How to Measure Inventory Accuracy

Wondering “How to Measure Inventory Accuracy”? Recently, we’ve focused a lot on inventory planning—making sure you have the right quantity, of the right item, in the right location, at the right time. But what if your available stock quantities aren’t accurate? You could be ordering too late—or too soon—and you wouldn’t be able to reliably tell your customers what’s actually in stock.

The Limits of Yearly Physical Counts

Many companies lean on a once-a-year full physical inventory (a “wall-to-wall” count). Problem is—that accuracy often evaporates the minute you resume filling orders or receiving stock. Here are how to measure inventory accuracy counts.

Accuracy Checking Process

Here are some steps to help you improve your accuracy during counts:

Focus on “A” Items: Where Errors Hide in Plain Sight

A small slice of your products—about 10% to 13%—often accounts for 80% or more of the disbursements. Those high-volume, fast-moving items are where errors are most likely to happen. Slow movers? They’re usually pretty accurate, since they rarely get touched.

Start with a Quick Accuracy Test

Before you ramp up rank-based cycle counting, run a quick test to gauge how accurate your inventory truly is. Here’s how:

Select items that have had usage in all 12 of the past 12 months.
Count each product twice, about seven days apart.
A “significant discrepancy” is usually anything greater than ± 5% or ± $50 initially. Over time, you’ll ideally drop that tolerance to ± 2–3% or ± $30.
Your goal? Fewer than 3% of counted items should show significant variance.

Then—Start Your Rank-Based Cycle Counting

After your test gives you a read on accuracy, launch (or refine) your rank-based cycle counting strategy. This ensures that you maintain inventory integrity over time—and not just at arbitrary checkpoints.

Measure inventory accuracy reliably—without wild guesses. Learn how to test current accuracy, focus on high-impact SKUs, define discrepancy thresholds, and build a smarter, rank-based cycle counting strategy.

How Often Should You Count?

Jon’s team often recommends counting “A” items five to six times a year. Everything else? Once annually is usually sufficient.

Why Discrepancies Happen (and How to Fix Them)

When discrepancies show up, dig in. Consider:

Are all material movements being properly recorded?
Is someone substituting one item for another without documenting it?
Is there confusion over units of measure—like cartons vs. pieces?
Are you seeing pilferage or shrinkage issues?

These are classic culprits—and only by tracking them down can you improve your inventory accuracy.

Insights from Effective Inventory Management

Successful inventory management leads you to reorder products when your net available quantity of an item (i.e., ON-HAND – COMMITTED + ON REPLENISHMENT ORDER) is less than or equal to its order point (i.e., ANTICIPATED LEAD TIME DEMAND + SAFETY STOCK). But what if your available stock quantities are not accurate? You will either order too late or too soon.

Many companies try to maintain accurate on-hand quantities with a once- a-year full physical inventory. But even if this counting of every item results in totally accurate available quantities, how long do these counts remain accurate? Usually until you resume filling orders and receiving stock. Other organizations will cycle count (counting a certain number of items every day) trying to count every item in stock three or four times a year. While this may seem like a good idea, it is not the most productive way to maintain an accurate inventory.

For most organizations, a small percentage of items account for the majority of picking activity. It is not unusual for 10% to 13% of inventory items to account for 80% or more of material disbursements; these items are often referred to as “A” ranked items. Usually, these are the products that are most susceptible to available quantity discrepancies. After all, every time someone goes to a bin location to fill an order for one of these products is another opportunity for a mistake to happen. And your customers probably count on you consistently having these fast moving items in stock. It is extremely important that the on-hand quantities of these “A” items are accurate. Your slower moving products are probably very accurate. Warehouse workers rarely access these items.

Many of our clients will try to count “A” ranked items five to six times a year. Other stocked products can be counted once a year.

But before you begin a rank-base cycle counting program, it is a good idea to perform a quick test to ascertain your current inventory accuracy. We suggest you select all of the items in each of your warehouses that have had usage in all 12 of the past 12 months and count these products twice. That is, you will count all of these items and then count them again seven days after the first count. If there is a significant discrepancy during the second count, review recent transactions to try to determine the reason for the discrepancy. We normally consider a significant discrepancy to initially be greater than ± 5% or ± $50. Eventually most of our clients will lower their tolerance to ± 2% to 3% or ± $30. It is our goal that no more than 3% of the items you count will experience a significant discrepancy.

Inventory Audit Discrepancy Checklist

In trying to determine the reason for a significant discrepancy for an item:

Ensure that all material movement is being properly recorded. Often warehouse workers are able to identify receipts or disbursements that are “falling through the cracks” of your inventory counting procedures.
Be sure that one item is not being substituted for another without it being noted on applicable paperwork
Determine if units of measure are being confused. For example, are cartons rather than pieces being pulled to fill an order?
Could you be a victim of pilferage?

Once you have determined your current level of accuracy, begin your normal rank-based cycle count program. Warehouse management should be responsible by ensuring that cycle counting is conducted according to the established schedule. Remember that achieving effective inventory management is impossible without knowing exactly what is in your warehouse(s).