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Guide to Inventory Accuracy: How to Calculate and Improve It
Posted by Julia Morrissey on May 11, 2022
Inventory accuracy is one of the industry’s biggest challenges today. According to Forrester, 56% of retailers say it is a problem for their omnichannel efforts.
Many retail brands are having trouble getting it right because most inventory management systems haven’t evolved for modern retail. But it’s imperative to develop a system to properly manage it. Poor inventory management not only negatively impacts revenue but also your customers’ experience.
This article highlights how to calculate inventory accuracy, the benefits of making inventory accuracy a priority, and steps you can take to improve inventory accuracy so that your retail brand can operate efficiently and meet customer expectations.
What Is Inventory Accuracy?
Inventory accuracy measures the disparity or inconsistency between physical and recorded inventory and is an integral part of inventory management.
Your customers expect your products to be available if you say they are. If you can’t connect your customers to what they want, when they want it, you risk losing their loyalty and repeat business. On the other hand, poor inventory management can result in wasted resources. You don’t want to have more product in stock than is likely to sell through.
To drive customer service and improve your bottom line, you’ll want to improve inventory accuracy.
How to Calculate Inventory Accuracy
To calculate inventory accuracy, you need to first get an accurate count of what you have in stock. Next, you can do inventory reconciliation and compare the physical inventory count with the record of inventory on hand.
If your retail brand has many SKUs, a high quantity of items, and inventory in many locations, you’ll likely want to use a sample to calculate inventory accuracy.
Inventory accuracy is shown as a percentage. You’ll divide the number of counted items that are completely accurate by the total number of inventory items counted, and then multiply this number by 100. Inventory is considered correct when both the quantity and location match what’s on record.
Strategic Benefits of Inventory Accuracy
As we’ve discussed, achieving inventory accuracy is vital for success. Making inventory accuracy a priority will greatly benefit your brand. We highlight these key benefits below.
1. Elevated Store Experience
The store of the future will be all about the experience. With accurate inventory, you can reduce friction during processes like returns and exchanges, while increasing the store’s overall utility.
Gone are the days of massive stores stocked with goods from wall to wall. How? Well, by making your inventory available to sell across your network of stores, warehouses, and distribution centers. Now, you can have smaller stores with less inventory and more experiential draws, such as in-store workshops, lounge areas, or influencer meet and greets.
At the end of the day, you want to create as many opportunities for positive engagement as possible between your store associates and customers, and your customers and brand.
2. Improved Event Response Time
Real-time inventory data allows for an immediate response to dynamic events in your supply chain such as a sudden increase in demand in one location. Having an accurate picture of inventory means you can quickly transfer items to satisfy the demand. Your frontline team can shore up the sale instead of turning away customers.
3. Greater Planning Ability
Inventory visibility is also strategic for proper forecasting and planning. It’s imperative you have a keen understanding of what is really happening to your inventory over a specific period of time. This will allow you to carefully calculate the inventory needed to fulfill future orders, while also zooming in on customer buying behaviors, trends, and patterns.
4. Boosted Resource Efficiency
With the real-time synchronization of all inventory data, manual tasks like cycle counting and receiving become a fully automated, even ongoing process. Additionally, for your fulfillment associates, it prevents mispicks and reduces the chance of shortages. These efforts all become even more efficient from a mobile device.
5. Enhanced Employee Empowerment
Less cumbersome processes mean more time for personalized service. Your associates will be back on the store floor instead of checking the stock room or calling another store for an item check. Being shoulder to shoulder ensures your employees build unique and profitable relationships with every customer.
6. Increased Store Health
Better inventory visibility = more inventory sell-through = higher GMV. (That’s the North Star metric in retail). A new academic study found 60% of retailers surveyed had inaccurate inventory; however, when corrected their sales jumped 6%. We can believe it––inventory accuracy is the backbone of modern retail.
How to Improve Inventory Accuracy
There’s no denying that achieving inventory accuracy is hard. It takes a well-defined process, training, diligence and the right software. Fortunately, there are steps you can take to improve inventory accuracy. We cover them below.
Omnichannel Order Management
When a retail IT stack is made up of legacy point solutions––for e-commerce, warehouse management, transportation, etc.––there is no data integrity. The systems don’t communicate and aren’t connected, which quite simply doesn’t allow for a single view of stock.
When you lack real-time inventory data, you’re forced to use safety stock to make your omnichannel solutions work. This means buying and carrying more inventory than you need. But what happens when you overbuy in the wrong place? The product gets marked down and you lose out on the full-price sale. At the industry level, markdowns cost retailers $400 billion in revenue, or 12% of total sales, in 2018. And it is all because of poor inventory management.
An omnichannel order management system connects inventory, customer, and order information in a single, unified platform. It also provides a singular view of enterprise-wide inventory which you can use to determine if a product is available to sell.
Another way to tackle inventory management is with radio-frequency identification (RFID) technology. RFID is no longer a sexy option out of your reach; as costs decrease, its adoption is skyrocketing. In 2014, only 34% of North American retailers had implemented RFID. Today, 93% of retailers say they’re either piloting the tech or have fully adopted it into their business.
Why the sudden spike in adoption? The lower barrier of installation is one, but also Accenture found RFID can increase inventory accuracy from 70% to over 95%. If inventory has been an Achilles heel in your quest to omnichannel success, this is a solution worth implementing. It can also help in other business areas, including preventing theft and tracking how product moves about your store.
A general rule of thumb is to avoid handwritten labels on inventory items. This is because they are prone to error and hard to read—thereby resulting in mislabeled goods that are hard to track, negatively impacting inventory accuracy.
The best way to pull off inventory labeling is to use printed labels containing the bar or QR codes of the individual inventory item. Barcodes should integrate with automated systems.
Cycle counting is an inventory auditing procedure. It uses a sampling technique that allows businesses to count a subset of inventory in a number of areas.
Although brands don’t have to count their entire inventory, it serves a useful purpose by establishing a regular system of checks and balances. Cycle counting, therefore, allows businesses to verify that their physical inventory counts match their inventory records.
Cycle counting helps brands quickly identify problem areas in their inventory. But to improve inventory accuracy, retail brands must ensure they have a comprehensive cycle counting program that’s been integrated into daily operations.
Improving inventory accuracy often comes down to having ample space to store inventory items. Brands can lose money due to ineffective storage methods that waste time and increase labor costs. This could also impact customer retention, especially if there’s lost inventory and customer orders aren’t fulfilled on time.
Organizing a warehouse effectively entails categorizing inventory appropriately for easy access. You can also professionally store inventory. Though you’ll incur more overhead costs, professional storage companies have the technology and knowledge necessary for inventory accuracy.
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