The costs of having less than 99% warehouse inventory accuracy

Inventory accuracy is the difference between physical inventory and recorded inventory data. It is an important aspect of supply chain management because firms that allow their inventory accuracy to decline suffer many dangers. Misleading inventory levels may make it seem that these firms have more inventory than they actually have, which drives the organizations to sell goods that are not there and can result in disappointed consumers. Inventory data that isn’t accurate can also hide real stock, which can cause stock to sit in a warehouse until it’s no longer useful.

The increased carrying cost of inventories is a related issue. To obtain a better picture of how much additional cost might be attributed to carrying inventory, APQC evaluated data from its Open Standards Benchmarking in logistics. The data shows that the difference in inventory value as a percentage of sales between the best-performing and worst-performing firms is almost 11 percent:

16 percent: lowest performers
9.4 percent: median performers
5.2 percent: Top performers

This difference in inventory holding costs equates to $108 million for a company with $1 billion in revenue!

Companies with the very highest level of inventory accuracy spend just 5% of total product cost on inventory. Bottom performers spend about 3 times more.

Aside from cheaper inventory carrying cost and more pleased customers, increased inventory accuracy can contribute to improved performance in many other warehouse processes. A faster dock-to-stock cycle time, more on-time supplier deliveries, an increase in the number of sales orders completed on time, less time wasted searching for inventory and so on. All of these are linked to an improvement in inventory accuracy, according to APQC’s Open Standards Benchmarking database.

The above measurements have the potential to have a ripple effect throughout the whole supply chain. When incoming goods arrive within the allocated time window and are swiftly transported put-away into the warehouse, those items are ready for client orders sooner. Faster processing and delivery of items leads to happier consumers and cheaper inventory carrying cost.

How to improve inventory accuracy?

What steps can an organization take to increase inventory accuracy by one percent (or even more)? The key to inventory accuracy is generating visibility.

It all starts with a proper Warehouse Management System (or ERP) that is connected to the organization’s order management systems ensuring accurate order information, product availability, and a repository of what is stored within the warehouse.

A potential next step is that organizations can engage with suppliers and carriers to collect real-time data on inbound deliveries so that the business can precisely mark in the systems when items arrive and are accessible. To improve the accuracy of inventory counts, it is important to find and fix flaws in logistical procedures that lead to wrong counts.

In a competitive market like this, settling with a WMS only is not sufficient anymore. Once a solid process is in place and basic inventory data is consistently stored in the WMS, one should leverage this data to deploy more advanced technology. This can range from relatively expensive and impactful solutions like robots to more accessible software-based solutions utilizing big data or artificial intelligence. Powerhouse AI is an example of that. These solutions function as an add-on to a WMS and can provide a warehouse with significant productivity- and accuracy gains as human interference and manual work are minimized.

Regardless of this, organizations must make a concentrated effort to track inventory accuracy and performance measures to guarantee that any initiatives are effective. This helps firms to assess whether they should revisit their inventory accuracy plan to see if any improvements are needed. Monitoring performance also helps enterprises to measure themselves against other companies.

Inventory accuracy, according to APQC’s findings, may do considerably more than merely lowering inventory carrying costs and minimizing stock outages. Improving inventory visibility may have an impact on a wide range of logistical activities, from receiving incoming commodities to processing orders. Although these initiatives may entail expenditures in new technologies and data monitoring, they will eventually have a considerable return on investment.

Get a demo today