Whether or not you find the culprit, you’ll need to update your inventory records. In Excel, you’ll need to manually update each affected stock item. With an inventory management software, there should be user-friendly tools to facilitate this update.
One way to limit business disruption is to conduct cycle counts, which we will discuss later in this article. For now, it’s important to benchmark your existing inventory, so you have a starting point.
Set an Improvement Goal
Once you have your inventory accuracy, set a target. For example, We will improve our inventory accuracy by 5% by the end of Q4. One report puts the average inventory accuracy rate in the United States at 65%.
Schedule Regular Cycle Counts
Once you’ve done one large inventory count, it pays to conduct periodic cycle counts. These are like inventory spot checks. Rather than counting all of your inventory, you check specific items and use that cycle count accuracy as an indicator of your overall inventory accuracy.
Incorporate the following best practices for your cycle count accuracy:
- Conduct cycle counts by category: The goal of cycle counts is to get through your entire inventory over a longer period of time. In order to do this effectively and limit confusion, go category by category for easier record-keeping.
- Count categories during their peak popularity: A cycle count is meant to assess stock accuracy and identify discrepancies. To maximize your cycle count accuracy, check categories when they are the most popular as this is when they experience the most movement.
- Mix up your cycle count staff and schedule: To reduce opportunities for theft, use different employees at different times to conduct cycle counts.
Assess Your Standard Operating Procedure for Inventory Control
A great inventory control process limits instances of theft, improves record-keeping, and empowers businesses to identify and prove supplier fraud quickly. Review your existing inventory control processes as part of your effort to improve inventory accuracy. This will help you:
- Identify gaps in your existing processes: Perhaps there are entire sections of your inventory control chain that are not properly governed. Employees will follow their own processes which leads to variability in record-keeping and management from shift to shift.
- Eliminate redundant efforts: There may be some steps that are repetitive, leading to inefficiency or to workers employing their own shortcuts.
- Define standard operating procedures: You may not have an end-to-end standard operating procedure (SOP) for your inventory control. Documenting your existing processes (or lack thereof) allows you to start developing them. Once you’ve identified the need for an SOP, gather key stakeholders for consultations.
Essentially, you want employees to take specific steps every time they move inventory since these are the instances in which inventory goes missing.
Typically, the inventory control process includes the following steps:
- Receiving Goods
- Storing and Controlling Goods
- Inspecting Goods
- Securing Goods
- Shipping Goods
At minimum, your inventory control standard operating procedures should account for the following activities at each stage.
Inventory Control Stage
Standard Operating Procedures (SOP) Activities
Storing and Controlling
Scheduling and Inspecting
Bottom line: Do not move inventory unless it is authorized and documented. Enforce this rule, so employees know you are serious.
Don't Let Your Inventory Become a Liability: Poor inventory accuracy leads to a host of issues that cut into your margins. Learn how Logiwa integrates all your sales channels and provides real-time inventory tracking.
Limit Human Error by Embracing Inventory Management Technology
Sometimes, inventory inaccuracy occurs due to innocent human errors. Implementing inventory management technology helps businesses improve their stock accuracy through better product tracking.
Physical inventory counting is a pain. Finding every item on the inventory sheet is tedious. The chances of double counting and human error, not to mention lost sheets that result in entire recounts, are high. In addition, once the physical count happens, someone has to enter that data into a spreadsheet.
Today, most companies use mobile scanners. They scan the barcode and that information is loaded into a CSV file or into a specific software, eliminating double counting and entire recounts. That said, this is still a rather manual process, albeit an upgraded manual process.
According to observers, the future of inventory counting is RFID. It didn’t take off as quickly as proponents anticipated. However, today the combination of complicated supply chains (e.g. a mixture of supplier-to-store and direct-to-consumer pipelines within the same business) and the falling price of RFID technology attracts more and more companies.
According to Forbes, the price of an RFID tag was about $1 in 2003. Today, it’s around 10 cents.
How does RFID technology improve inventory accuracy?
RFID (radio frequency identification) uses radio waves to track inventory. Whereas traditional barcodes require scanners to have line of sight to the Universal Product Code (UPC), RFID don’t, enabling an entire pallet of items to be scanned at once.
This eliminates a lot of the manual tasks that come with traditional scanners, such as re-orienting all of the boxes on a conveyor belt so that the barcodes with the UPC face the scanner.
In face, RFID scanners can help reduce labor costs, which is one of the biggest operating expenses for companies.
RFID scanners also increase the amount of data companies have access to. You can use this data to identify waste or lucrative opportunities for improvement.
Nevertheless, there are some drawbacks to RFID technology.
- The cost of RFID tags and upgrading your facilities as well as securing buy-in from supplier and transportation partners
- Interference issues with the radio signals depending on the type of materials a company stores (e.g. metals)
- An overload of data that may be difficult to manage, especially for companies with limited data management talent within their workforce
- Incompatibility in RFID technology across multiple geographies, which can be a problem for companies that operate internationally
Replacing Excel Spreadsheets with an Inventory Management System
Even if you’re an Excel whiz who’s memorized all of the relevant formulas, there are drawbacks to using a spreadsheet for your inventory management:
- Information isn’t updated in real-time
- It’s a redundant method (print Excel sheet, record inventory manually, enter count back into Excel)
- It’s easy to make mistakes
- The information can only be accessed by one person at a time
- There are version control issues
- It’s not a scalable tool
On the other hand, an IMS like Logiwa enables you to scale and manage inventory more accurately and efficiently in the following ways:
- Automatically generate and upload counts to your database: Once you create the count plan, employees scan items, that data is automatically uploaded to the IMS. This eliminates the need for further data entry.
- Segment your demand forecasting: With a robust IMS, you understand more than just which products are selling. You also know what specific features of each product are the most popular including color, size, or scent.
- Track specific lots: If there’s a recall, you can quickly identify which items from your inventory need to be pulled. Also, you can see which customers purchased said items from your company.
An IMS also allows you to better calculate your safety stock and minimize carrying costs.
To the casual observer, the total cost of inventory is just a function of the purchase cost. If an online beauty retailer needs olive oil for its organic soap line, total cost isn’t equal to the price of the olive oil. Rather, the total cost includes:
- Purchase cost: The price of the olive oil multiplied by the order quantity
- Ordering cost: The price of having it shipped and delivered to the warehouse
- Carrying cost: The various costs associated with managing surplus inventory including storage space, labor, insurance, and potential interest payments
Obscene inventory costs result from order too much inventory. But there’s also such a thing as ordering too little inventory leading to stockouts.
Stockouts bring costs that you’ll struggle to quantify but are just as dangerous to your business’s profitability. In the short term, a stockout prevents you from making money. In the long term, stockouts erode customer loyalty.
Having easy access to the right data allows you to order just the right amount of buffer stock. In this way, you avoid stockouts without incurring enormous carrying costs due to excess inventory.
Point-of-Sale (POS) Technology Integrated with Inventory System
Integrating your POS system with your IMS makes it easier to account for sold inventory if you have brick-and-mortar locations. A POS system without inventory management capability (or integration) means you’ll need to spend time uploading and categorizing sales into your system.
Consider the following when selecting a POS technology for your inventory management:
- The user-friendliness of its interface: A system with various bells and whistles is only as good as its usability.
- The robustness of the basic features: Some systems may require you to fork over additional cash for features you thought were included.
- Multi-location functionality: If you need to manage inventory across multiple locations, ensure the tool you use can manage this well.
Improving Inventory Accuracy Protects a Company’s Valuable Products
Checking and maintaining inventory accuracy is a non-negotiable part of running a business. You make money off the sale of goods, after all. A missing, damaged, or spoiled product is equivalent to someone taking its cash value from your till. Prioritize inventory accuracy by:
- scheduling counts
- reconciling your physical count against your electronic records
- purchasing the technology that will make inventory management more efficient
- improving your existing processes
When Logiwa customers integrate all of their sales channels, 100% inventory accuracy is within their reach. Schedule your free demo of Logiwa today.
Written by Ruthie Bowles
Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.