How To Calculate Inventory Accuracy (And Tips To Improve It)
Updated 21 September 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Efficient inventory management helps businesses make informed purchase decisions and close sales confidently. Several companies use stock accuracy as a critical metric to gather real-time information on product sale trends to avoid overstocking and stockouts. If you are a supply chain professional or inventory manager or planning a career as one, knowing how to calculate stock accuracy can help you make better purchasing decisions in your role. In this article, we define inventory accuracy, share its formula, discuss how to calculate it, explain its importance and provide tips on improving your accuracy.
What Is Inventory Accuracy?
Inventory accuracy tracks any inconsistencies between a business's physical and digital inventories. It is a critical metric that helps inventory managers, supply chain professionals and warehouse operators measure the differences between their digital inventory and physical stock. It helps companies maintain an accurate track of their inventory, preventing shortages, stockouts, damages or theft of items. Companies use stock accuracy percentages to track and monitor the correctness of their physical stock levels.
For example, an 80% accuracy value indicates that 80% of the products listed in the digital inventory management system match what is available in the warehouse, retail outlet or other storage locations. The remaining 20% of the inventory listed in the inventory management system is unaccounted for or missing physically. High levels of stock inaccuracy signal storage or supply chain troubles.
Related: What Is An Inventory Manager? (Plus How To Become One)
How To Calculate It
You can apply the above formula to measure inventory precision using the following steps:
Select an item that you are going to measure.
Manually count the physical units you have of the specific item in the warehouse, retail outlet and other storage locations.
Next, identify the number of units of the item available in the electronic stock records.
Divide the number of units of physical stock by the number of units from the electronic records.
Multiply your answer by 100 to determine the accuracy percentage.
Formula To Measure It
The formula to calculate inventory correctness is:
Inventory accuracy = [Number of physical units of a particular item / Number of digital units of the item in the inventory management system or electronic records] x 100
The higher the value, the more accurate the inventory is. Companies often aim to achieve an inventory precision of 97% or higher.
Related: What Does A Storekeeper Do? (With Skills And Salary)
Example Of Stock Accuracy Calculation
Pretty Cases is a company that sells mobile phone cases. The employees manually count a total of 1500 phone cases at their warehouse. According to their records, they have 1600 mobile cases in stock. Using the above formula, they calculate the accuracy of the inventory by dividing 1500 by 1600 and multiplying the answer by 100. In this scenario, the answer is 93.75, which, when rounded, gives an accuracy value of 94. This means the company has a stock accuracy rate of 94%.
Methods To Calculate Physical Stock
The first step to calculating stock accuracy is manually counting physical stock. Here are two ways to help you track the available physical units of an item:
Start by splitting the warehouse or storage unit into designated zones. You can appoint two team members to count the stock in each zone. The two team members work separately to count the number of items in each zone. Once they have finished the task, they can compare their results. If the two team members have the same number, you can record it. If there is a mismatch, they recount the zone until they reach a consensus.
Add the number of units of an item from all zones and calculate stock accuracy using the formula discussed above. This method of physical stock-taking is known as inventory reconciliation and works best for brands with fewer units of items. Inventory reconciliation is not suitable for companies with large volumes of inventory as it may get too time-consuming and labour-intensive to count and tally physical stock manually.
Related: 14 Types Of Inventory (Plus Effective Management Tips)
If you are a large company with a substantial physical inventory, you can consider inventory valuation instead of inventory reconciliation. Inventory valuation refers to the cash value of unsold stock. In this approach, the first step is to calculate the cash value of the physical inventory. You can use barcode scanners to add up the value of the available stock. Next, divide this value by the inventory value you have on the electronic records. This method is helpful for companies with large inventory volumes, where the physical stock-taking is impractical or too time-consuming.
Related: Understanding Cost Of Goods Sold (With Formula And Methods)
Why Is Stock Accuracy Important?
Here are a few reasons why stock accuracy is a crucial metric for product-based companies:
Improves inventory management
An inaccurate inventory leads to supply chain and order fulfilment problems like product shortages or delayed orders. Accurate inventory helps improve inventory management by providing greater control over physical stock. It enables you to recognise selling trends and determine when and how much to reorder. This information allows you to maintain a consistent stock flow from ordering to fulfilment and replenishment.
Related: 8 Inventory Management Software Solutions (With Benefits)
Eliminates overstocking or stockouts
With stock accuracy, you can get better insights into the stock levels and make smarter purchase decisions. It helps you reorder products at the right time, so you do not run out of stock. Similarly, it provides a precise count of available stock, helping you avoid overstocking goods. It ensures that you have the proper inventory to satisfy customer orders while preventing dead stock from accumulating in the warehouse.
Reduces operational costs
Accurate inventory helps in reducing operational costs significantly. It provides timely insights into which products are selling well and those that remain in the warehouse for a long time. If you notice a particular slow-moving item, you can consider running a marketing campaign to promote it, bundle it with other best-sellers or stop ordering the product altogether.
Promotes inventory forecasting
Accurate inventory helps you improve inventory forecasting accuracy. You can make smart purchase decisions based on actual inventory data. This enables you to avoid common forecasting mistakes like ordering too much of the same item or failing to predict seasonal demand.
Helps identify and eliminate inventory shrinkage
Inventory shrinkage is when the actual stock is lesser than the recorded balance in the inventory management system. By prioritising accurate inventory, you can identify discrepancies in the electronic records and rectify them as soon as possible. Inventory shrinkage also protects the business from fraud or theft. Examining the inventory records periodically helps you identify missing stock and determine its reason.
Improves customer experience
Maintaining accurate inventory helps in improving customer satisfaction. Accurate inventory helps companies streamline the fulfilment process, resulting in faster deliveries and satisfied and loyal customers. Additionally, it provides greater visibility into product movement, allowing you proactively stock the shelves with in-demand items. For example, you are not likely to accept new orders when you do not have specific items.
Improves cash flow and saves money
With accurate inventory tracking, you can avoid spending money on slow-moving or dead stocks and improve business cash flow. It prevents wasting capital on excess inventories, improving the organisation's liquidity. Additionally, tracking stock helps supply chain professionals and warehouse operators make quicker and smarter decisions about available stock.
Related: Format Of A Cash Flow Statement (With Methods And Examples)
Tips For Maintaining Accurate Inventory
Here are a few tips that can help improve a company's stock accuracy:
Organise the warehouse. A systematic and orderly item organisation in the warehouse makes it easy to locate products for customer orders and ensures that warehouse operators store inbound stocks efficiently.
Standardise storage. Ensure that it is easy for team members to locate products quickly by using standard storage bins and pallets that improve warehouse organisation and make item retrieval easy and quick.
Document the location of each item. You can use a spreadsheet or other software programs to track the exact location of a product in the warehouse. This helps you locate products quickly when fulfilling customer orders.
Add barcodes to all products. Invest in a software program that prints a label with barcodes so that you can quickly track products. Printed labels improve readability as you can scan barcodes to locate an item.
Upgrade the inventory management system. An advanced inventory management system can help you track incoming and outgoing goods in real time, helping you avoid discrepancies between physical and digital stocks.
Make double-checking a standard procedure. When counting inventory in the warehouse, you can instruct your team members to double-check their counts. This helps avoid human errors.
Conduct regular cycle counts. Cycle counting is manually measuring stock periodically without interrupting other operations. Depending on the business size, you can conduct regular inventory counts weekly or fortnight to improve accuracy.
Explore more articles
- How To Write Job Descriptions (With Example And Tips)
- Infrastructure Monitoring Tools (With Features And Examples)
- What Is A Contingency Plan? (Importance And Example)
- What Are Net Earnings? (With Steps For Calculation)
- How To Create A Customer Journey Map: A Complete Guide
- What Are The 3 Retail Marketing Types? With Examples
- What Is Market Share And How To Increase It In Business
- How To Improve Business Conversation Skills (With Tips)
- Guide: What Are The Stages Of The Product Life Cycle?
- How To Apply A Hanging Indent In Word: A Comprehensive Guide
- 25 Zoom Icebreakers To Start Your Next Team Meeting
- Best Engineering Courses For A Rewarding Career And Salary