Inventory Accuracy KPI: How to Improve, Optimize, & Calculate

Allison Champion
5 min read
August 23, 2023


Imagine an online store specializing in handmade jewelry. At the beginning of the month, the store starts with 100 necklaces in its inventory. After selling 20 necklaces, the store should have 80 necklaces, right?

Let’s say that while the inventory management system shows 80 necklaces remaining, a physical count finds only 75. This discrepancy reveals an accuracy issue with their inventory.

Improving inventory accuracy is not just about numbers; it is about delivering on customer expectations, minimizing costs, and maximizing operational efficiency. By prioritizing inventory accuracy, ecommerce brands can lay a solid foundation for success in supply chain management. 

What Is Inventory Accuracy & Why Is It Important?

Inventory accuracy refers to the precision and reliability of recorded inventory quantities matching the actual physical inventory count in a brand’s warehouse. It is one of many essential inventory management KPIs for businesses as it enables them to effectively manage their supply chains, improve customer satisfaction, and optimize operations.

The Role of Inventory Accuracy in Supply Chain Management

In supply chain management, inventory accuracy is the cornerstone of efficient operations. Accurate inventory tracking data allows businesses to make informed decisions regarding procurement, production, and distribution. It ensures that the right products are available in the right quantities, minimizing stockouts and reducing excess inventory. By maintaining optimal inventory accuracy, businesses can streamline their supply chains, reduce costs, and improve overall operational efficiency.

The Impact of Inventory Accuracy on Customer Satisfaction

Inventory record accuracy directly influences customer satisfaction. Inaccurate inventory can lead to stockouts, delays in order fulfillment, and incorrect deliveries, all of which can frustrate customers and damage their trust in a business. 

Let’s use the example of the jewelry store again. What if customers purchased the remaining 80 necklaces that month, but when the brand went to fulfill those orders, they found out they were five necklaces short. That issue is not going to make for very happy customers.

On the other hand, high inventory accuracy ensures timely order processing, accurate shipment, and improved customer experience. By meeting customer expectations consistently, a brand can enhance loyalty, increase customer retention rates, and foster a positive brand reputation.

The Formula for Calculating Inventory Accuracy

Calculating inventory accuracy involves a simple yet powerful formula:

Inventory Accuracy (%) = (Actual Inventory / Recorded Inventory) x 100

For our hypothetical jewelry company, their recorded inventory was 80 and their actual inventory was 75. Plugging those numbers into the formula calculates their inventory accuracy rate:

93.75% = (75 / 80) x 100

Understanding the Components of the Inventory Accuracy Formula

The formula relies on two key components: actual inventory and recorded inventory. Actual inventory refers to the physical count of products present in a brand’s warehouse, while recorded inventory represents the inventory quantities recorded in their inventory management system.

What Constitutes a Good Inventory Accuracy Rate?

While an inventory accuracy rate of 100% is certainly ideal, it’s almost impossible to reach. A good inventory accuracy rate depends on the industry and business requirements. However, in general, an accuracy rate of 95% or higher is considered excellent. Achieving and maintaining a high accuracy rate ensures that a brand’s inventory data remains reliable and trustworthy, supporting supply chain operations and customer satisfaction goals.

The Consequences of Inaccurate Inventory

Inaccurate inventory records can have severe repercussions for an ecommerce brand. Let’s explore two major consequences: overstock and understocking.

The Risk of Overstocking and Understocking

Inaccurate inventory levels can lead to overstocking or understocking of products as well as dead stock. Overstocking ties up valuable capital in inventory that’s just sitting on a warehouse shelf, occupying storage space unnecessarily, and increasing holding costs. Understocking, on the other hand, results in stockouts, missed sales opportunities, and dissatisfied customers. Both situations negatively impact profitability and customer satisfaction.

The Effect of Inaccurate Inventory on Customer Retention

Inaccurate inventory disrupts order fulfillment processes, leading to delayed shipments, wrong item deliveries, or canceled orders. Such issues frustrate customers and erode their trust in brands. By contrast, accurate inventory levels enable brands to fulfill orders promptly, provide accurate shipment information, and deliver the right products on time. Positive customer experiences like these enhance customer retention and foster repeat business.

Strategies to Improve Inventory Accuracy

From enhancing customer satisfaction to optimizing costs and driving operational efficiency, accurate inventory management can determine the success or failure of an organization. To improve inventory accuracy, brands should consider implementing regular inventory audits and cycle counting.

Implementing Regular Inventory Audits

Regular inventory audits involve physically counting and verifying stock to identify discrepancies between recorded and actual quantities. These audits provide opportunities to correct any inventory inaccuracy quickly, uncover process inefficiencies, and ensure ongoing accuracy maintenance.

The Role of Cycle Counting in Maintaining Inventory Accuracy

Cycle counting is a continuous counting process where a subset of products is counted regularly, rotating through different areas of a warehouse over time. By counting a small portion of inventory consistently, brands can identify and rectify inaccuracies before they escalate. Cycle counting is less disruptive than full-scale audits and promotes ongoing accuracy monitoring.

The Importance of Standardizing Bins and Pallet Sizes

Standardizing bin and pallet sizes in a warehouse simplifies inventory tracking, reduces human errors, and facilitates accurate recording. Consistent storage configurations enhance the efficiency of picking, packing, and replenishment processes, minimizing the chances of inventory discrepancies.

Leveraging Technology for Inventory Accuracy

Leveraging technology can significantly enhance a brand’s inventory accuracy efforts and streamline warehouse operation. Brands can implement a warehouse management system, real-time tracking, and automation.

The Role of Warehouse Management Systems in Inventory Accuracy

Warehouse Management Systems (WMS) provide comprehensive tools for inventory management, tracking, and reporting. They automate data capture, improve visibility across the warehouse, and enable real-time inventory updates. Implementing a WMS ensures accurate inventory records and streamlines warehouse operations, improving supply chain KPIs.

How Real-Time Tracking Enhances Inventory Accuracy

Real-time tracking technologies, such as barcode scanning and radio-frequency identification (RFID), enable accurate and efficient inventory monitoring. These technologies minimize human errors, automate data capture, and provide instant visibility into stock movements, ensuring accurate inventory records.

The Impact of Automation on Reducing Human Errors

Automating inventory management processes reduces reliance on manual data entry and minimizes the risk of human errors. By integrating automated systems for order fulfillment, stock replenishment, and data capture, brands can improve inventory accuracy and optimize operational efficiency.

How Flowspace Can Help Improve Your Inventory Accuracy

Flowspace understands the critical role inventory accuracy plays in a brand’s bottom line and overall success. Flowspace’s comprehensive warehousing and fulfillment solutions are designed to help businesses achieve and maintain high levels of inventory accuracy. 

The order fulfillment platform by Flowspace effortlessly integrates with e-commerce platforms and various sales channels. This allows brands to easily monitor inventory, manage products, and generate sales order summaries in mere moments.

Moreover, Flowspace offers an in-depth product inventory management system, granting brands a full view of their stock. This enables brands to monitor their inventory in real-time, receive notifications when stock is running low, and derive insights to predict future product needs. As a result, brands can maintain the ideal stock quantity, sidestep low inventory scenarios, and cut down on surplus inventory expenses.

Reach out now and discover how a fulfillment company such as Flowspace can assist in preventing or handling overstock and fine-tuning your inventory management strategies.

Written By:

flowspace author Allison Champion

Allison Champion

Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing.

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