Posted May 12, 2015 by Don Amato, Vice-President, Sales of Chicago Tag & Label in Libertyville, IL.

How to Ensure Inventory Accuracy

Inventory management has a huge impact on the profitability of an e-commerce business — especially when you operate a business with a fairly sizeable inventory. When inventory levels are too high, cash is tied and space is inefficiently utilized. When inventory levels are too low, stock-outs and late deliveries jeopardize customer retention — remember, Amazon sets a high bar for e-commerce delivery speed, often delivering within 24 to 48 hours. A common reason for inventory levels being too high or low is inaccurate counts. Here are tips for making sure your inventory accounting is accurate at all times:

Set minimum/maximum levels for each SKU

Obviously, you can’t tell whether you’re carrying too much or too little inventory unless you establish standards. Establishing a minimum and maximum stocking level for each item enables you to know when to reorder or when you have too much of a given item.

The challenging part, of course, is determining what the minimums and maximums should be. Demand, purchasing price points and lead times are usually the main drivers.  If an item has a 30-day lead time, you’ll probably want a minimum of 45 day’s supply on hand, especially if it is a popular item. However, if you qualify for a 20 percent discount by ordering a 90-day supply, it’s probably to your advantage to do so and set a higher minimum.

In terms of maximums, if you are turning your inventory four to eight times a year, you’re doing a terrific job of inventory management. With that in mind, a 90-day inventory is a good benchmark for a maximum. Space can be a big consideration, too. If you sell large, bulky products like office furniture, you’ll be forced to manage your inventory carefully. However, don’t be lulled into a false sense of security if you sell small items such as labels and forms: they may not take a lot of space, but they represent a large investment that adds to your cost of doing business.

Physically count your inventory

Over reliance on computerized inventory management systems puts your business at risk. Inventory management systems are reliable, but can be thrown off by entry errors (e.g., entering the wrong item or quantity on shipping document) or physical errors (e.g., picking the wrong item or quantity).

There’s no substitute for physically seeing what you have on the floor. A complete physical inventory should be taken at least once a year, and physical cycle counts should be taken on a regular basis as a way of systematically “spot checking” inventory accuracy. This can be a simple process if you’re just starting out, with a small space for your entire inventory. When you’ve reached a volume of inventory that requires a warehouse, checking the inventory physically can be time consuming but well worth the time in the long run.

Make sure products are clearly labeled and have a specific storage location. This facilitates easy counting as well as reduces the chances for shipping errors. When you uncover discrepancies between physical counts and computer system counts, review the item’s sales and purchasing history to identify how the problem occurred. You may find the discrepancy was caused by a one-time error, or that you have a flaw in your system.

Be mindful of theft

Products sometimes have a way of “disappearing” from the warehouse; and e-commerce businesses that sell consumer products are especially vulnerable to theft. Employees don’t usually see anything sinister about taking home a few shipping labels or rubber bands or other small items. It is therefore important to convey the fact that leaving the building with shipping labels or rubber bands is like leaving with money stolen from the safe. By building awareness about the nature of inventory — i.e., that it is money in a different form — this issue can be greatly minimized or eliminated entirely.

Sometimes, however, theft can be organized and occur on a large scale. This is another important reason why inventory discrepancies must be resolved. If no error can be identified in the system, especially if discrepancies occur frequently, theft could be the cause.

When you have a sizeable inventory, implementing simple security measures such as limiting warehouse access to specific employees and installing security cameras at exit points can help tremendously in reducing your exposure. Limiting warehouse access also promotes safety — people unfamiliar with warehouse operations sometimes go where they shouldn’t. On a smaller scale, limiting access to the storeroom and keeping the storage area locked at all times can reduce theft and disappearing items.

By maintaining an accurate inventory, you’ll be able to deliver on time while keeping your operation efficient and profitable. E-commerce is competitive: no matter how good the products and marketing, staying in business requires careful management of perhaps its largest asset, inventory.