How Do Inaccurate Inventory Records Erode Operational Efficiency?

By Herb Billings
July 14, 2020

Retailers – do your omnichannel strategies suffer from inaccurate inventory records?  Of course they do, and the increasing importance of BOPIS, click & collect, curbside pickup, “retail-to-go” and ship-from-store make inventory record accuracy an important cornerstone for omnichannel success.

Inaccurate inventory records are a significant drain on operational efficiency!

In a previous article we found that truing up your inventory records with more frequent counts boosts your sales.  An equally important benefit of accurate inventory records is efficient operations.  We were first alerted to this by one of our clients who told us “our stores are much happier in the weeks immediately following a physical inventory.”  This observation was all about omnichannel fulfillment, but the impacts go much deeper.

Shortages

A shortage occurs when an item’s actual count in the store is lower than the system’s inventory record.  Shortages often result in late replenishment orders which lead to unknown out-of-stocks (see “How Do Inaccurate Inventory Records Cause Lost Sales?”).

The item’s “unknown” out-of-stock condition persists until a customer attempts to purchase the item through a digital sales channel.

Late replenishment order graph

The negative effects of shortages on operations are clear to see.

BOPIS / Click & Collet
  • The order is allowed because the store’s inventory record shows positive units
  • A fulfillment specialist wastes time looking for the item
  • In many cases, a second (or even a third!) employee wastes time looking for the item
  • A store manager or assistant must then cancel the order and initiate a refund
  • This likely results in an unsatisfied customer jeopardizing future sales
  • Somebody must adjust the inventory record for that item
Ship-From-Store diagram
  • The order is allowed because at least one store’s inventory record shows positive units
  • The system sends the order to the store that is most likely to have the item
  • A fulfillment specialist wastes time looking for the item
  • In many cases, a second (or even a third) employee wastes time looking for the item
  • Somebody must update the fulfillment status so the order can move to the next store
  • Somebody must adjust the inventory record for that item
  • If the order is not found in any store, a store manager or assistant must cancel the order and initiate a refund, or redirect it to a DC resulting in additional cost and unnecessary delay to fulfil the order.

Our clients also report lower morale for omnichannel fulfillment specialists as their out-of-stock orders increase.  Remember that inventory record accuracy degrades over time (see “Inventory Accuracy % Is Not Enough”).  Order fulfillment is generally much more successful immediately following a count than it is in the weeks leading up to the next count.

Typically retailers implement safety stock levels to avoid unknown out-of-stock conditions.  This prevents items from being sold through digital channels when the inventory record shows units below the safety stock threshold.  It reduces the likelihood of unknown out-of-stocks with a costly increase in inventory levels.  This amounts to throwing money at the problem, which could result in overstocks and future markdowns.

It’s important to note that shortages are only found and corrected when an order is placed for an unknown out-of-stock item, or when the store is supposed to count the item in a cycle count, category count or a full physical inventory.

Overages

Shortages are often the most analyzed and talked about example of inaccurate inventory records, but overages also exact a toll on operational efficiency.

An overage occurs when an item’s actual count in the store is higher than the system’s inventory record.  Overages often result in premature replenishment orders, meaning higher inventory levels and the potential for future markdowns if the items are not sold by the end of the season.

Overages are only found and corrected by a cycle count, category count or a full physical inventory.

Early Replenishment Order graph

Conclusion

Inaccurate inventory records cause wasted labor, employee dissatisfaction, increased inventory costs, dissatisfied customers who are unlikely to return, and of course, lost sales.  It is perhaps surprising that both shortages and overages result in increased inventory levels. 

Omnichannel retailers must maintain accurate inventory records to execute efficiently, reduce expenses, and increase sales.

Conducting inventory counts is the only way to true up inventory records.  The investment in counting targeted inventory more frequently is easily returned by not only the operational expense reduction resulting from more accurate inventory records but also increased sales.

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