What Is IRA Inventory Record Accuracy?

What Is Inventory Record Accuracy? 
Inventory Record Accuracy (IRA) is a measure of how closely official inventory records match 
the physical inventory (figure 1). Many managers equate IRA with cycle counting, but there is a 

lot more to it than just counting. 

The units of measurement are either dollar based or count based. These two bases have different 

purposes and may give widely differing results. 

Accountants and financial auditors prefer dollar-based measurements of accuracy. Their concern 

is to ensure that the inventory value stated on books and tax returns is accurate at an aggregate 

level. Discrepancies on individual items hold little concern provided that positive and negative 

discrepancies are roughly equal and the total value is the same. Operations and material 

management people have a stronger interest in the accuracy of individual SKUs. If one SKU is 

short, they can rarely substitute some other part or item that happens to be long. They need count

based measurements of accuracy. 

Why Inventory Accuracy Is Important !!!

The reasons for having accurate records are legion. Stock outs increase cost in a hundred ways

and sap the time and energy of everyone. Poor accuracy begets more inventory and requires 

more capital. Inventory is often the largest consumer of capital for an enterprise. The various 

reasons for accuracy fall into the two general categories of financial and operational. Here are a 

few of them: 

Financial Reasons: 

· Investors want to know that the book value is accurate and inventory is 

usually a large balance sheet item. 

· Combined with other financial data into various ratios, imventory is a 

primary indicator of a company’s financial health and value. 

· Conventional lenders, such as banks, often lend money using inventory as 

collateral. If the loan should default, they want to ensure that the inventory stated is accurate. 

They are also likely to be concerned about obsolete and slow moving inventory. 

· Taxation often depends on inventory value. Overpayment of taxes reduces profits and 

underpayment incurs penalties. 

Operational Reasons: 

· Stockouts interrupt production and create delivery delays. 

· Missing items cause delays and idle time that reduce 

manufacturing efficiency. 

· Schedules must often be juggled to accommodate 

stockouts. 

· People waste hours looking for misplaced or missing 

items. This happens in the warehouse and often again on the 

manufacturing floor. 

· When stockouts are frequent, inventory rises to compensate. This unnecessary inventory 

requires space and capital. 

· Inventory turnover reflects overall manufacturing efficacy. 

· MRP and ERP systems require very high accuracies (95%-99%) to function well. 

· The annual physical inventory audit is a nuisance for everyone and takes several days from 

production capacity. Such audits are required when inventory accuracy is questionable but can be

eliminated when accuracy is demonstrated to the auditors through cycle counting and other 

means. 

IRA and Lean Operations 

Inventory accuracy links to Lean Manufacturing in much the same way that quality is linked to

Lean Manufacturing. They both eliminate waste and allow the smooth production with low 

inventories that characterizes lean. In fact, inventory accuracy is really a special case of quality; 

it is quality in the warehouse and transaction process. 

Lean Manufacturing 

Lean Manufacturing reduces the need for inventory and transaction volume in many 

ways. It makes high accuracy easier. If transaction volume is reduced through kanban, 

backflushing, Cellular Manufacturing or other simplification, errors drop proportionately. 

The stockouts common to firms with poor accuracy generate significant fears throughout 

the organization and create difficulties for a lean implementation. Because of this, 

increasing inventory accuracy through more conventional means such as cycle counting 

may be a necessary part of a lean implementation. 

The Lean Warehouse 

IRA is also an element of lean operations within the warehouse. Inaccurate records are 

one of the major sources of waste for warehouse and inventory operations. At he same 

time, streamlined warehouse processes and low inventory prevent many errors from 

occurring. 

The Lean Office 

The lean office takes Lean Manufacturing principles and applies them to the typical 

administrative and information-based activities of office work. Since inventory accuracy 

depends greatly on information-based transaction processes, lean office techniques apply 

directly. At the same time, increased inventory record accuracy helps smooth many front 

office processes that depend on inventory information.