Inventory Accuracy: The Competitive Advantage
Inaccurate inventory, no matter the industry environment, will have a significant negative impact on a business – as companies like Amazon have shown, the more accurate the inventory process, the more successful a company can become. Inaccurate inventory results in a myriad of problems for an organization, including (but certainly not limited to) ineffective use of capital (for example, carrying extra inventory to compensate for a lack of knowledge regarding what is in stock), wasting valuable time (time spent locating inventory and making adjustments is an inefficient use of labor), purchasing issues (the purchasing process is affected by having to order inventory at the last minute or inaccurately thinking there was no stock or, conversely, not enough), customer satisfaction dilemmas (shipping wrong items or back-ordering items results in extra costs and losing customers) and financial loss (companies incur a financial loss when forced to write-off missing inventory).
Managing a company’s inventory is such a vital aspect of most businesses that without a proper management system in place, long-term profits can be affected because inefficiencies are bound to occur. As we all know, there are always negative consequences to improper management; in the long run, all of the aforementioned problems that can plague an organization will have a distressing effect on a company’s overall profitability.
The best way to ensure none of these negative effects occur is to put processes in place which will be able to efficiently track inventory and integrate all data into the company’s ERP system. Characteristics of good warehouse management process include:
- Providing real-time information to determine inventory status and other warehouse activities
- Remotely scanning barcoded items and tracking shipments
- Tracking the output of employees for efficiency
- Tracking merchandise via a number of factors including location, SKU and lot number
- Managing the locations and receiving elements of merchandise
- Including an accounting component of inventory
- Encompassing an Internet-enabled dashboard from which to control and assess all aspects of multiple operations
- Easy integration with company’s ERP system
Of course, business executives are always looking for mobility, efficiency and ease-of-access when integrating warehouse processes, while staying focused on:
- Reducing operating expenditures
- Improving customer relationships and service
- Reducing unnecessary costs
- Shortening fulfillment lead times
- Streamlining inventory management
- Eliminating manual data entry
- Tracking inventory in real-time
- Increasing transitory speed of inventory
- Increasing employee productivity
- Increasing profits in the long-term
The Dreaded Write-Off
When it comes to inaccurate inventory concerns, most operations managers are focused on one cost-related element: The dreaded write-off. You see, no one wants to have to tell his or her boss that they just wrote off some $50,000 worth of inventory for any reason – but the true cost of inventory inaccuracy is much larger than that.
The following are additional costs businesses can incur from not dealing with inaccurate inventory problems:
- Purchasing/working capital – Working capital is tied up when inventory sitting on a shelf in the warehouse isn’t moving; this is why inventory turns are so important. Let’s say a record system is claiming there are 500 units of SKU-A in stock with a recommended stocking level of 1,000 units, but in the course of cycle counting it is discovered that there are actually 700 units in the warehouse – the order the purchasing department just placed for an additional 300 units ties up company cash in excess inventory. In the manufacturing world, this could affect production schedules and rampage through a supply chain like a whirlwind.
- Warehouse labor costs – Labor often makes up 70- to 80-percent of warehousing operating costs, and when an SKU is picked for an order and the pick can’t be completed due to inaccurate inventory, that labor cost is wasted. What’s more, actions such as verifying the location, searching for the inventory, discussing it with management, making an adjustment and reviewing the adjustment all lead to more costs being incurred; a similar situation exists when an employee attempts to replenish an active location and the reserve inventory doesn’t add up.
- The customer cost– A worst-case scenario in running a business is not being able to fulfill a customer’s order, and sometimes the situation looks like this: An ERP says the inventory is there. A customer orders this inventory. The inventory is inaccurate. Now, customer service must handle the refund process and explain the situation to the customer – not an easy or pleasure-yielding challenge to tackle. Not only that, but the sale was lost and the sales goal missed. But business owners should be able to put themselves in their customers’ shoes for a moment: Will they order from this company again? How has their life or business been impacted by failing to deliver?
- The lost sale that should not have been– While an ERP overstating actual inventory negatively impacts a business, so does the opposite – an ERP system understating actual inventory. In the latter case, sales can be lost due to customer’s orders being rejected because the ERP is reporting a lack of merchandise. To make things worse, to avoid losing the sale, businesses will bring in the requested merchandise using expedited shipping methods. All of which could have been avoided, saving time and money, had inventory records been more accurate.
We can even take this one step further and imagine that the inability to satisfy a customer’s order impacted him or her severely enough to disrupt their business – they then inform others about this, and suddenly a company’s reputation as a reliable supplier or retailer has been jeopardized.
The Barcode Factor
Barcode technology is currently the most accessible with regard to cost, complexity and universal acceptance. Indeed, reduced picking errors, inventory levels, carrying costs and data entry errors are just a few of the examples wherein a barcode system can help achieve significant gains – from a relatively small investment. While payback on automated systems varies, it can be as short as one inventory count; payback on a basic system should range between six and 12 months, and that’s when only taking the tangible benefits of an automated data collection system into consideration.
The following table illustrates how much of an impact a simple barcode system could have on your operations – by identifying and reducing data entry errors at the most critical points, you can eliminate costly data entry errors:
|Savings from reduced picking errors|
|Lines picked per day||500||1,000|
|Errors per day||5||10|
|Error reduction rate||50%||50%|
|Error reduction per day||2.5||5|
|Cost to correct error||$25||$25|
|Daily cost to correct errors||$62.50||$125|
|Work days per year||250||250|
|Annual cost savings||$15,625||$31,250|
The Bottom Line
Once you have figured out the root of your problems and decided upon the best warehouse management system for your business, you will quickly and easily fulfill your goals and effortlessly manage your inventory. The thing to remember is this: Don’t let improper inventory management affect your bottom line – make the necessary improvements immediately.