Inventory Analysis Explained: 5 Metrics & Strategies to Try
A good inventory management strategy is the backbone of any successful eCommerce company. Without it, you will find yourself with stockouts or too much capital tied up in your existing SKUs. But when you have an effective plan that includes analyzing what products are needed and not wanted, there’s more opportunity for success.
By streamlining your inventory management via metrics related to stock counts and operating efficiency, you will better understand what is going on with both.
What is an Inventory Analysis?
Inventory analysis is a process that helps you determine the best amount of inventory to carry. You can use it as a guide for your company’s profitability and identify trends in customer demand to help forecast sales.
Why You Need Sales and Inventory Analysis Strategy
A sound inventory analysis strategy can help you maintain a good supply of products and have an accurate forecast. This will free up capital, save time in managing your collections, and simplify the process of procuring new items.
1. Have enough inventory always
To avoid overstock or out-of-stocks, a company needs an inventory analysis strategy that considers the demand and availability of different products. An eCommerce business can use stock analytics in conjunction with their supply chain information to ensure they have just enough on hand.
2. Forecast inventory accurately
Inaccurate inventory forecasting is the most common cause of deadstock, so it’s essential to have an analysis system in place. An analysis strategy will collect data on your SKUs and forecast and reorder accuracy or adjust pricing.
3. Tie up less inventory capital
It’s not uncommon for manufacturers and retailers to have most of their money tied up in inventory. Luckily, practical inventory analysis can help you get an idea about your lead times (as well as customer demand) so that you know when it’s time to buy more or stop buying items if they’re sitting around.
4. Streamline the supply chain
An inventory analysis can help you consolidate suppliers or shift to single sourcing, reducing overhead and simplifying operations. On top of that, an inventory analysis provides visibility into the product life cycle- launch, growth, maturity -which is paramount for productivity in your supply chain.
Standard Methods of Inventory Analysis
Several different inventory analysis methods can be used depending on the type of business you run. The most well-known and widely-used strategies include ABC, HML, VED, and SDE — all of which serve a designated purpose with advantages for specific types of businesses.
ABC analysis is a method for inventory management that divides goods into three categories: A, B, and C. Goods are classified according to their consumption value, affecting the cost of annual inventory.
One of the most important things for a business is having inventory. A-inventory is a product with high margins and represents significant portions of profits.
(2) “B-inventory” – products that are not the most expensive and also not the cheapest.
Using ABC analysis allows you to give your most important inventory additional time and focus, boosting revenue. It also reduces dead stock because it optimizes inventory turnover rate while helping with demand forecasting.
HML analysis is a type of inventory management that classifies or measures items by their cost per item. This type of classification also divides products into three categories:
It turns out that a paycheck is not the only thing that matters.
(2) Medium Cost: items priced at an average price.
Low-cost items, such as clothing and food, should always be listed in descending order of unit value. You will need to set limits for these categories on your own.
Although HML does not account for an item’s sales value, it is still a helpful tool in budgeting and controlling costs.
VED analysis is different from ABC because it measures the importance of an item to your business by how much inventory you have. VED breaks down things into three categories: necessary, discretionary, and peripheral.
(1) A company needs to keep a certain amount of inventory on hand.
(2) Essential: enough of these items will be needed to start with.
For retailers, it is essential to offer optional goods.
VED analysis is a way to ensure that an item will sell and be profitable.
The SDE inventory analysis method is centered around the scarcity of items your company can acquire. The system looks at what supply you have and how soon it will be available, so when demand for a commodity increases, there are more options to buy from.
With this approach, scarce products are usually imported, which means they may take longer to arrive (or the supply may be harder to come by).
The three inventory divisions included in SDE analysis are Raw materials, work-in-process, and finished goods.
(1) Scarce: items that take longer to be delivered because they are imported.
The SDE method typically deals with raw materials or similar items that are not readily available.
Inventory Analysis Metrics to Track
A detailed inventory analysis will tell you what your business is doing by using a series of key performance indicators. Among the most effective and important metrics for an inventory analysis are turnover ratio, write-offs, gross margin return on investment, days outstanding in stockouts.
1. Inventory turnover ratio
Inventory turnover is how many times a company sold and replaced inventory during a specific period. It can tell you whether or not your business is running efficiently because it shows what items are being turned over in less time, which means they were likely more popular with customers. You calculate this by dividing the cost of goods sold by average inventory.
2. Inventory write-offs
If you have inventory that has gone bad, is out of date, or is not worth what it once was, then an inventory write-off can be used to acknowledge the loss formally. The process might involve expensing the cost directly into your COGS account or using a journal entry to offset any remaining value in your assets.
3. Gross Margin Return on Investment (GMROI)
When it comes to managing your inventory, you need to know the return on investment. This is calculated by dividing gross margin by the average cost of goods sold (COGS). The formula for GMROI looks like this: GMROI = [gross margin ÷ COGS]
A higher than one number means you are selling the product for more money than what it cost to buy, and a number below one would mean your profit margin.
4. Days Inventory Outstanding (DIO)
This metric is a good indicator of operational and financial efficiency. The formula for calculating this number is days inventory outstanding = [average inventory ÷ cost of sales] x number of days in the period.
5. Stockout rate
The stockout rate is the number of times a company cannot supply an item on demand. This KPI highlights how your inventory meets infrequent customer needs by measuring annual sales volume.
Save Time & Money with these 4 Inventory Analysis Tools
There are various inventory management and analysis tools on the market today, but not all have features that make them worth buying. Skubana, for example, is one such tool with lots of functionality.
Skubana is an all-in-one software that helps automate the synchronizing of inventory data and analysis across sales channels, warehouses, 3PLs, POS systems. The advanced automation for inventory tracking help minimize storage costs by eliminating dead stock or unsold goods, avoiding stockouts with timely order updates; balance turnover ratios to keep your products in supply without too much excess product on hand.; Plus, it’s easy to use real-time data analytics to better schedule orders when raw materials are needed.
Skubana, a company specializing in e-commerce inventory management software for B2B and retail businesses, knows the importance of an effective forecasting strategy. This is why they offer help with their customers’ forecasts to ensure they have the right products available at all times without overproducing or underselling items. Skubana also guides safety stock levels and reorder point settings, allowing your business to avoid overselling while guaranteeing customer satisfaction.
SkuVault is a powerful system that connects your channels, organizes warehouses, and manages inventory. With SkuVault, you can access vital data to construct detailed reports on how well you fulfill orders and identify any potential errors in the order fulfillment process.
Daily software is easy to use and has inventory data analytics designed for non-technical users. The Daasity team will work with Skubana so your company can see all of its sales numbers in one place, including information on individual channels.
4. Inventory Planner
Inventory Planner is a leader in inventory control and demand forecasting, which helps to simplify the reordering process. To tackle forecasting challenges, inventory planners can utilize current data from analyzing their sales trends with vendor lead times for automatic replenishment recommendations.
5. Shopify POS
Shopify POS allows companies to create purchase orders and transfer inventory while tracking incoming and outgoing products. This software helps manage ABC inventory analysis as well.
Many people have questions about inventory analysis, but they are often difficult to answer. Below is a list of some frequently asked questions and answers on the topic.
Frequently Asked Questions
- What is inventory turnover analysis? Inventory turnover analysis looks at how many times a company sold and replaced its inventory within a designated amount of time. Using inventory turnover analysis can affirm the efficiency of your brand, seeing as a higher turnover rate is generally associated with selling a lot of merchandise (without having too much inventory on hand).
Inventory turnover analysis can see how many times a company sells and replaces its inventory within the designated period. This method of measuring efficiency is typically more accurate than other methods because it considers what you’re selling (and not just focusing on costs).
- What are the benefits of inventory analysis? Inventory analysis is the process of examining inventory levels to determine the ideal amount your company should carry. Some of the most significant benefits of a sound inventory analysis strategy include always having enough available stock, the accuracy of demand forecasting, less capital tied up with inventory, and a more streamlined supply chain process.
This can include having a clear idea of demand, not wasting money on unnecessary products, and supplying your customers with ease.
- What tools are there for inventory analysis? While there are various inventory management and inventory analysis tools on the market today, only a few have the features and functionality to make them stand out. Skubana is an all-in-one inventory management software, which supports businesses in synchronizing their inventory analysis across sales channels, warehouses, 3PLs, POS systems, purchase orders, and more. Skubana’s advanced inventory tracking and reporting automation help minimize storage costs, eliminate deadstock, avoid stockouts, and balance inventory turnover ratios.
Inventory management and analysis tools are plentiful on the market, but not all of them have what it takes to make a difference. Skubana is an inventory management software that synchronizes information across channels like sales, warehouses, 3PLs, POS systems, and purchase orders. Its advanced automation for tracking stock ensures minimal storage costs while helping you avoid stores outs or balancing turnover ratios.