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The foundation of operational efficiency — Inventory accuracy

Vallabh Daga
January 16, 2021
6
mins read

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If you discovered you only have INR 10,000 in your bank account when you should have had INR 1,00,000, wouldn't you be concerned? The same sentiment is applicable when you have a discrepancy between your actual inventory counts versus what you thought you had.

Poor inventory accuracy might not feel like something which requires the immediate attention of your business, however, it becomes a humongous financial liability due to lack of data organisation.

To highlight the costs of poor inventory accuracy, IHL (global research and advisory firm) published a detailed case study titled 'We lost Australia' in which they found the worldwide cost of inventory distortion to be more than 1.1 trillion dollars — more than the GDP of Australia. That is a staggering amount of finances dissipated due to inefficiencies in the system.

What is inventory accuracy?

Inventory accuracy shows how close your inventory records and your actual physical inventory match up. While every business would like to have 100% inventory accuracy, the constant movement of merchandise makes it challenging.

To keep your inventory accuracy as high as possible, the difference between what's recorded in your inventory management system and what you have available in your warehouse should be minimum.

Why inventory accuracy matters?

Inaccurate inventory brings complications for your business, such as:

  • Accepting a customer order for items you don't have — this leads to seller cancellations which means hefty Service Level Agreement (SLA) breach penalties for your business.
  • Failing to identify ageing inventory on time and not realising the right time to liquidate your inventory. Additonally, perishable inventory can turn into deadstock if not identified on time.

Additionally, inaccurate inventory also creates implications on the accounting side of your business, such as:

  • An inaccurate inventory valuation, i.e an incorrect estimation of the monetary value of your inventory in your accounting records.
  • Reduction of inventory value in your accounting records to rectify discrepancies during inventory reconciliation, also known as an inventory write-off.

Why ecommerce businesses struggle to maintain inventory accuracy?

Achieving inventory accuracy isn’t an easy task, but it can be made easier with the right technology, processes, and know-how. Here are the most common reasons why inventory accuracy is challenging for ecommerce businesses:

1. Self-fulfilment approach

In an attempt to be independent and cost-effective, many ecommerce businesses operate with a self-fulfilment model — where they store products in their own facility and deliver orders themselves. However, operating their facility professionally becomes a herculean task — whether it is conducting daily cycle counts, inventory audits, or even shortage analysis.

2. No proper inventory management systems

A lot of ecommerce businesses still record and track inventory on paper or spreadsheets. Without a proper inventory management system, inventory accuracy is challenging to achieve — since the recording and reconciling of inventory is a completely manual process.

3. Traditional inventory management systems

Traditional inventory management systems lack the capability to handle modern-day ecommerce operations, such as:

  • tracking inventory across multiple locations
  • integrating with your Enterprise Resource Planning (ERP) or any other business management systems
  • syncing inventory across multiple sales channels in real-time
  • identifying ageing inventory on time

How to calculate inventory accuracy?

The calculation of inventory accuracy is also known as inventory reconciliation — which means comparing physical inventory counts with the records of inventory on-hand. All you need to do is to physically count all your available inventory on-hand and then compare it with your records. If your inventory count matches the one on your records, then your inventory is accurate. If your inventory count doesn't match — there are discrepancies that you need to resolve.

You can perform weekly or monthly checks to keep a tab on your inventory progressively. This helps reduce stock discrepancies and analyse reasons for the variance in inventory

To calculate inventory accuracy you must know:

  • The sum total of inventory in units or in INR
  • The absolute variance in inventory in units or in INR

For example, if you physically counted 900 product units and your records show you were supposed to have 1,000. Your inventory accuracy is 90%.

Inventory accuracy formula

How to improve your inventory accuracy?

Conduct regular cycle counts

Cycle counting is the process of partially counting merchandise on a periodic basis so you can stay on top of stock levels without interrupting regular operations.

This procedure involves dividing your inventory into smaller groups of products that need to be counted. This division could be done on the basis of various segmentations such as product category, product vendor, warehouse location and more.

Note: This segmentation can be done easily when using an efficient inventory management system.

However, it is advisable to create these two specific segments for the best results from cycle counts:

1. High-risk counts: These are a set of products which have historically had the largest inventory discrepancies, are prone to errors or have had the most inventory write-offs.

2. High-value counts: These are a set of products which have the highest cost or potential sales value. As these products are the most valuable, it is crucial to track them accurately.

Invest in the right technology

Most ecommerce businesses use barcode scanners to track inventory— where scanned information is loaded into a CSV file or an inventory management software to eliminate double counting and recounts. However, this is still a manual process; albeit an advanced manual process.

The future of inventory counting is RFID (radio frequency identification) — where radio waves are used to track inventory. Unlike traditional barcode scanners which require the barcode to be in the line of sight with the UPC (Universal Product Code), RFID doesn't — allowing you to scan an entire pallet of items in one go.

This reduces a lot of manual tasks which come with traditional scanners such as the re-orientation of boxes to maintain the line of sight. It also helps you reduce labour costs, which is a huge operational expense.

However, keep in mind RFID requires tremendous capital investment and isn't viable for most ecommerce businesses.

Barcode Scanning vs RFID Scanning

Upgrade your inventory management system

A reliable inventory management system is crucial if you're looking to sustainably scale your business. Traditional inventory management systems are basic, error-prone and lack the features you need to thrive in the modern ecommerce landscape.

The right inventory management software can help you:

  • Ensure that you're never understocked or overstocked
  • Maintain item level accountability of your inventory
  • Sync inventory across all sales channels
  • Compile real-time inventory data to provide data-driven insights

Outsource your operations to an ecommerce fulfilment partner

Instead of taking on the storage and distribution in-house, you can team up with a fulfilment partner who can store and manage your inventory professionally by conducting daily cycle counts and inventory audits. Fulfilment companies typically specialise in picking, packing and shipping orders.

A tech-enabled fulfilment partner like Eshopbox can even provide you with comprehensive inventory reports and key distribution metrics which help you track inventory accurately.

Discover more accurate inventory with Eshopbox

Enterprise grade Standard Operating Procedures (SOP)

Eshopbox has efficient operating procedures in place at every stage of inventory control:

1. Receiving:

  • Create a electronic documentation trail for each item
  • Conduct visual inspection of each item received
  • Reject and document damaged items or incomplete consignments

2. Storage:

  • Document specific storage requirements of each item (ex: temperature, orientation, and more)
  • Ensure item level accountability to enable inventory tracking

3. Maintenance:

  • Conduct periodic cycle counts and quality checks
  • Identify ageing inventory on-time and provide proactive notifications
  • Ensure warehouse pickers select the oldest items first on order placement
  • Document the disposal of expired inventory or dead stock

4. Fulfilment and return management

  • Document items that have been shipped for each channel (retail, wholesale or direct to consumer)
  • Quality check returned items and document their status in your ERP — whether it is sellable or non-sellable

Multi-location inventory tracking

With Eshopbox, you can track your inventory and its status across multiple locations all from one platform. This allows you to proactively replenish inventory, monitor your sell-through and accurately reconcile inventory across different fulfilment centres.

Eshopbox multi-location inventory tracking

Integrated technology

You can easily integrate Eshopbox with your ERP system using developer-friendly APIs. This allows you to make your ERP a single source of truth. Whether it is inventory, orders or payments — all your data is recorded electronically in one place with an accurate real-time view for you and your team.

5-minute inventory sync

Eshopbox syncs your inventory across all sales channels every 5 minutes, this means you get an accurate, real-time view of your inventory and its statuses. This will make sure you only take orders for items you have in stock.

Latest inventory management software

Eshopbox inventory management software provides all the features you need — an easy to use interface, effective order management, accurate inventory tracking, and smart inventory insights. Here's what you can do with Eshopbox:

  • Track inventory in real-time and reconcile inventory at the Stock Keeping Unit (SKU) level.
  • Analyse historic selling trends, forecast demand and plan inventory supply.
  • Set a re-order threshold to automatically replenish inventory and prevent stock outs.

Continuous cycle counts

Eshopbox conducts periodic cycle counts to ensure every item in your inventory is accounted for. Item level traceability provides detailed information about each item and its status — whether it is in stock, packed, shipped or being returned.

Bottom line

Now that you know how to calculate inventory accuracy and ways to improve it, you can strive for 100% inventory accuracy. This will help you stay in complete control of your inventory, improve your customer experience and reduce leakages.

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