Inventory is the lifeblood of any retail store. With units in stock, you have products ready to sell and make a profit.
…If only it was that easy.
Inventory control is a major challenge for all retailers, regardless of whether they stock 40 SKUs or 400. The last thing you want to do is promise a product for a customer, only to realize that it isn’t in stock.
Poor inventory accuracy contributes to stockout problems. It’s an order fulfillment challenge the pandemic caused for almost a quarter of merchants, and happens when the stock in your storeroom inventory doesn’t line up with the volume you’ve recorded electronically.
This guide discusses why it’s important to monitor inventory accuracy, with bonus tips on how to calculate and improve your own.
What is inventory accuracy?
Inventory accuracy measures the difference between recorded stock and actual inventory. If you have 100 units in your stockroom but 80 recorded in your inventory management system, for example, your inventory accuracy would be 80%.
The importance of inventory accuracy
- Avoid over or understocking
- Ensure accurate inventory valuation
- Prevent order delays
- Reduce dead stock
Inventory accuracy is one of the most important retail metrics. Let’s take a look at its impact on your brick-and-mortar store.
Avoid over or understocking
Inventory is hard to manage. Both under- and overstocking can have disastrous impacts on your business.
Understocking drives customers away because the product they want to buy is sold out, costing retailers an estimated $1 trillion per year. Excess inventory, on the other hand, leaves you with too much money tied up in unsold goods.
Inventory accuracy helps you get loyal customers. They won’t order products that are out of stock and this is pretty helpful for them. Moreover, you’ll have a better idea of which products are selling, so you can push them further and make the whole experience smoother for customers. This, in turn, will help your business grow and improve consumer loyalty.
Jared Mosser, head of marketing at Thrive by Shopventory, adds: “Let’s look at a boutique home goods store for instance. Sure, wrong inventory levels might mean turning a shopper away due to stockouts, but it also has implications on your yearly taxes or ability to open up more locations.”
Take the guesswork out of restocks
Only Shopify helps you make smarter inventory purchasing decisions. See your most profitable and popular items, forecast demand, get low stock alerts, and create purchase orders without leaving your POS system.
Ensure accurate inventory valuation
Inventory valuation tells you how much money you have wrapped up in unsold inventory. Retailers rely on it to maximize profits and ensure that ending inventory on their year-end accounts is accurate.
Laura Weisberger explains how this works when forecasting inventory for her business, Fervor Candle Company: “My business offers free samples with every order. These samples are deducted from our inventory in a separate category in a spreadsheet, so I can best determine the quantity of supplies I will need for an upcoming product release.
“If my sales goal is 100 of a particular item, I will also need at least 100 samples, assuming each product is a unique order. If I did not account for this in my inventory, I might only order enough supplies to make 100 products and end up sampling out a significant quantity of another item, reducing the number of sales I could capture from that alternative product.”
Laura adds, “Those samples are lost sales and cost me money to produce, meaning I have actually lost money when I could have made a profit had I properly managed my inventory and supply needs.”
💡 PRO TIP: When you use different platforms to run your online and retail stores, inventory discrepancies are more likely to happen. This can lead to more frequent inventory counts to reconcile differences and ensure stock levels are accurate.
Prevent order delays
The Amazon effect is in full throttle—consumers are conditioned to expect products to be in their hands as quickly and cheaply as possible.
The problem: shipping delays and order fulfillment hiccups ultimately lead to inventory shortages. Customer orders can’t be completed. The customers have no choice but to wait weeks for stock to be replenished. That’s a mistake you can’t afford to make.
Sylvia Fountaine, founder of Bowl and Pitcher by Feasting at Home, adds that “Having accurate inventory counts is not only important for keeping organized, but for staying accountable to your vendors, suppliers and customers.
“We work a lot with local artisans, so an inventory mistake can mean less income for them and inconsistent supply for eager customers. If a product takes weeks to make and you aren’t aware your supply is low, you’ll be dealing with backorders and risk loss of interest in a product that would otherwise sell out consistently.”
Reduce dead stock
Dead stock is inventory that you’re unable to sell. This could happen if the product has expired, no longer in style, or the prime season for sales has passed.
Inaccurate inventory can lead to your stockroom becoming cluttered with dead stock—and ultimately, no profit. If you think you’ve got 50 units of a summer product but have 150 in the stockroom, for example, you’ll work to sell just 50 and build up 100 units of dead stock.
Not only that, the costs associated with running a retail store are increasing. Retailers face a 140 million square foot shortage by 2024, driving up warehousing rents by 10% in a single year. Make sure that dead stock doesn’t take up precious space you already have.
Accurate inventory counts can help optimize your storage space. By knowing exactly how much space each item takes up in your warehouse or storeroom, you can efficiently use all the space you have.
💡 PRO TIP: Only Shopify POS unifies your online and retail store data into one back office–customer data, inventory, sales, and more. View easy to understand reports to spot trends faster, capitalize on opportunities, and jumpstart your brand’s growth.
Inventory accuracy challenges
Some of the common inventory accuracy challenges include shrinkage, poor inventory systems, and suboptimal inventory storage. Let’s examine each of these challenges.
Retailers struggle to maintain inventory accuracy due to shrinkage. This happens when items seemingly disappear, leaving a discrepancy between your recorded inventory items and actual stock.
Reasons for shrinkage include:
- Administrative errors
- Employee theft
- Return fraud
It’s a problem that costs retailers $61 billion per year. Have a loss prevention strategy in place to minimize shrinkage. That could mean clear return policies, strict accounting procedures, and investing in staff training.
Lackluster inventory management systems
The job of an inventory management system is to synchronize stock. It should act as the single source of truth for stock levels, but poor systems—like those without the ability to manage stock across several stores—can cause inventory inaccuracies.
Sylvia Fountaine had experience being a chef before she started selling products. She says, “Adapting to kitchenware sales online was a challenge. The website would tell customers we had a certain number of bowls in stock, but then someone would come into our physical store and buy us out, with no time to adjust the website.
That’s what Shopify has helped with the most: cohesion between our online store and physical store’s inventory management.
💡 PRO TIP: Shopify POS comes with tools to help you control and manage your inventory across multiple store locations, your online store, and warehouse. Forecast demand, set low-stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
Sub-par inventory storage
It’s hard to keep track of inventory if it’s scattered across an unorganized stockroom. Your electronic inventory records might show 500 units in stock. But if SKUs are separated on different shelves or piles, a thorough count might reveal 20 more that are unaccounted for.
How to calculate inventory accuracy
To calculate inventory accuracy, you must understand the inventory accuracy formula and the variables associated with it.
Inventory accuracy formula
To calculate the accuracy of your inventory, manually count the number of units currently in stock. Divide that number by the figure in your inventory management system (IMS) and multiply by 100.
Let’s put that into practice and say you’ve counted 500 units in your storeroom. Your electronic records show that you should have 550. Using the inventory accuracy formula:
(500 / 550) * 100 = 90.9% inventory accuracy rate
Physical inventory counting
Calculate how much inventory you have in-stock with a physical stock check. Prepare the area you’re going to count, and manually tally up how many SKUs you see in each section, using pen and paper, a mobile POS system, or a barcode scanner.
Some retailers prefer the inventory valuation method to determine how accurate their stock levels are. In this case, you’ll divide your physical stock value by the dollar value recorded in your inventory system. If you count $500 worth of inventory in your stockroom but have $600 accounted for electronically, you have an 83% order accuracy rate.
While it gives a rough overview of how accurate your inventory records are, it’s not a foolproof method—especially if you’re selling products at different price points. A $50 discrepancy might look like a big problem, but be just a single high-priced product unaccounted for.
What is a good inventory accuracy rate?
Research shows that the average inventory accurate rate is 65%. However, optimal inventory accuracy is 100%—the closer you can get to that figure, the easier it will be to run your store efficiently.
How to improve inventory accuracy
- Regular inventory audits
- Organized inventory storage
- Leverage technology
- Limit access to inventory
- Hire an inventory specialist
- Unify inventory management systems
Let’s take a closer look at some of the ways you can improve your store’s inventory accuracy.
Regular inventory audits
An inventory audit helps uncover discrepancies between your actual stock and recorded amounts. The more often you do them, the quicker you can rectify discrepancies that worsen your inventory accuracy.
Popular inventory processes include:
- ABC analysis: Categorizing stock based on its value, and prioritizing inventory accuracy for your top-performing products.
- Cycle counting: Counting a small group of products at once to confirm actual stock versus recorded inventory. This causes minimal disruption to your store operations.
- Inventory layers: Grouping inventory that share similar characteristics—such as their cost—and counting the number of units within each.
We use cycle counting for continuous inventory management and accuracy. One of the best things about this approach is that it helps us identify key problem areas so that we can take timely action. We see it more as a quality control procedure, and it eliminates considerable physical inventory expenses.
Organized inventory storage
It’s easier to keep track of inventory that isn’t hidden in the depths of your stockroom. Organize your inventory storage so that it’s easy to find (and count) items during each physical stock-take. That might mean:
- Designated shelf space for each SKU
- A labeling system to maintain order
- Grouping similar products near each other
- Regular stockroom organization days to tidy up
Research shows that more than half of retailers are still using manual processes to manage supply chain logistics. That leaves them exposed to human error.
Instead, use barcode scanners or radio-frequency identification technology to improve inventory accuracy. The latter works by placing a tag on each product. A RFID scanner reads the tag and stores its information on a database, like an IMS or warehouse management system (WMS).
By placing a RFID tag on each stock that we receive, we’ve automated a significant portion of the process. As these tags get scanned, the inventory count gets automatically updated. This technology has significantly reduced our margin of error, and our accuracy has improved.
Technology can seem like an unnecessary investment for a small store. But the average retailer has an inventory accuracy of just 65%. For companies that use RFID, this increases to 99.6%.
Limit access to inventory
Discrepancies can crop up if too many people are entering your stockroom and disrupting its harmony. Limit who can access your inventory to prevent this from becoming unmanageable.
Similarly, employee theft can be the cause of low inventory accuracy. Make sure that retail staff who have access to the stockroom can be trusted, and kit the area out with CCTV to protect your merchandise from thieves.
💡 PRO TIP: Want to control which staff can count, receive, and adjust inventory quantities? Set roles and permissions to set boundaries on what staff can and can’t do when logged in to your POS system, like accessing its inventory management tools.
Hire an inventory specialist
There are many moving parts that make up a successful store. While inventory is arguably one of the most important, it doesn’t have to be a task that takes up most of your time—especially if you’re lacking the skill, interest, or commitment that inventory management requires.
Consider hiring an inventory control specialist if it’s too big of a job to handle yourself. Someone with previous experience managing inventory can advise on the best way to count your stock, assist with a cycle counting program, and run regular audits to maintain accuracy. That frees up extra time for you to work on the things you’re best at.
Unify inventory management systems
Warehouses, stockrooms, the shop floor, pop-up shops—retailers have inventory scattered across several places. The same stock depletes through a variety of different sales channels. How can you keep up?
The answer: Have one platform that records stock levels across multiple locations to improve inventory accuracy.
We have policies in place that state when a product should be barcoded. These are automatically recorded in our inventory software to keep track and stay on top of our inventories.
Shopify POS syncs stock levels as you receive, sell, return, or exchange products in real time. It’s a single source of truth for your inventory data, giving you an always-updated bird’s-eye view of how much inventory you have, where.
Improve your store’s inventory accuracy
Inventory accuracy is a critical KPI for any retailer. From forecasting demand to reducing dead stock, use the formula given above to regularly assess your inventory accuracy rate.
Not meeting the benchmark? Trial ways to improve accuracy, such as RFID technology or limited access to your stockroom. The closer you get to 100%, the easier it will be to run a profitable retail store.
Manage your inventory with confidence
Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Compare inventory costs to revenue, see which items are selling out or sitting on shelves, forecast demand, and more.