The hidden costs of poor inventory accuracy

Is your inventory only accurate once a year? Do you understand the real consequences?

Inventories are the backbone of global supply chains. Warehouses form a network of static inventories, typically housed in physical buildings. While most of a company’s inventory is held in warehouses, some may be in transit, meaning not all inventory is physically in the warehouse at any given time. Still, all stock counts as part of the total inventory. What does this mean?

Defining Inventory vs. Stock

When discussing inventory, it's essential to recognize that interpretations can vary. To clarify, there's a saying: "All stock is inventory, but not all inventory is stock”.

In simple terms, stock refers to products ready for sale and delivery to customers. This includes finished goods and other sellable items that generate revenue.

In contrast, inventory encompasses all materials owned by a company. This includes sellable stock, semi-finished goods, parts, raw materials, and work-in-progress (WIP) items. Essentially, inventory consists of everything needed to create marketable goods.

Understanding this distinction allows businesses to manage their resources better and improve operational efficiency.

In practice, stock and inventory may be used interchangeably, particularly by retailers or distributors who primarily deal with sellable items. However, manufacturers handle a broader range of materials, many of which are not sellable—such as raw materials—so they use these terms more precisely, depending on the context.

Now that we’ve defined the difference between inventory and stock, we can discuss inventory accuracy. Inventory accuracy refers to the alignment between your actual (physical) inventory and the inventory recorded in your IT system (e.g., ERP or WMS). To determine accuracy, a physical inventory count is required. For example, if your IT system shows 20,000 units but your physical count shows 18,000, your inventory accuracy is 90% (18,000 / 20,000 * 100%).

The physical counting process typically involves counting stock-keeping units (SKUs) one bin at a time. Comparing all SKUs in the warehouse against IT systems at once is usually impractical, as the same SKU might be stored in multiple bins across the warehouse.

Isn’t physical counting a significant task? Traditionally, this has been done annually in a “big bang” approach, where the entire inventory is counted simultaneously. This method is time-consuming and resource-intensive. While laws and regulations often require it, the primary benefit should be for your operations. Additionally, with Industry 4.0 and digital advancements, physical counting may no longer be necessary. More on that later.

What’s the Ideal Inventory Accuracy?

What's considered a good level of inventory accuracy? ?97% accuracy is typically acceptable, while anything lower can lead to issues. The standard benchmark is 99.5%; however, different industries have different requirements. For instance, in the automotive industry, where lean processes are crucial, 97% accuracy could be disastrous, and even 99.5% may only be the minimum requirement.

While these benchmarks provide guidance, real-world performance often needs to be improved. A study by Auburn University found that inventory accuracy in the retail sector ranges from 65% to 75%. Another survey by CAPS (Center for Advanced Procurement Strategy) reported an average of 91%. Retailers face unique challenges as customers have direct access to products, increasing the risk of theft, damage, or misplacement.

Why Do Inventory Discrepancies Happen?

There are three main reasons for discrepancies between physical inventory and system records:

1. Inventory Shrinkage refers to losses not reflected in the system, such as theft, fraud, damage, spoilage, or transaction errors. According to the National Retail Federation (NRF), the average shrinkage rate is about 1.6% of sales.
2. Misplacement – Items placed in the wrong location can result in inaccurate counts, as the physical stock seems lower than it is. This can lead to unnecessary reordering or lost opportunities if the items are later found to be obsolete.
3. Wrong Scanning—Scanning errors during transactions can cause “ghost inventory” (overestimation) or “hidden inventory” (underestimation), impacting your ability to meet demand.

The cost of poor inventory accuracy

Inventory accuracy significantly impacts your business. Inaccurate records make managing Purchase-to-Pay (P2P) and Order-to-Delivery (OTD) processes difficult.

• P2P: Inaccurate inventory leads to overstocking or understocking. Overstocking ties up capital, reduces inventory turnover, and increases the risk of obsolescence. Understocking results in immediate pain, as you lack the necessary materials to fulfil orders.
• OTD: In the OTD process, poor inventory accuracy can prevent you from fulfilling orders, damage your reputation, lead to lost sales, and even penalties. Companies that value reliability and punctuality may stop doing business with you.

Beyond these operational challenges, poor inventory accuracy wastes time and resources. Warehouse staff spend extra time resolving discrepancies, and customer service teams must explain delays. Purchasing departments may expedite orders at higher costs, leading to inefficiencies.

How Konecranes Agilon ensures benchmark inventory accuracy

Konecranes Agilon’s automated storage system with Smart-WMS (Warehouse Management System) helps achieve benchmark inventory accuracy through three key components: the physical storage unit, Smart-WMS, and optimised processes.

1. Preventing Shrinkage: Agilon’s closed system—with physical walls, ceilings, and controlled workstations—ensures all transactions are logged. The system also takes pictures and weighs handling units, preventing theft, fraud, and recording errors.
2. Eliminating Misplacement: Agilon prevents SKU misplacement by handling one SKU at a time, automatically moving items to their correct locations within the system.
3. Avoiding Wrong Scanning: Even in the rare case of a mislabelling error, Agilon’s weighing system flags discrepancies, allowing operators to correct mistakes before they affect inventory records.

The future: Continuous inventory counting

Traditional annual inventory counts are now obsolete. With Agilon, inventory is automatically counted during regular operations. Each putaway and picking transaction is verified in real time, ensuring continuous inventory accuracy. This way, inventory is continuously tracked and counted every day, hour, and second without needing a separate physical count.

Agilon automated storage and Smart-WMS elevate your inventory operations to a new level of accuracy and efficiency. Enhancing accuracy streamlines your processes, allowing operators to focus on tasks that drive real value. The result? A better work environment and more robust business outcomes.

Agilon's impact extends beyond just inventory. Are you ready to explore how it can boost performance throughout your operations?

Key takeaways for you?

We've gathered insights from various sources and extensive data to help you reach your full potential. Here are the key points:?

• Inventory vs. Stock: Stock refers to products ready for sale and delivery, while inventory encompasses all materials, including stock, semi-finished goods, raw materials, and WIP (Work in Progress).

• Inventory Accuracy: A benchmark accuracy of 99.5% is critical for effective operations, although 97% is often considered acceptable. Agilon helps you meet and exceed these standards, reducing the need for frequent physical counts.

• Common Causes of Poor Accuracy: Issues such as inventory shrinkage, misplacement, and incorrect scanning contribute to inaccuracies, disrupting your supply chain and leading to inefficiencies.
• Business Impact: Poor inventory accuracy affects key supply chain processes like Purchase-to-Pay (P2P) and Order-to-Delivery (OTD), resulting in under- or overstocking, increased warehousing costs, lost sales, and potential damage to your reputation.
• 100% Inventory Accuracy Advantage: With Konecranes Agilon's automated storage and Smart-WMS, you can eliminate these issues and enable your operations to achieve complete inventory accuracy.

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Discover the efficiency and precision Agilon & Smart WMS bring to your warehouse:

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