It's crucial to leverage effective inventory analysis to keep your production going well. If you are a retailer or manufacturer, you must be aware of the role of inventory and why it needs to be maintained. Analysis and planning of the core function of a business is a must to improve business prospects, functioning, and prospects.
This article discusses the benefits of inventory analysis, inventory analysis strategy, key metrics to measure inventory efficiency, how to do inventory analysis, and more. Using this information, you would be able to analyze your company's inventory effectively and improve your bottom line.
What Is Inventory Analysis?
Inventory Analysis is the process of analyzing customer demand and market trends to assess the required inventory levels. The primary objective of this process is to ensure that inventory is never out of stock, the flow of working capital is maintained, and the supply chain is always streamlined.
The process involves real-time analysis of inventory with routine record keeping of goods sold, cost of goods, in-stock supply, and stock on order. Efficient inventory analysis offers greater insight and improved control over your business as well. You can adopt Enterprise Resource Planning (ERP) software to automate inventory management to a great extent.
Why Do You Need an Inventory Analysis Strategy?
Before you implement an inventory analysis system into your business, it is essential to understand which issues can be addressed by problem inventory analysis directly. You must also know why you need to have a strategy for inventory analysis. The primary motive of both is to know the underlying issues, get new ideas, and enhance business processes.
Let's now understand why businesses need an inventory analysis strategy. It is the action plan related to maintaining appropriate inventory levels.
Address Improvement Scopes: Metrics and records essentially need to be put under comparative study to understand loopholes, areas of improvement, industry standards, and other problems in inventory management.
Minimize Stock Outs: In the retail industry stock-outs are witnessed as big red flags which immediately result in customer dissatisfaction, negative sales, and reduced potential sales. However, inventory analysis can act as a tool to minimize such issues.
Reduce Inventory Wastage: Routine analysis of inventory helps to rule out chances of expired stocks, damaged stocks, and stockouts.
Improved Cash Management: To elevate a retail business it is important to keep fresh and versatile stock. Analyzing inventory helps to avoid investing huge finance in stocks at a time, instead, you can plan for assorted stocks.
Besides you may even understand market waves, and forecast market demands to accordingly plan your cash into stocks, and therefore avoid stockouts, excessive waiting periods for customers to avail stocks, and delayed delivery. Reduce Turnaround Time: In the era of e-commerce, consumers look for fast delivery of orders. Inefficient inventory record data could increase turnaround time resulting in losing consumer interest.
Therefore, managements look for effective ABC analysis in inventory management to offer fast order delivery and ensure large inventory stocks for fast shipping.
Avoid Inventory Obsolescence: Many products might need seasonal supply. Inventory record updates can essentially keep controlled monitoring over the stocking of such obsolete products with either minimal market demand or low shelf life.
Improved Customer Satisfaction: It is a competitive market out there and to cut through such tough competition, inventory monitoring and improvement play a vital role to enhance customer service and satisfaction.
What Are the Benefits of Inventory Analysis?
The secret to a successful retail and manufacturing business is to manage your inventory well. This requires effective inventory analysis. It intensifies business workflow and revenue along with customer satisfaction.
Eliminate Stockouts
The amount of stock or inventory you need depends on the orders and business size. Insufficient stock will not only delay project deliveries but also result in losing potential clients, delays in order delivery, customer complaints, and finally hampering the business reputation.
However, knowing your inventory like the back of your palm with effective inventory analysis methods will ensure that there is no disruption in the supply chain or delivery of orders. This way your customers won't face order delays or the need to buy from your competitor.
No Inventory Waste
Storing more than required inventory with low shelf life, poor demand, or off-season stocks poses a challenge by blocking cash flow, especially when you can't clear off old inventory.
However, proper analysis of the inventory required and what is already there in your warehouse essentially rule out these hazards.
You can plan inventory strategies like when to buy, how to clear off inventory, have profit margins that will subside losses, and minimize inventory wastage. Storage expenses are also reduced if you don't stock inventory more than what is required.
Enhance Working Capital
Business profits are directly linked with the investment a business puts into its inventory as well as its management. You can reduce constant cashflow problems significantly through proper inventory analysis and inventory management.
In a retail and manufacturing business, inventory utilizes large cash outflow. With effective analysis of inventory, you can reduce unwanted expenditures, wastage of inventory, obsolete inventory items, and save cash.
Businesses can effectively utilize forecasting analysis to optimize inventory, control cash flow, increase the return on investment (ROI) with seasonal inventory stock upgrades and reduce inventory stock orders as per market demand
Improve Customer Satisfaction
Through inventory analysis you too can serve your customers by decreasing response time, engaging with them, and knowing their requirements. This will eventually grow your customer base.
Better Deal Negotiation
Knowing your inventory, such as which products have the maximum profit margins, allows you to negotiate better deals with vendors and suppliers. A detailed analysis of inventory helps to know your product lines, sales, profit margins, type of inventory to buy, and more.
This gives business owners the confidence and knowledge to grab a more profitable deal and design strategic moves.
Now that you are aware of the benefits of inventory analysis, let's see how it can be conducted.
How Do You Analyze Inventory?
Even though there are multiple industrially used methods for inventory analysis, the best way to pick one is as per your inventory and business type.
ABC Analysis
Perhaps the most popular among all analysis types of inventories is the ABC inventory analysis. This technique categorizes inventories into three distinctive categories namely A, B, and C.
This technique is primarily designed based on the Pareto principle - that is the 80/20 rule. In the retail industry, the A category refers to inventories where approximately 80% of sales are fetched from 20% of a company's complete inventory.
Category B refers to inventories that sell out regularly, however, do not stand for a high value as A. The rest of the inventory which does not attract higher sales, is categorized as C.
You can additionally make use of the XYZ analysis in inventory management along with the ABC technique, which effectively forecasts the hurdles in the selling of specific items. XYZ consequently refers to items as per their difficulty in selling with X being easy to sell and Z being the most difficult item.
VED Analysis
This method is prioritizing the importance of having an item in inventory stock. VED analysis in inventory management is widely used by manufacturing companies to analyze their stock of components, and raw materials.
Vital: Refers to inventory items that essentially need to be in stock as per VED analysis of inventory control. Essential: Even a minimum amount of these items must be there in inventory. Desirable: It is good to have these items in stock as well, but not necessary.
HML Analysis
The analysis of inventory in many manufacturing units is primarily based on cost. The HML analysis in inventory management categorizes the inventory as high expenditure, medium, and low cost.
- Last-in, First-Out (LIFO) - These companies focus on selling the items they bought last.
- First-in First-Out (FIFO) - These companies try to sell the inventory they bought first.
First-Expire, First-Out (FEFO) - Items are pushed for sales as their expiry dates drive the sales. This helps the companies to clear out inventories with close expiry dates.
SDE Analysis
This inventory analysis method makes use of information like availability, scarcity, availability scopes, etc. The SDE focuses on the opposite aspect, that of availability. This technique finds popularity in manufacturing industries to manage raw material and component inventories.
Scarce: Scarce availability of a component Difficult: Not essentially scarce but difficult to avail within the limited time Easily Available: easily available materials or components
Fast, Slow, and Non-moving (FSN)
This is altogether a different approach to analyzing inventory. Therefore, in FSN analysis in inventory management, once again the complete inventory is segmented into three categoric divisions that are fast-moving, slow-moving, and non-moving inventory.
In every inventory, there are a few items that are in constant movement of stocking, selling, refilling, and so on. Comparatively, others are slow and others might be stagnant. Inventory managers make use of this analysis technique to create PO or Purchase Orders for the company inventory.
What Are Key Metrics You Can Use to Measure Inventory Efficiency?
There are wide variations of key inventory metrics used to fetch optimized analysis of profits, and turnover.
Gross Margin Return on Invested Inventory (GMROI)
In the retail industry, GMROI is a key metric that finds extensive usage. This is used to scale a specific element that can influence their profitability. It measures the annual gross profit made against the investment made for inventory by a retailer.
Inventory Turnover Ratio
The turnover rate of any inventory unveils the efficiency or loopholes in the management of the inventory. The average of the inventory is kept against a certain time and measures how many times it has been sold. Using this particular formula you get to know the results in these metrics. The formula is:
The cost of inventory stocks sold / The average inventory, within a specified period.
Available to Promise
Available to promise (ATP) is typically an inventory formula that is specifically used to dig out the record and analysis of order fulfillment in an inventory. This process of analyzing unveils essential data of market requirements and inventory management essential steps required to meet.
The formula of ATP is ATP or Available to Promise = Quantity On Hand + Planned Order Supply - Sales Orders Demand
In a business, the promised time for any inventory item depends on the expectations of the market and consumers and may essentially differ with industries.
Carrying Cost
Carrying costs are also often referred to as holding costs. This considers the expenditure which is spent in maintaining and stocking an inventory. This metrics study can essentially involve a record of warehouse rents, equipment rentals, insurance, electricity, security, as well as labor costs.
Average Days to Sell Inventory
This metric specifically focuses on the analysis of the total time taken in crafting an inventory and selling it completely. However, if not exactly an average calculation is made to chalk out essential data.
Stockout Rate
The stockout rate encompasses the analytical study and data of the ratio of comprehensive stock orders, and losses. Profits are expressed in percentages. This reveals the skilled efficiency of a company in managing an inventory.
How to Start Using Inventory Analysis in Your Business?
For those who are planning to integrate inventory analysis into their business, here is how to start:
Stock Level Audit: Audit allows you to know your complete inventory stock before you initiate an analysis of the inventory.
Strategic Inventory Analysis: Every business is different and has different business approaches and goals. Therefore, whenever you plan to integrate inventory analysis, strategically plan which type of analysis suits your business pattern, and set your goals accordingly.
Inventory Analysis Software: Instead of manual labor, with analysis software you can achieve accuracy, reliability as well as better results in no time. Therefore, it saves both time and cost.
Inventory Analysis Means More Revenue
Managing a business is not easy; it requires a lot of strategic planning and the integration of smart techniques. Inventory analysis makes way for businesses to improve their cash flow, reduce delays, minimize inventory wastage, smoothen the supply chain, satisfy customers, and more.
Implement inventory analysis with the inventory management module of TranZact. It helps you to view every inventory movement in real-time and gain higher inventory control to enhance sales!
FAQs on Inventory Analysis
1. Explain what is the ABC analysis technique of inventory control?
In ABC analysis the inventory is categorically divided into three distinct groups. The benefits of ABC analysis in inventory management are fetched from specific analysis of these groups, with A defining the highest valued stocks, B for the regularly sold stock which is not effectively of high value, and C for stocks that are seldom sold.
2. How ABC analysis is useful in inventory management?
ABC analysis technique allows you to essentially recognize and prioritize the highest-value stocks in an inventory. This way you can essentially elevate your sales figures and profits by focusing on different categories of stocks.
