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Inventory Accuracy: Why It’s Important And How To Improve It [+Formula]
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The average US retailer has 63% inventory accuracy. And it leads to a lot of wasted time, money, and energy for these direct-to-consumer (DTC) brands.
That’s because inventory accuracy helps prevent stockouts and overstocking, facilitates inventory forecasting, and minimizes your operational overhead.
But perhaps the greatest benefit is that it streamlines fulfillment — which translates to faster delivery, happier customers, and greater retention for your brand.
Meaning, this modest inventory metric packs a punch for ecommerce retailers. Find out more about the importance of inventory accuracy and how to improve your accuracy percentage down below.
Inventory accuracy is a percentage calculated by taking physically counted stock numbers and comparing them to digitally captured stock numbers. This percentage is a crucial metric to track as it reflects the accuracy of your inventory management.
Inventory accuracy is an important metric for product-based brands. Especially since accurate inventory counts minimize stockouts, identify errors, and reduce your overhead costs.
Inaccurate inventory counts can lead to problems with your supply chain and order fulfillment process.
For example, you might run into product shortages or fulfillment delays if your records show you have plenty of stock available — when in reality, you’re down to the last unit.
On the flip side, accurate inventory counts improve your inventory management practices by providing greater inventory control.
Inventory accuracy gives you a clear picture of where your inventory is, how it’s selling, and how much you need to reorder.
With this information, you can maintain a consistent flow of stock from replenishment to fulfillment (and every stage in between).
With inventory accuracy, you get better insight into your stock levels and can easily make smarter purchasing decisions.
Accurate stock counts also help you understand how much inventory you need to meet demand. And it ensures you reorder at the right time, so you don’t run out of product.
In other words, inventory accuracy minimizes both stockouts and overstocked goods.
When your inventory counts match your inventory records, you won’t have to worry about potential shortages or having too many items in stock.
Inventory accuracy makes sure you have exactly the inventory you need to satisfy customers and prevent dead stock from accumulating.
Accurate inventory accounting can reduce your operational costs significantly.
Inventory accuracy shows you which products are selling well and which products are sitting still. If you notice a certain SKU isn’t moving, then what it’s really doing is racking up carrying costs.
In that case, you might consider running a marketing promotion around the SKU, bundling it with a better seller, or discontinuing it altogether.
Getting rid of these slow-moving products will be a major win for your company since you’ll no longer be paying an arm and a leg to store these items at your warehouse.
It might go without saying, but accurate inventory forecasts begin with accurate inventory counts.
It’s impossible to forecast your replenishment needs when working with incorrect data or inventory misinformation since you can’t trust your numbers.
That’s why inventory accuracy is so vital to your forecasting efforts. Because it ensures you’re basing your predictions on true inventory data.
This way, your projections reflect what’s really going on with your products, provide an honest representation of demand, and avoid common forecasting mistakes.
Inventory errors come with the territory if you’re a DTC seller. The trick is to identify and reduce these errors as much as possible.
By prioritizing inventory accuracy, you can pinpoint errors in your stock counts.
For instance, comparing stock records to your physical inventory will reveal whether you have inventory shrinkage (when your actual stock is less than the recorded balance).
Inventory shrinkage will likely throw off your inventory valuation (the monetary value of your unsold stock) when using the retail inventory method. So, it’s important to correct your electronic records as soon as possible.
According to the 2020 National Retail Security Survey, inventory shrinkage has reached an all-time high. It’s now accounting for “1.62% of a retailer’s bottom line” and costing the industry a whopping $61.7B.
With this in mind, your company should do everything to improve inventory accuracy (and avoid being part of the larger problem).
In addition to identifying shrinkage, inventory accuracy also safeguards your business against fraud.
Examining your inventory records sheds light on discrepancies in accounting and highlights where stock is missing (so you can address any potential fraud head-on).
Last but certainly not least, inventory accuracy offers a huge boost to the customer experience.
For one, inventory accuracy ensures you don’t take more customer orders than you have items available. But accurate records and stock counts also offer greater visibility into product movement.
You can then use this knowledge to proactively stock your shelves with what you need.
When your products are in stock and ready to ship, it creates a smooth fulfillment process. This ease of fulfillment then lends itself to faster delivery, happier customers, and greater retention for your DTC brand.
To calculate inventory accuracy rate, use the following formula:
| inventory accuracy = [counted items / items on record] * 100 |
Start by counting how many units you have in stock of a specific SKU. Then, divide that number by the recorded stock count of that same SKU, and multiply by 100.
The answer is expressed as a percentage. And generally, a good inventory accuracy rate sits around 97% or higher.
Let’s walk through an example. Say your company sells phone cases, and you count 1,000 cases at your warehouse. According to your records, you should have 1,020 cases in stock.
In this scenario, you’d divide 1,000 by 1,020, then multiply by 100. When rounded, this gets you an answer of 98. This means your phone cases have a 98% inventory accuracy rate.
When calculating your brand’s inventory accuracy rate, keep in mind that the formula only works if you have a reliable stock count.
You can either use a physical inventory count or opt for inventory valuation to inform your calculations.
As the name implies, a physical inventory count requires teams to manually take stock of each unit on hand. This can quickly get overwhelming, especially if you have a lot of SKUs.
So, when relying on a physical count, split your warehouse into designated zones. Then, have teams take stock of only one specific zone at a time.
When taking stock, you’ll want 2 people counting each SKU separately and comparing their results.
If the 2 team members come up with the same number, record it. If not, they should recount until they meet a consensus (this will rule out any human errors).
When you’re done counting each SKU in that zone, calculate your accuracy rate using your counting team’s numbers. This process is called “inventory reconciliation.”
Typically, inventory reconciliation is best suited for brands with fewer SKUs — since large volumes of inventory will take considerably longer to tally.
If your physical count matches your records, then your inventory is accurate.
If not, you’ll need to investigate this discrepancy further. Otherwise, you put your brand at risk of stockouts or accumulating excess inventory.
To get the most out of your physical inventory counts, perform daily counts, called “cycle counting” (more on this below).
Another method for calculating inventory accuracy is using inventory valuation.
Remember that inventory valuation is the monetary value of your unsold stock at the end of a reporting period.
For this approach, take the value of your actual inventory. Most brands use barcode scanners to quickly and accurately add up the value of their available inventory.
Then, divide it by the inventory value you’re supposed to have on hand. The merchandise you’re supposed to have at your warehouse can be found in whatever system you use to track inventory data.
Let’s go back to the phone case example.
Say you sell each phone case for $5 each. Then, those same 1,000 cases you have on hand are valued at $5,000, and the valuation of the 1,020 cases you’re supposed to have is $5,100.
Using the same inventory accuracy rate formula, you get the same 98% inventory accuracy rate.
[5,000 / 5,100] * 100 = 98%
This method is most useful for DTC brands with large inventory volumes, where manual counting is less practical or too time-consuming.
You already know how inventory inaccuracies can cause trouble for your supply chain.
But you might not know all the factors that trigger these inaccuracies in the first place. Here are the most common ones.
Inventory loss is another term for inventory shrinkage. It’s when the number of products in stock is less than the recorded balance.
Inventory loss can happen for many different reasons, from theft and clerical errors to damage during delivery.
When these losses go unrecorded, it can affect your inventory accuracy in a big way. Unfortunately, this lack of documentation is often seen with damaged goods.
If you have a damaged product that you can’t sell, exclude it from your physical count. And instead, note it in your inventory records. That way, you know to write this inventory off.
Otherwise, if you forget to document the damage, your inventory records will still show this product as available. And this is where discrepancies can arise since your physical count won’t be aligned with your inventory records.
The best way to prevent this is by documenting all your inventory losses as soon as they occur. This quick action in the present will be a gift to your business in the future.
When you place an order with your supplier, you expect it to be fulfilled correctly. But when there’s an error with your purchase order (PO) or your supplier makes a mistake, it impacts your inventory accuracy.
The worst part about order fulfillment errors is that your inventory counts will be off before you even receive the shipment.
As a result, you won’t have the right product in the right place at the right time. Instead, you’ll be left to work out these issues with your supplier.
Correcting fulfillment mistakes can be pretty costly, but it can also cause further delays in getting products to your customers.
That’s why it’s necessary to work with fulfillment partners you trust, who have a solid reputation and take responsibility for any missteps.
You might even want to request an emailed fulfillment confirmation before your supplier ships your PO out.
This way, you can double-check for any errors before your next shipment heads out the door and proactively get ahead of any mistakes.
A disorganized warehouse isn’t just a roadblock to productivity — it can also curb your inventory accuracy.
That’s because a cluttered space is vulnerable to any number of errors that can affect your inventory counts and throw your totals way off course.
If an item isn’t in the correct place or has incorrect labeling (like the lot number or serial number is wrong), it’ll inevitably limit the accuracy of your reporting.
When your inventory isn’t properly marked, this misinformation gets added to your inventory app and creates greater issues down the line. Most notably, it’ll cause your physical counts to differ from your inventory records.
This is why it’s so important to organize your warehouses and pick locations.
With uniform bins and pallets and an inventory labeling program, you can avoid confusion for your pickers and set your counting teams up for success.
Another root cause of inaccurate inventory counts is mismanaged returns.
For example, you’ve created an inaccurate return record when returned goods are coded incorrectly (such as a damaged product being marked “available”).
This human error then causes false inventory records when the item is reintegrated with your inventory. And it ensures these records don’t match your physical counts.
In this case, you’ve created what’s known as phantom inventory. This is where your accounting system shows certain goods as available when they’re not actually available.
To bypass mismanaged returns, you’ll need to maintain greater control over your inventory levels.
With effective inventory management, you can facilitate a smoother return process and reduce the number of errors in your inventory records.
It’s also important that your team is well-versed in handling returns. With thorough training, your team can apply the correct codes before placing items back in stock.
This cuts down the wasted hours reconciling your inventory records with your stocktaking tallies.
Now that you know what causes inaccurate inventory counts, let’s look at the 5 best practices to improve inventory accuracy for your DTC brand.
Standardized bins and pallets are the backbone of an organized warehouse. With standard dimensions, you can optimize warehouse workflows and move inventory more efficiently.
In addition, this streamlined warehouse storage can increase inventory accuracy, too.
As mentioned above, a messy warehouse is one that’s vulnerable to errors — especially when it comes to counting your physical stock.
But when products are placed into standard bins (on standard pallets), it becomes a lot easier to sort, count, and track these inventory items. So, your reporting becomes more accurate and your product catalog more aligned.
Label printing programs are a huge boost to inventory accuracy. With label printing software, your DTC brand can take advantage of built-in tools that’ll create, manage, and print labels for inventory management or shipping purposes.
The leading software (like BarTender and Loftware Spectrum) can generate price tags, barcodes, and RFID tags to really ramp up your organizational game.
This way, you have visibility and tracking information for all the products you sell.
Product labels show you exactly where your products are at every stage of the supply chain, making it easy to track SKUs throughout the product lifecycle and simplifying how you account for stock regardless of its location.
Cycle counting is a perpetual inventory auditing procedure that checks and balances your stock by confirming your physical inventory counts match your inventory records.
This process involves counting a small portion of stock every day. This way, you count your entire inventory over a set timeframe.
Some brands may count from highest to lowest priced items, while others might begin in one warehouse corner and work their way through every aisle.
Both strategies ensure that all inventory is counted on a rotating basis.
Any errors discovered during these smaller counts will signal the need to investigate these discrepancies. That way, you can get ahead of what’s causing it and adjust your inventory records accordingly.
By implementing a cycle counting program, you’ll almost certainly have higher levels of inventory accuracy.
When you count a smaller percentage of inventory on a more consistent basis, you can quickly catch (and resolve) any inventory issues that come up.
Inventory audits compare your actual inventory levels to your current financial records to guarantee the accuracy of your accounting.
Sometimes, inventory audits can be performed in-house with a simple count of your existing stock.
Other times, these audits may require the help of a 3rd-party auditor.
(This is usually the case if brands have a large volume of inventory or multiple warehouses they’re working from.)
As mentioned above, cycle counting is a type of perpetual inventory audit. Meaning, it’s happening continuously and often in real-time.
On the other hand, periodic audits happen at specified times (once a month, once a quarter, once a year).
The bottom line is that the more often you perform an audit, the more accuracy you’ll enjoy.
Plus, regular audits help identify inventory shrinkage like lost or damaged goods before it becomes a problem.
Modern operations software is full of features and automatons that support inventory accuracy.
This technology makes conducting physical inventory counts much easier and more efficient.
For instance, operations software provides accurate details on the location and movement of stocked goods — and even updates this information in real-time.
Because operations software works around the clock, you can feel confident that your inventory data is always accurate.
This visibility into your inventory levels also reduces the scope of errors since you can tackle any issues as soon as they arise.
If you’re looking for an operations partner to help improve your inventory accuracy, Cogsy has you covered.
Cogsy has all the functionality to keep your stock levels accurate, from data monitoring to predictive inventory intelligence to enhanced reordering practices.
If you can’t see what your products are doing, it will be tough to maintain inventory accuracy.
Fortunately, Cogsy’s actionable dashboard makes monitoring your inventory data a breeze. In fact, Cogsy stores all of your real-time and historical data in one convenient place.
That’s right — Cogsy is a single source of truth for all your inventory data and makes this information readily available whenever you need it.
With a reliable teammate like Cogsy, you can keep a pulse on your stock levels and make sure they’re always in line with your inventory records.
There’s nothing worse than guessing what your inventory is doing or when you need to restock. Thankfully, Cogsy takes the guesswork and self-doubt out of your inventory planning.
Cogsy replaces your spreadsheets with proactive sales predictions that automatically forecast future demand (and help you plan accordingly).
When your forecasts are automated, it dramatically reduces the number of errors you’ll encounter. And fewer errors translate to greater accuracy — not just for your inventory levels but your operations as a whole.
Cogsy is always on, always monitoring the most important parts of your business. This includes what your stock levels are doing at any point in time.
Cogsy checks your product movement in real-time and ensures accurate stock counts across all SKUs and storage locations.
And this inventory accuracy is the key to making better, more informed purchasing decisions. Lucky for you, Cogsy also helps with that.
Cogsy leverages your inventory data to create a customized purchase order at the click of a button.
This way, your brand purchases exactly the right amount of inventory at exactly the right time. How’s that for enhanced (re)ordering practices?
If you’re ready to make big moves for your DTC brand, Cogsy can help you achieve amazing growth and financial success. Try it free for 14 days.
Perpetual inventory accuracy means all inventory data is collected and consolidated from an established operations system in real-time. This approach reduces errors and maintains the integrity of your data, ensuring inventory counts are aligned with inventory records.
To calculate inventory accuracy as a percentage, use the formula:
inventory accuracy = [counted items / items on record] x 100
The inventory accuracy benchmark is 97% or higher. Remember that the more sales your brand makes, the greater your chances of inventory data discrepancies. That’s why it’s so important for companies – especially larger ones – to prioritize methods for improving inventory accuracy.
The main goals of inventory accuracy are to improve inventory management practices, minimize stockouts and overstocking, and reduce operational costs. In addition, inventory accuracy often lends itself to better demand forecasting and increased customer satisfaction.
Maintaining inventory accuracy will require your brand to standardize its bins and pallet sizes, use a label printing program, and perform regular inventory audits. You can also lean on an operations platform like Cogsy to make maintaining inventory accuracy easier.
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