Complete Guide to Inventory Accuracy: Calculations, Methods & Best Practices 2024

What’s the point of running a business if you don’t know how much inventory to stock? Knowing the exact number of items to store in your inventory is critical to meet customer demands and running the business efficiently. Otherwise, it will simply take up space and cost you money.

What happens when you sell a product you don’t have, and the customer has to wait weeks or months for you to resupply?

You risk permanently losing those customers.

To avoid these problems, your inventory’s digital records must correspond to the actual situation in your warehouses. This is where inventory accuracy comes into play.

In this article, we’ll go over inventory accuracy in detail, show examples of companies that have improved it, and explain how you can do the same.

Understanding Inventory Accuracy

Definition and core concepts

Inventory accuracy is a metric that evaluates the difference between your warehouse stock records and your actual inventory. Inventory accuracy is essential for avoiding stockouts, shortages, and shrinkage, as well as controlling inventory quality and providing a positive customer experience.

Key components of inventory accuracy

Physical count accuracy

Physical count accuracy refers to the consistency between the actual number of items in your warehouse and the numbers recorded during physical inventory counts. Regular cycle counts or annual physical counts help ensure this accuracy.

System record accuracy

System record accuracy examines the reliability of inventory records maintained in your warehouse management or enterprise resource planning system. 

Inconsistent or outdated system records can lead to discrepancies in stock levels, affecting reordering and fulfillment processes.

Location accuracy

Location accuracy focuses on whether items are stored in the correct locations within the warehouse. 

Misplaced inventory can create delays in order fulfillment and impact the accuracy of stock counts.

Why is inventory accuracy important?

Inaccurate inventory is a problem because it can lead to incorrect orders, a shortage of products, theft, damage, and loss for your business, or even difficulty selling your stock before it becomes obsolete.

For instance, inaccurate inventory records can cause inventory shrinkage when stock is less than the recorded balance in accounting records, and it can throw off your inventory valuation at the end of a fiscal year or accounting phase.

Calculating Inventory Accuracy

Standard calculation methods

The inventory accuracy formula to count the accuracy rate is:

(counted items / items on record)×100=inventory accuracy\text{(counted items / items on record)} \times 100 = \text{inventory accuracy}(counted items / items on record)×100=inventory accuracy

Begin by calculating how many units of a specific SKU you have on hand. Then multiply that figure by 100 and divide it by the recorded stock count for that SKU.

The result is given as a percentage. A good inventory accuracy rate is generally around 97% or higher.

For example, assume your company sells t-shirts and you have 1,000 in your actual physical inventory, but you should have 1,020 t-shirts in available inventory, according to your records.

In this case, you need to divide 1,000 by 1,020 and multiply by 100. When rounded, this gives you a result of 98. Your t-shirts have an inventory accuracy rate of 98%.

Remember that the formula only works if you have a reliable stock count when calculating your brand’s inventory accuracy rate. You can use either a physical inventory count or inventory valuation to gauge your calculations.

Advanced metrics and KPIs

Accuracy rate calculator

Using a digital inventory accuracy calculator can streamline the process of determining your accuracy rate. These calculators often integrate with warehouse management systems to pull real-time data and provide accurate percentages without manual calculations.

Inventory reconciliation tools

Inventory reconciliation tools help match the physical stock counts with system records. These tools identify discrepancies quickly and enable businesses to take corrective actions, such as adjusting records or investigating shrinkage causes, to maintain high accuracy rates.

Industry Best Practices

Every product-based business, regardless of industry, should prioritize inventory accuracy as part of inventory control. Inventory management processes must be optimized for a company’s smooth operations, from receiving goods from suppliers to delivering customer orders.

Consider the five techniques listed below for maintaining and improving inventory accuracy.

1. Maintain inventory in an organized warehouse

Make sure your warehouse is always arranged systematically. It is significant for two reasons: items will be easily identifiable for customer orders, and inbound material can be received and stored efficiently.

You’ll be wasting valuable employee time and lowering your overall operational efficiency if your warehouse staff can’t quickly locate the items they need to fill an order or store new items properly because of a disorganized inventory.

So, having a well-organized warehouse with clear, easy-to-read maps of the warehouse in convenient areas and well-labeled inventory areas with clear signage and item descriptions helps to improve overall accuracy and efficiency.

2. Inventory labeling and naming

Organizing and labeling the inventory go hand in hand. On a larger scale, well-organized inventory makes it easier for warehouse personnel to locate the correct division. Properly labeled inventory will make finding the appropriate material or product inside the section easier on a micro level.

Aside from clear labels, the naming convention used for item identification on the labels is also crucial. Item names should be short and simple, with numbers and letters to identify each product/material.

Each item must be named and marked in the warehouse with information that thoroughly describes it, and any specific concerns, such as expiration dates, hazardous material warnings, packaging requirements, etc., must be highlighted.

3. Implement a cycle counting program

Even though most businesses have efficient procedures to ensure that their inventory is accurate, cycle counting is still necessary and has benefits.

Cycle counting is a method of counting brief subsets of inventory that are counted repeatedly. Cycle count causes less disruption to daily operations than traditional physical inventory counting, which requires a facility to halt operations while every item is estimated at once.

Cycle counts also evaluate the accuracy of inventory records and method execution and assist in determining the underlying reasons for inventory issues.

4. Limit access to inventory

Only allowing access to personnel who require inventory accuracy measurements is a simple way to protect inventory management. 

You should know who has access and ensure that this selected group has received the necessary instruction about your company’s inventory management procedures. 

This will protect your stock from reporting errors by limiting access to the document and the handling or evaluating inventory metrics to a small group of trained staff. This, in turn, will improve staff compliance continuously while making it much simpler to identify the cause of stock discrepancies.

5. Use advanced software

Nowadays, technology is a part of almost all corporate operations. If your company still uses pen and paper or basic spreadsheets to keep track of inventory,  you must’ve probably noticed how much simpler and more accurate inventory control and organization can be with inventory management software.

The inventory management software files electronic records,  making it simpler for you to track your inventory regardless of how complex your inventory requirements are. It makes physical inventory counts much easier and more efficient. For example, operations software provides precise information on the location and movement of stocked goods — and even updates this data in real-time.

Main Reasons Why Businesses Fail to Maintain Inventory Accuracy

As a business owner, you may also face issues with your inventory which disrupts your entire supply chain. However, you may be unaware of all the factors that contribute to these errors in the first place. The following are the primary causes of inaccurate inventory:

1. Inaccurate quantities

Inaccuracy remains one of the most serious issues currently faced by warehouses. Inaccuracy occurs in various ways, including incorrect quantities, misplaced storage locations, erroneous pricing, and wrong identification.

Most businesses will encounter an incorrect quantity of one or more products in their warehouse at some point. This is common in retail companies, particularly big-box retailers with millions of product stock-keeping units or SKUs. 

Incorrect product quantity is frequently the result of another area of inaccuracy. An item placed in the wrong location of a warehouse may be overlooked when searching for inventory. As a result, the item count in the inventory will be incorrect.

2. Storage issues

Capacity issues are frequently associated with inventory issues in both large and small warehouses. When a warehouse becomes overcrowded with pallets and cases of inventory, basic warehouse management rules are frequently overlooked. 

Products are often damaged, lost, and not accounted for in the inventory management system in an attempt to store more inventory. Storage issues can also lead to obsolete inventory.

 A company may only have one product carton left but cannot locate it due to storage issues. As a result, the product becomes obsolete and is written off the company’s balance sheet.

3. Product damage

In a warehouse, inventory becomes vulnerable to damage every time it is touched or moved. Many businesses attempt to recoup some of the financial losses associated with damaged inventory by selling it at steep discounts to the general public—consider furniture liquidation centers that sell scratch and dent merchandise.

 Inventory damage can occur in various ways. If a company has a large amount of damaged inventory, it should consider additional employee training and root-cause analysis to determine the source of the problem.

4. Issues with product identification

Warehousing issues arise when inventory arrives with incorrect labels, barcodes, product SKUs, or packaging. 

For instance, an orange bottle has the SKU ABC123, whereas a blue bottle has the SKU DEF456. Both cups are sold in cartons of 100. The SKU and description of the product, as well as a barcode for scanning the product into the inventory software, are printed on the outside of each carton. 

When the orange bottle arrives, the warehouse scans the barcode label on the cartons, but the manufacturer inadvertently places the barcode on the labeled blue bottle. The warehouse employee accepts the barcode scan without inspecting the contents of the box. This results in inventory errors.

5. Lack of proper training

Many warehouse inventory problems are caused by insufficient or non-existent employee training. Human error is usually blamed for inventory accuracy, damage, and product identification problems. Inadequately trained warehouse personnel cause inventory problems that better-trained personnel routinely avoid. 

For example, an inexperienced forklift driver is more likely to damage products during inventory storage and retrieval. Proper training boosts warehouse efficiency and productivity while reducing inventory management issues.

6. Inaccurate return records

Another root cause of inventory inaccuracies is mismanaged returns. For example, if you coded returned goods incorrectly, you’ve created an incorrect return record and marked a damaged product as available. This human error results in false inventory records when the item is reintegrated into your inventory. 

How can Upper Help You Regain Your Inventory Accuracy Level?

Upper Route Planner is an amazing delivery route planning and optimization software that can help you manage your inventory most efficiently.

It offers reports and analytics features that collect and visualize real-time statistics to assess your inventory accuracy.

You can filter, sort, and group all data from your dashboard’s available date or date range.

You can even access a performance report that will provide an overview of the completed or missed deliveries by the drivers. This way, you’ll have access to even the small, unnoticed things that lead to inventory inaccuracy.

Try the Upper Route Planner for 7 days for free to see its full potential.

Conclusion

Improving your inventory accuracy has become essential to sustain in the competitive business environment. It can ensure you manage your SKUs and offer a smooth delivery business.

You can choose Upper Route Planner to increase the delivery process efficiency and avoid shrinkages and shortages in your inventory. 

Access the 7 days free trial to experience the software.