November 6, 2020
 Humberto De Santiago

Retailers rely on accurate inventory records to execute efficiently, reduce expenses, and more importantly increase sales.  Retailers know that shrink is a major contributor to inaccurate inventory records - it is impossible to maintain accuracy for items which leave the store via bad actors.  However, there are many more ways for inventory records to become inaccurate which we will cover in this article. Unfortunately, there is no definitive retail industry study identifying the relative impact of each reason inventory records become inaccurate.  Consequently, each retailer must determine for itself which of the following reasons cause the bulk of its inventory accuracy problems. It is easy to understand how both internal and external theft impacts inventory records.  Items leaving the store without being paid for bypass the POS system leaving inventory records unchanged.  For example, if the inventory record shows 10 units and 2 were stolen, the store will have 8 actual units while the system still shows 10.

Undetected, shortages like this can delay or even completely miss replenishment/reorder points, and eventually result in an out-of-stock for those items. Shipment errors are a very common cause of inaccurate inventory records.  Errors may result from mis-shipments or incorrect fulfillment by the manufacturer, vendor and distribution center.  In some cases, what appears to be an error might actually be a case of vendor fraud.

A mis-shipment is a box intended for one store but shipped to another store.  This is easier to do than you might think, especially for stores sharing the same conveyor belt in the distribution center.  We have also heard from clients that vendors will invoice to the order but ship different or fewer items.

Retailers with a robust carton receipt or item receipt process will identify and correct shipment errors before they cause inaccurate inventory records.  Retailers without a process to confirm receipts experience direct impact on inaccurate inventory records caused by mis-shipments, vendor errors, and fraud. This single error causes inventory record accuracy issues at both the intended store and the receiving store.  The intended store will likely have delayed or missed replenishment/reorder points, and may suffer from an out-of-stock on those items.  The store which actually received the merchandise will have a surplus, and may experience negative on-hand units. Items with an incorrect ticket can be caused by the manufacturer, the supplier, the distribution center, poor re-ticketing processes, or human error.  One of our clients experienced a mis-ticketing issue which was particularly difficult to diagnose.  Items were regularly found without tags because they were not securely attached.  Sales associates had difficulty identifying the proper item which led to incorrect tags (for example - is the color “orange” or “coral”?).

Placing the wrong tag on an item forces two SKUs to have inaccurate inventory records.  In this case the actual SKU may become an out-of-stock, while the incorrect SKU may have negative on-hand units in the system. Execution at the point-of-sale provides many opportunities to decrease inventory accuracy, most of which are due to human error. It is often easy to miss items or double-count items which will cause one SKU to be inaccurate. Items without a barcode or RFID tag require manual entry – enter the wrong SKU and the result is two SKUs with inaccurate on hand units.

The impact depends upon the type of error.  Missed items work just like theft to cause potential out-of-stocks. Double-counted items result in overages which may cause an early replenishment/reorder of the item. And incorrect manual entry of a single SKU prompts 2 SKUs to be inaccurate, one at risk of becoming out-of-stock and the other potentially experiencing negative on-hand units. Other sources of inaccurate inventory records are customer returns, returns to vendor, transfers, merchandise receipts, and damaged items.  Each transaction requires an accurate record of the event.  Inconsistent and/or complex processes invite human errors and therefore, inaccurate inventory records.

As with POS errors, the specific error determines the type of inaccuracy. When discussing inaccurate inventory records, inaccurate inventory counts are often overlooked.  These are among the worst types of errors because they remain in the system until the next count.  Our clients have called out issues with inattentive resources provided by count services, lack of exception reporting, and poor counting processes as a source of inaccurate counts.  A robust counting application with extensive audit and system controls for annual or semi-annual full physical inventories, periodic category counts and frequent cycle counts is essential to avoid these errors. Much has been written about the read accuracy of RFID tagged merchandise.  It’s true that RFID vastly improves overall inventory record accuracy – most retailers report 98% once RFID is fully implemented.  But it is important to understand that a retailer with RFID will continue to experience the causes of inventory inaccuracy as listed above.  While most of the inaccuracies are cleaned up by the next cycle count (usually a week), there are two special cases which are not: items without RFID tags and RFID tags without items.  RFID does not require counters to touch every item, which means it is impossible to know of these conditions just by performing an RFID count.  These cases are part of the 2% of inaccurate inventory records after an RFID count.

Items often become separated from their tags.  Even the most diligent store can have 100 or more items without tags when counting their stock.  The result is an overage for each item which persists until the store discovers and corrects the missing tags.

In our opinion RFID tags without items merit more attention.  This is certainly possible when tags get separated from their items under normal circumstances.  We also know of a case where shoplifters remove the RFID tag and place it behind immovable fixtures before leaving the store.  Until they are found and removed, these tags are counted as if they are attached to merchandise.  As with any theft, the result is a shortage potentially delaying or missing replenishment/reorder points and becoming future out-of-stock items. Inaccurate inventory records erode operational efficiency, increase inventory costs, lose sales and sometimes lose a customer. Regardless of whether the inaccuracies are shortages or overages, both result in increased inventory levels.

There are many methods by which inventory records become inaccurate, more than just by internal and external theft. The only way to identify why inaccuracies exist and correct them is to count your stock and perform a root cause analysis on the discrepancies.

Remember that on hand units become less accurate over time – inaccuracies persist until the next count. Counting your stock frequently corrects the inaccuracies sooner, before they result in out-of-stocks or negative on-hand units.

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