Inventory management is the pillar of a successful business in the complex and bustling world of supply chains and warehouses. Inventory management is a holistic umbrella term for the entire management of inventory within the entire supply chain. It includes a lot of complex processes which demand accuracy.
One such crucial process wherein the chances of errors and demand for accuracy is high is inventory accuracy. But what is inventory accuracy? How can you improve inventory accuracy? We bring you this comprehensive guide on inventory accuracy which will clear up all your doubts. Let’s get started!
What Is Inventory Accuracy?
Inventory accuracy, pretty much like it sounds, is nothing much but a metric that measures the accuracy of inventory levels within the supply chain. It measures if the recorded inventory levels match the actual inventory levels.
Let’s understand it with an example. Let’s say a business has an 80% inventory accuracy rate. In simple terms, this means that 80% of the inventory recorded in the system is actually available within the warehouse. Besides, 20% of the recorded inventory is unavailable.
Inventory accuracy is a crucial component of inventory management because it reflects the effectiveness of the strategies and software used for inventory management.
Why Is Inventory Accuracy Important?
Now, you must be wondering about the importance of inventory accuracy. Let’s explore!
1. Reduces the Risks of under or Overstocking
Inventory accuracy helps you track your inventory levels accurately, which further helps you forecast demand accurately. Thus, you have a clear picture of how much inventory you have and how much you would need more. Moreover, this way, you also reduce the chances and risks associated with under or overstocking.
2. Reduces Dead Stocks
When you are aware of your inventory levels and track them regularly, you’ll automatically be aware of dead stocks. Dead stocks are items that have exceeded their shelf life or become obsolete. This reduces the potential financial losses which may arise due to unsellable items.
3. Reduces Operational and Holding Costs
Accurate inventory records help you value your inventory accurately, thus ensuring that you don’t overpay. Moreover, it streamlines fulfillment, thus minimizing order delays. It also helps prevent stockouts, understocking, and overstocking, which reduces operational and holding costs.
4. Improves Supply Chain Visibility
Maintaining inventory accuracy enhances supply chain visibility, benefiting businesses with accurate forecasting, smarter resource allocation, improved efficiency, better inventory management, and increased customer satisfaction.
5. Helps Save Time and Finances
Maintaining inventory accuracy saves time and finances by avoiding recounts, reducing shipping costs and delays, identifying sales trends, improving financial reporting, and lowering holding costs.
6. Improves Customer Satisfaction
Inventory accuracy plays a crucial role in maximizing and improving customer satisfaction. Firstly, it ensures that you accept orders from customers only when you have the appropriate inventory levels to fulfill the order. Secondly, you always stay updated with your product movement, and the chances of order delays are reduced.
7. Increased Profitability
From identifying errors and reducing inefficiencies to accurate forecasting and improving customer satisfaction, inventory accuracy helps businesses to improve their services while ensuring efficient utilization of time, money, and effort. Thus, inventory accuracy helps maximize business profitability, productivity, and efficiency.
How to Improve Inventory Accuracy?
Are you struggling to improve inventory accuracy? Well, here are a few ways in which you can reach your target:
1. Maintain Inventory in a Well-Organised Warehouse
With an organized warehouse, you’ll have a clear map of the exact amount and location of a particular inventory item. Besides, it also reduces the risks associated with misplacing or losing inventory, leading to more reliable stock levels.
2. Limit Access to Inventory Records
We’ve discussed how thefts are also a major factor affecting inventory accuracy. Limiting access to the inventory records only to authorized personnel minimizes the chances of the records being tampered with or changed. This way, the inventory records stay accurate & reliable.
3. Clear Inventory Naming and Labelling
While discussing inventory accuracy, you can’t forget about Clear inventory naming and labeling. When inventory items are well categorized and labeled, it’s easier to locate them and find misplaced items. Thus, the first step to improving inventory accuracy is to organize your warehouse, categorize your inventory items and store them properly in their correct locations.
4. Invest in an Inventory Management System and Software
Inventory management systems and software provide a centralized and automated platform to track inventory levels, movements, and transactions. This system streamlines data entry, minimizes human error, and enables real-time updates, reducing discrepancies between physical stock and recorded data. It also facilitates data analysis, forecasting, and optimizing inventory levels, leading to better decision-making and improved overall inventory accuracy.
5. Conduct Regular Inventory Audits
One of the key ways to improve inventory accuracy is to conduct regular inventory audits. You may use various methods such as ABC analysis, cycle counts, etc. These regular audits help you look closely into the inventory management system and its accuracy and efficiency.
6. Take Advantage of the Automation Technology
With automation entering the inventory management process, you can automate the key processes. This reduces the chances of human errors and improves the efficiency of operations. From tracking your inventory in real-time to getting notifications on overstocking and shortages, automation provides a lot of amazing features.
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Factors Affecting Inventory Accuracy
Now, you must be wondering about the crucial factors which Influence this key KPI. Below listed are six driving factors that affect inventory accuracy.
1. Inventory Receiving Process
The process of receiving inventory at the receiving dock is the starting point for measuring your inventory accuracy. It’s the point where you should check the quality and quantity of the inventory received as compared to the order placed.
This first step informs you if there are chances of under or overstocking. Moreover, the items with damage or defects are identified at this earliest stage which saves you from providing faulty products to customers and causing financial loss.
2. Inventory Allocation Methods
The method your business uses to categorize and allocate inventory within the warehouse also affects inventory accuracy. There are two most common inventory allocation methods: FIFO (First In, First Out) and FEFO (First Expiration, First Out). Without a proper method to allocate your products, you won’t be aware of the inventory levels flowing in and out of the warehouse.
3. Warehouse Layout
The warehouse layout directly impacts inventory accuracy by influencing accessibility, organization, and ease of locating items. A well-designed layout minimizes errors, reduces handling time, and enhances visibility, leading to improved inventory accuracy and overall operational efficiency.
4. Technologies and systems used
The lack of modern, advanced, and unified inventory and warehouse management systems increases the chances of human errors, which ultimately reduces inventory accuracy. These modern and unified systems and technologies will provide you with digitized and accurate inventory reports and forecasts anytime, which can significantly increase inventory accuracy.
5. Damaged Products or Theft
You would be surprised to know that employee theft contributes to about 28% of retail inventory losses. Theft, both by employees and outsiders, is common within the supply chain.
Much similar to theft, the chances of some inventory being damaged or expired are also common. Both these factors lead to discrepancies between the actual and recorded inventory levels, thus reducing inventory accuracy.
6. Market Demand
Inventory accuracy also depends on how well you understand, comprehend, and predict market behavior and demand. When you have a poor understanding of the market, you won’t be able to forecast future demand, which will surely lead to inventory accuracy.
However, you may take the help of technology to analyze demand patterns and previous order frequency, which will help you in managing inventory levels accurately.
How to Calculate Inventory Accuracy?
There are two commonly known methods to calculate inventory accuracy:
- Physical inventory counting: As the name suggests, in this method, you’ll have physically count the number of items available in the inventory. Then, you’ll have to compare it with the recorded amount to know if any discrepancies exist.
- Inventory valuation: In this method, the recorded value of the inventory in the accounting system is compared with its estimated value based on factors like purchase prices and how much the goods are worth now. It not only informs businesses on inventory accuracy but also helps evaluate the inventory’s worth.
If you’re looking for how you can calculate inventory accuracy, here’s a simple formula to help you out:
Inventory Accuracy = [Available inventory amount / Recorded inventory amount] * 100
To simplify it, all you need to do is divide the available inventory amount by the recorded inventory amount and then multiply by 100. You would generally receive the accuracy in the form of a percentage.
Let’s understand this better with an example. Suppose your business should have 1050 inventory items in stock but has only 1000 items available. In this case, the available inventory is 1000, whereas the recorded inventory is 1050. Hence, the inventory accuracy, in this case, would be calculated as follows:
Inventory accuracy (in %) = (1000/1050) * 100, which would be around 95%.
Although 100% inventory accuracy sounds difficult and rare, businesses must aim to have an inventory accuracy of at least 97%. The higher the inventory accuracy, the better the inventory management system.
FAQs: How to Improve Inventory Accuracy
1. What is inventory accuracy?
Inventory accuracy is a metric which measures the accuracy of inventory levels within the supply chain.
2. Why is inventory accuracy important?
Inventory accuracy is crucial because it ensures efficient operations, reduces costs, prevents stockouts, and enhances customer satisfaction by providing real-time information on stock levels.
3. How to calculate inventory accuracy?
There are two commonly known methods to calculate inventory accuracy: physical inventory counting and inventory valuation
4. What is the formula to calculate inventory accuracy?
The formula to calculate inventory accuracy is: Inventory Accuracy = [Available inventory amount / Recorded inventory amount] * 100
5. List the factors affecting inventory accuracy.
Here are factors that affect inventory accuracy: inventory receiving process, allocation methods, warehouse layout, market demand, theft, and damages.
Wrapping Up
Inventory accuracy is undoubtedly a crucial and cumbersome process of inventory management. By adopting a strategic approach encompassing robust inventory management systems, regular audits, and real-time tracking technologies, companies can minimize errors and improve overall operations.
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