Issues with inventory accuracy, such as over reflecting available stock, can affect every link in the supply chain. Customers will submit orders for items that are out of stock, the warehouse won't be able to fill the orders in accordance with anticipated SLAs, and the anticipated shipping windows will be missed.
According to estimates, inventory problems cost the economy $1.1 trillion annually. Profit margins are eroded by issues like shrinkage, stockouts, and the expenses related to overstocking. Some businesses are completely unaware that it is happening.
Inventory inaccuracies affect every link in the supply chain
In one of our previous articles we touched upon several methods to improve warehouse inventory accuracy. This article will focus on the costs of not being a top performing warehouse with respect to inventory accuracy: the effects on your warehouse processes and clients and the costs in hard dollars.
According to the book “World-Class Warehousing and Material Handling” (Edward Frazelle) there are two core types of accuracies within a warehouse:
"Garbage in, garbage out" is a phrase you may be familiar with. Operations involving warehousing are nicely suited to this term. You will undoubtedly ship "garbage" in the form of faulty products and incorrect orders if you receive "garbage" in the form of defective products in defective packaging. You run the risk of sending erroneous or damaged goods out the door if you let damaged or incomplete deliveries through the door. There are two inbound indicators: put-away accuracy and inventory accuracy. High inbound accuracy gets a warehouse ready for high outbound accuracy.
Garbage in, garbage out. Accurate inventory starts at inbound
Put-away accuracy is the number of put-away transactions that are done in the right system-directed put-away location. If you put something away wrongly, it's hard, if not impossible, to fix. The accuracy of a warehouse's inventory is measured by the number of inventory locations that hold the amount of inventory that was recorded by the system.
There are two ways to measure outbound accuracy: the accuracy of picking and the accuracy of shipping. Picking accuracy is the percentage of order-line picks that are done with the right SKU and the right amount. Shipping accuracy is the percentage of shipping-line transactions that were done with the right SKU and the right amount.
Companies with the highest levels of inventory accuracy spend just 5% of the entire cost of the product on inventory, according to our previous article. Costs are three times higher for bottom performers.
The shipping accuracy of the top-performing warehouses in the world is around 99.997%. Warehouses that are satisfied with a 98% accuracy level for example should keep in mind that a 1% increase in inventory accuracy, already results in a considerable increase in orders supplied on time, a shorter dock-to-stock cycle time, and more sales orders completed on time, according to APQC's Open Standards Benchmarking database.
A single shipping mistake costs between $50 and $250, on average
Accuracy errors can cost anywhere from $10 and $250 for each mistake, depending on the cost of the items and the level processing required. This can potentially result in hidden costs worth millions of dollars.
What does a 1% error rate actually mean? Consider the following straightforward scenario for a business that ships 1,500 orders every day, 260 business days per year. If you consider an "average" cost of $125 per error, you may anticipate an increase in costs of $487,500 per year for a 1% accuracy error rate.
Imagine you're in sales and your system tells you there are 20 goods available, but you know from experience that this information isn't always accurate. Do you ask someone to search for it or do you just fulfil the order and handle the consequences later? Every minute lost looking for goods has an effect on another area of the company, with disgruntled clients and employees as a consequence.
The above example just touches upon a couple of factors that an inaccurate inventory leads to. Below, we list some of the other factors, which in the end all come down to dissatisfied customers and an inefficiently run warehouse.
Poor order fulfilment and inventory accuracy will have a terrible impact on customer service. Customers are not aware of all the steps taken in the background to fulfil an order. They only know that they could have bought it from a different shop, paid too much, or received an incorrect order.
B2C warehouses are mostly affected by this. 33% of customers, according to American Express, will think about switching businesses after just one negative customer service encounter. Furthermore, it takes 12 happy experiences to undo the harm produced by one unpleasant encounter. And the same customer will typically tell 9 individuals about a positive brand experience but 16 people about a negative one.
When forecast accuracy is low, planners frequently make up for it. They might adjust the forecast based on their instinct. Alternatively, they might order additional goods to ensure that the operation gets everything it needs.
If the forecast is off, trends cannot be recognized and demand peaks cannot be anticipated. Drilling down to data patterns can reveal seasonal microtrends and shifts in consumer preferences that would otherwise go undetected. This can be disastrous because the supply chains of many businesses can stretch to even 90 days.
Many warehouses establish a safety stock level due to high rates of erroneous inventory records. Safety stock levels reduce the damage caused by wrong inventory records by raising the minimum number of units that a warehouse should store.
A form of overage that attracts significantly less attention is when the inventory records are zero or fewer. These products are not displayed in the system and lead to a lost selling opportunity.
Zebra claims that decreasing overstocks and stockouts can help save up to 10% of inventory costs.
Managing your inventory will only become more challenging due to major logistics trends and increased expectations by customers. Because of these expectations, warehouses and distribution facilities are under constant pressure to complete orders correctly the first time. Nonetheless, many warehouses attempt to meet such goals while depending on legacy technologies and procedures such as manual stocktake and inbound processing.
Powerhouse AI assists warehouses to get a better grip on their warehouse inventory in up to 40% less time and without human error compared to barcode scanners or traditional paper processes. This is achieved by way of a(n) (phone) app that automatically counts and checks goods based on pictures and communicates with your WMS in real-time. For more information on how Powerhouse AI can improve your warehouse inventory accuracy, get in touch.