The High Cost of The One Percent Inventory Accuracy in Your Supply Chain

inventory accuracyIf your company is experiencing inventory accuracy problems, the problem extends across your entire logistics network—and right to your end customer. Here’s how digital inventory technologies are helping companies solve those challenges.

The supply chain industry is going through a transformation because customers’ expectations are changing and labor is hard to find and retain. If you add to that the national warehouse vacancy rate hovering at record lows and warehouses bloated with inventory pulled in from China during 2018 to get ahead of impending tariffs, managing inventory effectively has become an even more challenging task in 2019.

As we know, there are over one hundred thousand plants and warehouses in the USA alone. Even though 90% of inventory is stationary in the supply chain, inventory accuracy at distribution centers, warehouses, and plants ranges from 89% to 99%. In retail stores, this number drops to below 60%. That’s because most of the inventory management process is still a manual activity.

I can guarantee you that every company that runs a significant supply chain operation is plagued by inventory accuracy issues. It’s just the nature of the game, and a challenge that companies have historically used better forecasting, shifting safety stock levels, and enhanced order point and order quantity processes to overcome.

Having higher inventory accuracy also helps companies avoid these mistakes, as outlined by Industry Week:

  • Misleading inventory levels that make it seem like the company has more inventory in stock than it actually does, which leads to…
  • …the sale of stock that is not there to what will surely become dissatisfied customers.
  • Inaccurate inventory data that effectively “masks” inventory that is actually in stock…
  • …which means stock remains in a warehouse until it becomes obsolete and unsellable.

“Both overstocking and understocking are inefficient to your operations. The first lowers warehousing efficiency, while the second lowers the customer experience,” APS Fulfillment points out. “The ability to accurately track your inventory is necessary to determine the minimum, maximum, reorder, danger, and average level of materials to be stocked for each category of goods.”

Also, according to Industry Week, an increase in inventory accuracy of a single percentage point—from 98% to 99%–leads to an increase in supplier orders delivered on time, faster dock-to-stock cycle time, and an increase in the amount of sales orders delivered on time.

Improving these metrics affects the entire supply chain. “When inbound deliveries to an organization arrive within the scheduled time frame and are quickly moved into the warehouse, those materials are available for customer orders sooner,” the publication reports. “Faster processing and delivery of products leads to satisfied customers and lower inventory carrying costs.”

Where Does Your Company Stand?

Citing a recent APQC study, Industry Week says there is a nearly 11% difference between top-performing and bottom-performing organizations regarding inventory value as a percentage of revenue:

  •  16.0% — Bottom performers
  •  9.4% — Median
  •  5.2% — Top performers

For an organization with $5 billion in revenue, this difference translates into $540 million in inventory carrying costs, but a company doesn’t need to be producing billions in revenue every year to benefit from improved inventory accuracy.

“For manufacturers and distributors, product availability (i.e. inventory) is the driver of almost all revenue-generating activity. Next to fixed assets (property, equipment), inventory represents the biggest outlay of capital,” Rick Debusk writes in The Importance of Inventory Accuracy. “Unreliable inventory information impacts multiple facets of operations; customer-facing order fulfillment, replenishment planning and execution, and financial position.

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 myriad problems for an organization, including (but not limited to):

  • Ineffective capital usage
  • A waste of valuable time
  • Procurement challenges
  • Low customer satisfaction
  • Financial loss (i.e., when forced to write off inventory)

Managing inventory is a critical exercise that directly impacts the entire supply chain. Without a good inventory management approach—and the advanced technologies needed to streamline that system—companies may experience long-term profit losses and added operational complexity driven by a wide variety of inventory-related issues.

Using Digital Inventory Technology To Get to That One Percent

I’ve seen a continued effort from large to small organizations to gain control about their inventory levels and I believe this will perpetuate throughout 2019.

As I mentioned before, labor is tight, inventory volumes are higher, import tariffs are causing angst and customer expectations are higher than ever. Managing and moving inventory as efficient and effective as possible continues to be a key challenge for organizations, but more so during this time. Leveraging innovative digital automation and robotics technology focused on increasing inventory awareness has become a business imperative.

Here’s why. The inventory count process is an integral component of an organization’s internal control environment. However, this can be time-consuming, expensive, disruptive, require equipment (people lifts), and exposes employees to safety risks. Most important of all, inventory accuracy is never guaranteed due to verification process being manual.

That’s why digital inventory solutions are becoming so popular. These robotics solutions allow companies, large and small, to apply autonomous drone technology, coupled with computer vision technology, artificial intelligence, RFID sensors, and cloud computing to significantly improve accuracy beyond the one percent. Besides gaining an edge in understanding inventory levels and being able to move inventory faster throughout the supply chain, these companies are also creating safer working environments, redirecting their staff to handle high value activities and empowering their teams with rich information, which can then be revisited at any point and time and can be used to make better decisions.

Matt Yearling is CEO of PINC Solutions. He joined PINC as chief executive officer in March 2013 and is responsible for the overall strategic and operational management of the company. Matt’s past roles include vice president and general manager of Encryption Products at Symantec Corporation, senior vice president of Global CRM Product Development at Sage Inc., Chief Technology Officer for Embarcadero Systems Corp (a Ports America company). As vice president of Oracle On Demand, Matt played a pivotal role in making it Oracle’s fastest growing line-of-business.