Metrics that Matter: Inventory Accuracy

Inventory accuracy is arguably the most important metric for manufacturing operations. Without adequate levels of accuracy, the company cannot plan or forecast; the supply chain will falter; costs will rise; customers will be unhappy; and the shop floor will suffer from poor productivity and throughput.

That’s a big effect from a simple metric whose importance is often underrated. Let’s explore this crucial predictor of manufacturing success.

What is Inventory Accuracy?

Inventory accuracy is usually stated as a percentage, as in “we have 95 percent inventory accuracy.” Many people might think this means 95 percent of the on-hand balance records are correct. But to be a true measure of accuracy, the company needs four factors to be right:

• On-hand balance totals must be accurate.
• Locations and location counts must be correct.
• Item or bin labels and identification must be present.
• If the company uses serial or lot number tracking, an accurate inventory record must also correctly identify the lot or serial numbers on hand by location.

There’s only one way to be accurate. Accuracy means that when an employee goes to the location on the record, the part will be there, in that exact location, in the recorded quantity by lot or serial number and correctly labeled.

Why is Accurate Inventory Important?

Inventory is one of the most valuable assets for a company. A lack of inventory can spell trouble when there is unforeseen demand, which can make it difficult to meet sales goals. Inventory can also become a liability if there is an overabundance, introducing risks like damage, theft and spoilage. Inventory management systems can help to mitigate these risks by providing the visibility needed for proper business forecasting and planning, especially when dealing with complex supply chains. Having inventory accuracy:

• Improves inventory management practices
• Minimizes stockouts and overstocking
• Reduces operational costs

Taking Accurate Inventory Can Be Challenging in Multiple Ways

Inventory is not accurate if:

• The on-hand balance is off.
• The total count is right but the item has multiple locations and the specific location count is wrong.
• The lot number is wrong.
• The serial numbers in the location differ from the record.
• The item is not in the designated location, even if it’s off by a single bin.
• The item is in multiple locations but not all locations are part of the record.
• Items are misidentified or labeled incorrectly, even if the on-hand count is right.
• Items are mixed in the bin.
• You magically find items not included in the on-hand balance or location records.

Ways to Improve Inventory Accuracy

It’s easy to see that there are more ways to be wrong than to be right when it comes to inventory accuracy. In case any of these scenarios sound familiar, here are some best practices to consider when attempting to improve accuracy.

Standardize your Bins or Pallets

Tidiness counts when it comes to accurate inventory storage and using a few standard sizes of bins and pallets can help keep the warehouse neat. When you have mixed bin sizes on a single rack, it’s easy for the small bins to get shoved behind larger bins, where they may remain invisible for months. During the time the bin is hidden, your inventory records may reflect a balance that your staff can’t locate, resulting in lost production or worse, unhappy customers.

Be a Label Fanatic

Some warehouses write part numbers on cartons using markers or pens, which can cause potential errors. Handwritten labels can also be hard to read. The person writing the part number may transpose digits, resulting in mislabeled goods, or the carton may be reused, resulting in mislabeled goods.

Implementing a good barcode label printing program is an important step in improving accuracy. Labels should include human-readable numbers as well as barcodes, and labels should be large enough to be easily read from a picking distance.

Use Cycle Counting for Continuous Improvement

Many companies start a cycle counting program, count 20 items and pat themselves on the back when 19 items match the total on-hand. Yes, this could be construed as 95 percent accuracy, but it might not be. Make sure to validate that locations, lots and labels are accurate as well as the total.

Oftentimes, the real issue with cycle counting is that people misunderstand its purpose. The idea is not to simply correct errors in the on-hand balance and call it a day. Cycle counting is, first and foremost, a quality control procedure.

If you find an error during a cycle count, it should be standard operating procedure to track down how the error occurred and to adjust the process so that error can’t happen again. This is how continuous improvement on the shop floor works, and it should be how continuous improvement in your inventory process works as well.

You may uncover training issues, equipment issues, staffing issues or any number of other problems. The point is to resolve the issue, not bury it.

How to Calculate Inventory Accuracy

To calculate inventory accuracy, divide the number of counted items that perfectly match every aspect of the record by the total number of items counted. The resulting number is your inventory balance accuracy. QAD Cloud ERP includes tools and reports to make cycle counting and inventory accuracy calculations simple.

What challenges are you finding most difficult when it comes to inventory accuracy? Let us know in the comments section below.