Inventory often makes up a substantial portion of many companies’ assets, making its effective management crucial for both operational efficiency and financial stability
A key component of effective inventory management is maintaining accurate records. Yet, this is an element that modern companies still struggle with. Unfortunately, inventory-related inaccuracies can have serious repercussions on a business, such as disrupted workflows, unexpected costs, and even loss of customer trust (due to issues such as late deliveries due to production delays).
To remain competitive and resilient, companies must find ways to ensure their inventory records align with reality. In this article, we’ll explore some of the most effective techniques for improving inventory accuracy.
The term “inventory accuracy” refers to the degree to which the recorded inventory levels in an organization’s inventory systems match the actual physical inventory available in its warehouse or storage centers.
When a company’s inventory is accurate, its records accurately reflect the actual amount of stock that’s physically on hand.
You can calculate inventory accuracy using this formula::
Inventory accuracy = [counted items/items on record] * 100
For instance, if a physical count shows 950 units of a specific production component in your warehouse, but the inventory records indicate there should be 1,000 units, your inventory accuracy rate is 95%.
Inventory accuracy = (950/1000) * 100
Inventory accuracy plays a crucial role in an organization’s success, offering several significant benefits.
When inventory records are accurate, day-to-day operations run more smoothly. Warehouse staff spend less time searching for items, conducting inventory checks, or handling discrepancies, allowing them to focus on more meaningful activities. This operational efficiency not only reduces operating costs but also boosts overall productivity.
Accurate inventory records help you optimize stock levels, making sure capital isn’t unnecessarily tied up in excess inventory or lost due to stockouts. This optimization also reduces carrying costs, such as storage and insurance, and minimizes markdowns on unsold goods.
What’s more, inventory is a key part of financial reporting, affecting other metrics like cost of goods sold (COGs) and net profit. Accurate inventory data helps provide a true impression of a company’s financial performance. It can help prevent the overstatement of profits, which might expose your company to higher taxes. In the same vein, it can prevent the understatement of gross income, which can lead to the underpayment of taxes, exposing you to potential penalties from tax authorities.
Inventory accuracy directly impacts the customer experience. When businesses track inventory levels accurately, they can fulfill orders promptly and correctly, minimizing the chances of delays or errors.
This reliability fosters customer satisfaction, trust, and loyalty, and leads to repeat business as well as positive word-of-mouth recommendations.
Accurate inventory data supports better sales and demand forecasting by providing a clearer picture of trends and demand patterns. This insight helps businesses make more informed decisions regarding purchasing, production, and inventory replenishment.
Maintaining accurate inventory records is essential for compliance in industries with stringent regulatory requirements. Accurate documentation helps meet auditing standards and makes sure businesses adhere to industry regulations.
Accurate inventory data helps minimize waste by ensuring inventory levels align with actual usage and demand. It also assists in identifying and addressing issues such as theft or spoilage, thereby reducing potential losses and improving overall inventory health.
Inventory inaccuracies can stem from several factors. Let’s take a look at some of the most common causes.
Manual data entry processes are prone to a variety of human errors. Entries can be missed or duplicated, numbers can be transposed, and decimals may be put in the wrong place. All these errors can lead to significant discrepancies between actual inventory levels and what’s recorded in the system.
Employees with inadequate training in inventory management processes can make mistakes when recording inventory-related information or when conducting physical stock counts.
Comprehensive training ensures staff are not only familiar with the correct procedures for updating inventory records but that they also understand the importance of inventory accuracy.
Ineffective inventory tracking systems are another major cause of inventory accuracy in many organizations.
For instance, older systems might experience frequent technical glitches or crashes that disrupt inventory tracking and recording.
Some may lack real-time tracking capabilities, making it difficult to maintain up-to-date records of stock levels. Delayed updates can result in stockouts, overstocking, or missed sales opportunities, as decisions are made based on outdated information. Some systems may also struggle with integrating data across multiple channels or locations, leading to inconsistent and unreliable inventory data.
What’s more, older systems may not be compatible with newer inventory management technologies, such as RFID or barcoding. This incompatibility prevents businesses from leveraging the full benefits of advanced tools that could help automate processes and enhance data accuracy.
Some inventory systems might also not support integration with other critical business tools, such as sales, purchasing, or accounting systems. This lack of integration can create data silos, which can cause inconsistent information across different departments, leading to errors in stock levels, order processing, and financial reporting.
Products can be misplaced within the warehouse due to disorganized storage practices or errors during stock handling (such as improper labeling or poor documentation of returns and damages). This can result in inaccuracies between physical and recorded stock levels.
For example, when items are not stored in their designated locations or are placed in the wrong bin or shelf, it becomes difficult to locate them during audits or order fulfillment.
Furthermore, theft, whether by employees or external parties, contributes to inventory shrinkage and discrepancies. Such incidents can often go unnoticed until an audit is conducted, and if audits are too infrequent, the resulting losses may be substantial.
Inconsistent inventory handling procedures across different warehouses or locations can also cause inventory data discrepancies. If different teams or locations are following varied processes for receiving, storing, and counting inventory, there’s a high likelihood of confusion and errors.
To ensure your organization maintains the highest level of accuracy in its inventory management processes, consider implementing the following best practices.
Establish a consistent schedule for conducting inventory audits. Depending on the size and nature of the business, this can be monthly, quarterly, or semi-annually.
Regular audits help detect and correct discrepancies before they escalate into bigger issues. When you discover discrepancies, investigate the root causes and reconcile the differences promptly.
Cycle counting is a creative approach to inventory management that entails counting a subset of inventory on a regular basis rather than doing a full count of all inventory at once. This approach helps maintain continuous inventory accuracy while minimizing the disruption to daily operations.
Just like regular inventory audits, create a schedule that best suits your business needs. For example, you can group and count items based on criteria such as sales volume, value, or turnover rates. High-turnover items, which move more frequently, are more likely to experience discrepancies and should therefore be counted more frequently than slower-moving products.
Investing in advanced inventory management systems like Cin7 is another great way to improve inventory accuracy. Such systems offer a variety of features to help you maintain precise and up-to-date inventory records. These include:
RFID and barcoding allow for quick and accurate inventory tracking by scanning items as they move through the supply chain.
Barcoding involves scanning specific barcodes on items, while RFID takes things even further by allowing for wireless identification of items using radio waves. RFID tags can be read remotely, even when they are not in direct line of sight, making it easier to track inventory across large warehouses or multiple locations.
With barcodes or RFID tags, each item is uniquely identified, and its location is updated automatically in the inventory management system. This can speed up processes like receiving, picking, packing, and shipping. More importantly, it reduces the need for manual counting and data entry, significantly minimizing errors.
Properly training your employees is another important practice that can help improve inventory accuracy. Well-trained staff members are more likely to follow correct inventory recording procedures and use inventory management tools effectively.
Ensure all employees who interact with inventory are thoroughly trained on the company’s inventory management systems. This training should cover how to properly enter and update inventory data, use scanning technologies, and follow standardized procedures for receiving, storing, and shipping goods. It should also cover techniques for preventing common errors, such as double-checking data entries, using checklists during inventory counts, and properly labeling and storing items.
Additionally, your training programs should emphasize the importance of accuracy in every aspect of inventory management.
Because inventory management processes and technologies evolve over time, it’s important to offer ongoing training. Regular refreshers, workshops, and updates on new tools or procedures will help your team stay current with best practices and maintain high accuracy standards.
As highlighted previously, a big source of inventory inaccuracy is variability in inventory handling procedures.
To overcome this challenge, develop clear detailed standard operating procedures (SOPs) for all inventory handling tasks, including receiving, packing, and shipping. Outline step-by-step instructions for each process. SOPs provide a clear reference for employees and can help minimize variations in how inventory is handled.
Ensure other inventory control practices are also consistent across all locations and departments. This includes using the same inventory management systems, tools, and technologies, as well as adhering to the same counting methods and record-keeping procedures. Such consistencies help prevent discrepancies and ensure that inventory records are reliable.
Standardized practices and procedures are only effective if they are properly followed, so make sure to also regularly monitor and address any deviations promptly.
Secure all inventory storage areas with appropriate physical security measures such as locks, gates, surveillance cameras, and alarm systems. Use access controls to limit entry to authorized personnel only. Regularly review and upgrade these measures to address any potential vulnerabilities and to adapt to new security threats.
For your inventory management software, choose one with robust security features, such as user access controls, audit trails, and data encryption. These features help prevent unauthorized access, detect irregularities, and protect sensitive data, contributing to overall inventory accuracy.
Inventory accuracy is an important metric that can directly affect your business’s operational efficiency, financial health, and customer satisfaction.
As seen, there are several practical ways to enhance inventory accuracy in your company. These include conducting regular inventory audits, cycle counting, investing in a quality inventory management system, leveraging technologies like RFID and barcoding, establishing standardized inventory handling procedures, and training your employees on proper inventory management.
If you’re looking for a premier inventory management solution designed for SMBs to help your company achieve peak inventory accuracy, look no further than Cin7. Our software, rated the number one inventory management solution in 2024 by Forbes, provides a range of features — like real-time tracking, advanced automation capabilities, integration with other business tools, and powerful reporting and analytics — that work together to deliver unparalleled inventory accuracy in your organization.
Schedule a demo today to explore how our solutions can work for you.
