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The Business Owner’s Guide to Improving Inventory Accuracy

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 ecommerce 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 inventory data 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 warehouse technology, your business can enjoy these benefits.

In our guide to improving inventory accuracy, you’ll find:

  1. What is inventory accuracy?
  2. How to take stock of your current inventory accuracy situation
  3. Assessing your standard operating procedure for inventory control
  4. How an inventory management system can lower human error
  5. How to conduct inventory cycle counts

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 shrinkage formula:

Shrinkage 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 warehouse 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 counting of inventory 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:

  1. Receiving Goods
  2. Storing and Controlling Goods
  3. Inspecting Goods
  4. Securing Goods
  5. Shipping Goods

Read More: The Business Owner’s Guide to Improving Inventory Accuracy

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