Ecommerce Order FulfillmentOrder Management System (OMS)Warehouse Management System (WMS)

What is Inventory Accuracy? Formula and Best Practices

Possibly the most crucial statistic for industrial processes is inventory accuracy. The business won’t be able to plan or predict, the supply chain will break down, expenses will increase, consumers will be dissatisfied, and the shop floor will have low productivity and efficiency.

That’s a big impact from a straightforward measurement, whose significance is sometimes overestimated. Let’s investigate this vital production success indicator.

What does Inventory Accuracy mean?

Inventory accuracy is a measurement of the discrepancy between your records of inventory and your actual inventory for purchase at a shop, warehouse, or storage facility is measured.

For regulating inventory quality, reducing stockouts, shrinkage, and shortages, as well as ensuring a great customer experience, inventory accuracy is very important.

Even though every firm would prefer to gain full inventory accuracy, it is difficult due to the simultaneous movement of goods.

Your supply chain might suffer greatly from even a small error. It’s possible to sell a listed product that doesn’t exist. Even if you are down to your final item, your records may still suggest that there is plenty of stock.

At this time, inventory accuracy plays a key role.

To maintain the highest level of inventory accuracy, the discrepancy between what is shown in the inventory management system and what is really present in your warehouse should be as little as possible 

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Electronic records vs Real inventory

Regular counting and data reconciliation is necessary if you want to have any idea of how correct your data are.

Compare these two:

  1. Records are kept electronically by your business for the purpose of marketing and selling items both online and offline. An inventory management system or ERP solution is frequently used to manage the inventory data. Through interfaces with e-commerce platforms, this information is frequently immediately updated.
  2. Data from physical inventory manual counts.

You can count the physical inventory manually with two methods:

  • Once each two weeks or once a month, perform a comprehensive manual inventory count.
  • Use cycle counting: A cycle count is when you slowly count a small amount of inventory on a given day with an emphasis on accuracy.

You can’t assess the correctness of your records without the second dataset of manually checked inventory.

Before using the formula below, you must collect the necessary data.

The Formula of Inventory Accuracy

You must manually count the number of products in stock, divide that amount by the inventory count on file, and next multiply by 100 to determine inventory accuracy. The result is the accuracy rate of your inventory.

Inventory Accuracy Rate = (Counted Units/Units On Record) x 100

The-Formula-of-Inventory-Accuracy
The Formula of Inventory Accuracy

However, you must first establish that you have a trustworthy manual count to match your inventory data against before you can measure your inventory overall accuracy and apply this as a KPI.

The count must adhere to the following requirements:

  • Multiple personnel performs and validate the count, minimizing the possibility of human mistake.
  • The count is done carefully over several days with an emphasis on precision.

Calculate Inventory Accuracy: 2 Ways

Inventory reconciliation, which involves comparing physical goods counts with records of inventory on hand, is another name for the determination of inventory correctness.

All you have to do is personally count all of your current inventory, check it with your records, and then make any necessary adjustments. Your inventory is correct if the count you have matches your records. You need to correct any differences if your count inventory doesn’t match.

There are two typical ways to determine inventory accuracy.

Counting physical inventory

Inventory reconciliation or the practice of comparing actual inventory counts with inventories recorded aids in minimizing inventory discrepancies and determining their root causes.

If you have a modest SKU number, order quantity, and overall unit count, this method is the simpler of the two. Everything you must do is physically count every item you have on hand and compare the results to the inventory you should have.

The accuracy and consistency of your inventory are confirmed if the two counts agree. If they don’t line up, there is a clear disparity.

The easiest approach to make the most of this technique is to use it for weekly checkups. You can gradually maintain track of your goods in this way.

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Inventory analysis

The amount of the inventory available (physical inventory) is divided by the amount of inventory you are intended to have in whichever system you use to manage inventory data. This approach for determining inventory correctness is a practice in inventory accounting. Since you are not comparing every product in your inventory, this technique is less accurate.

Check your sales record – keeping if your inventory accuracy is poor. This could make the disparity obvious.

What Is a Good Accuracy Rate for Inventory?

As per the RFID Lab at Auburn University, businesses typically have inventory accuracy between 65 and 75 percent. This covers firms that employ barcode scanning and SKUs to manage inventories.

Naturally, this low percentage is bad for business.

97 percent or greater is the standard for most businesses looking to enhance overall inventory management.

The importance of accurate inventory

Your inventory records must accurately reflect your real inventory in order to run a successful business and maximize your inventory. If not, you can encounter any of the below negative effects:

Delayed orders might lose you customers

If your delivery is postponed by more than 2 days, up to 69 percent of your clients won’t do business with you again.

It can take weeks for a consumer to get their purchase if they place an order that is in the database not in the warehouse.

Imagine how they will respond to a lot longer wait if 2 days is enough to lose the business. You might prevent situations like these by accurately counting your goods.

Unregistered inventory won’t be sold

Additionally, it’s likely that you have inventory that isn’t listed anywhere. This inventory cannot be sold, so don’t make any plans to relocate it.

Product sales will be significantly slowed down as a result, and expired or ruined items may interfere with inventory control operations. Another crucial operation that can be affected by inaccurate inventory counts is inventory prediction, which can then result in problems with order fulfillment and replenishment.

Overstocking and higher holding expenses might occur

Bad records may frequently result in bad choices, such as making an excessive inventory purchase based on inaccurate consumption data.

This will result in too much inventory, higher carrying costs, and a stockpile of unsalable goods in your warehouses.

Maintaining correct digital data is necessary for an inventory process to be effective. If not, it will be hard to effectively control your stock levels.

Why can’t you achieve 100% inventory accuracy?

No matter the computation technique or technology you choose, maintaining a 100 percent inventory accuracy rate is nearly impossible.

The average rate of inventory accuracy is typically 99.6 percent; the remaining 0.4 percent is primarily the result of human mistakes, which is unavoidable for big businesses. The likelihood of an inventory data mismatch increases with the number of transactions, yet the occasional error is not caused for concern.

5 Methods for Enhancing Rate of Inventory Accuracy

When it comes to boosting inventory accuracy, it is obvious that there are many ways.  Here are a few excellent practices to take into account while attempting to increase accuracy in case any of these circumstances seem similar.

How-to-enhance-the-rate-of-inventory-accuracy
How to enhance the rate of inventory accuracy

Make your bins or pallets consistent

When mentioning inventory storage, organizing is key, and employing a few pallets and bins of conventional sizes helps keep the warehouse tidy. When you have different-sized bins on the same rack, it’s simple for the smaller bins to get pushed behind bigger bins, which may go months without being seen.

Your inventory records during the period the bin is concealed can show a balancing act that your employees are unable to find, resulting in missed productivity or, worse still, dissatisfied clients.

Become a label fanatic

Several warehouses use markers or pens to write product codes on boxes, which might lead to mistakes. Labels that are handwritten might be difficult to read. It’s possible for the component number to be incorrectly written or for the carton to have been reused, both of which might lead to mislabeled items.

Accuracy may be increased by putting in place a reliable barcode label printing program. Labels must include both barcodes and human-readable numerals, and they must be big enough to be recognized from a picking point.

Apply cycle counting for ongoing improvement

Many businesses start a cycle counting program, count 20 items, and then celebrate when 19 of them match the number of products they really have on hand. Yes, this may be said to have a 95% accuracy rate, but it could not. Verify the accuracy of the quantity as well as the places, batches, and labels.

The main problem with cycle counting is that it is frequently misunderstood. The goal is not to only fix the on-hand balance’s mistakes and move on. Cycle counting is mostly used as a quality control method.

To achieve the best cycle count results, it is suggested that these two particular segments be created:

  • High-risk counts: A group of items with a history of having the most inventory discrepancies, being likely to make mistakes, or having a lot of inventory write-offs.
  • High-value counts: A group of goods with the highest price tags or possible profit margins. It is essential to precisely track these items since they are the most lucrative.

Spend money on the technologies

The majority of e-commerce companies use barcode scanners to keep track of their inventory, loading the scanned data into inventory management software to prevent duplicate counting. Even though it’s a sophisticated manual procedure, it’s still considered a manual process.

Radiofrequency identification (or RFID), which uses radio waves to manage inventory, is the method of inventory counting for the future. RFID doesn’t need to match with the UPC ( or Universal Product Code) like typical barcode scanners do, enabling you to read a whole pallet of goods at once.

As a result, fewer manual chores associated with classic scanners—such as rotating boxes to keep the line of sight—are required. Additionally, it aids in lowering labor expenditures, a significant operating expense.

Nevertheless, keep in mind that most e-commerce companies cannot afford the significant capital expenditure required by RFID.

Work with eCommerce order fulfillment partner

You can collaborate with a fulfillment partner that can properly store and process your inventory by doing cycle counts as well as inventory audits, as opposed to handling the storage and delivery in-house. Firms that specialize in selecting, packaging, and delivering orders are called fulfillment businesses.

You can also get thorough inventory statistics and important distribution metrics from a tech-savvy e-commerce order fulfillment provider like Efex, which will help you keep precise track of your inventory.

Work-with-eCommerce-order-fulfillment-partner
Work with eCommerce order fulfillment partner

Conclusion

Inventory accuracy is important in eCommerce order fulfillment. You may aim for 100% inventory accuracy now that you understand how to estimate it and how to increase it.

It’s critical to improve inventory accuracy and inventory management efficiency. This will assist you in maintaining total control over your inventory, enhancing the client experience, and minimizing leaks.

It may, however, also be challenging and resource-intensive.

Thankfully, you can delegate all of this to an experienced third-party logistics company like Efex.

The order fulfillment services provided by Efex assist with inventory and order accuracy, warehouse receipt efficiency, warehouse picking enhancements, effective inventory management, and much more.

Ngoc Lee

Writing is an art that speaks from my heart!

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