By Herb Billings
May 7, 2020
Just what does inventory accuracy mean in a retail environment? How is it calculated? Why is it important? These are a few of the questions I will answer in upcoming articles. Together we will dig deeper into the gory details in the coming weeks.
Inventory accuracy measures how closely the number of items in a retailer's system matches what actually exists in the stores at the SKU level.
Accurate inventory records are crucial for a successful omnichannel strategy. Inaccurate records lead directly to unhappy customers, lost sales, and wasted labor.
First let’s discuss the formula – we have seen a number of ways to calculate inventory accuracy. Our preferred method is the ratio of the sum of the absolute unit variances divided by the total store stock on hand units (SOH), subtracted from 1.
Now let’s apply this to an example. As you can see, half of the SKUs have counts that match their SOH units. The other SKUs show variances with both overages and shortages. Using our formula above, the inventory accuracy % is 1 – (13 / 206) = .937 or 93.7%.
Why use absolute variance instead of net variance? Using a net variance here hides errors by treating an overage for one SKU as a fix for a shortage in another SKU. Since inventory accuracy is all about accuracy at the SKU level, we must use an absolute variance for full visibility.
Every retailer experiences inaccurate inventory records to some extent. Our clients execute tens of thousands of store counts with us each year. We find inventory accuracy percentages vary wildly between 20% and 97%, depending on the time between counts, market segment, and corporate culture.