Inventory Analysis
Inventory analysis is an evaluation of inventory performance to determine the right amount to maintain profitability. By analyzing data, a business can assess where improvements can be made in production and/or stock levels to meet demand while minimizing cash tied up in inventory.
Each business must compare product performance to its sales goals to determine whether stock levels are delivering optimal performance. Some common performance indicators include turnover, write-offs, average inventory, and number of days to sell. Different categories of products may perform differently depending on seasonal variations or popularity. Having access to timely and accurate data showing costs, sales, and profits will help management in setting optimal stock levels. Products may be allocated to certain categories and evaluated based on the performance of those categories, i.e. top sellers will have a different set of criteria than products that slower moving items. The goal is to satisfy demand while minimizing dead stock or spoilage while minimizing the cash invested. There are many inventory analysis methods; the ones you use may depend on your industry.
There are five different inventory analysis methods you can use:
- ABC Inventory Analysis – When you classify different products according to their profitability, you can determine which to prioritize in your inventory. Higher priced items may account for a small percentage of your inventory yet yield the highest profits.
- FSN Analysis – When you sort inventory by the speed of its turnover, you indicate which are fast moving (F), slow moving (S) and non-moving (N).
- VED Analysis – VED stands for Vital, Essential, and Desirable. You may have some inventory that you cannot go without, and it will be labeled Vital, but the Desirable may not sell regularly so they are ordered less frequently.
- HML Analysis – When inventory is sorted by cost, it is labeled high, medium or low cost inventory.
- SDE Analysis – This method sorts inventory by its availability labeling those items that are with long lead times as scarce, difficult to come by as difficult, and easy to acquire as easily.
These are simply different methods of sorting and labeling items to provide additional information for analysis.
Inventory analysis is crucial for businesses for several reasons:
Cost Efficiency: By analyzing inventory data, businesses can identify slow-moving or obsolete items and take measures to liquidate or reduce them, thereby freeing up capital and reducing carrying costs.
Optimized Inventory Levels: Effective analysis helps in maintaining optimal stock levels. Overstocking ties up capital, while understocking can lead to lost sales and dissatisfied customers. Analysis ensures the right balance.
Demand Forecasting: Inventory analysis aids in refining demand forecasting accuracy, enabling businesses to align their production and procurement processes with actual customer demand.
Operational Streamlining: Businesses can identify bottlenecks and inefficiencies in their supply chain through analysis, leading to smoother operations and reduced lead times.
Cash Flow Improvement: Efficient inventory management through analysis prevents excess funds from being tied up in inventory, allowing businesses to allocate resources more effectively.
Customer Satisfaction: Having the right products in stock when customers need them improves satisfaction levels and can lead to repeat business.
Data-Driven Decisions: Inventory analysis provides data-backed insights, facilitating informed decision-making for inventory purchasing, replenishment, and allocation.
Seasonal and Trend Identification: Analysis helps in recognizing seasonal trends and demand patterns, enabling businesses to plan and prepare for peak seasons or fluctuations.
Risk Reduction: By identifying potential inventory risks and taking proactive measures, such as diversifying suppliers or utilizing safety stock, businesses can mitigate disruptions.
Strategic Planning: Inventory analysis contributes to long-term strategic planning by offering insights into product lifecycle management, new product introductions, and discontinuations.
Turnover
The basic principal of inventory analysis involves examining past performance to predict future trends. Based on those observations, a company can determine if it will need more or less of a product to meet future demand. Part of that picture is painted by the inventory turnover, a percentage that indicates how often inventory has been sold and replaced. Usually, this will be reviewed over a long time period to balance periods of high and low fluctuation. Analysis tends to reveal best sellers and under performers and allows the business owner to plan and act accordingly. If a product does not perform well, that product’s production may be scaled back to allow greater focus on the money makers.
Dead Stock
Sometimes finished goods don’t sell. Sometimes products break or spoil. Depending on the industry, these losses may be handled in different ways. Food products, chemicals and medications may be discarded post-expiration or spoilage. Other types of products may sit on the shelves collecting dust because they went out of style or demand has decreased. A discount may be necessary to move them. In either case, the business may have to write off the loss and modify inventory counts. If your balance sheet is showing these products as having their full value, your numbers will be incorrect, overstating profits and potentially impacting tax paid.
Overhead
The cost of production from start to finish includes labor, materials, and storage. The longer a product sits on a shelf, the higher its storage cost. Looking at this cumulative cost over time indicates which products are most profitable and which are not selling well.
Here are some real-world examples of how inventory analysis is used:
Retail: Used to identify the best and worst-selling products and those that are not moving off the shelves, better informing decisions to buy, price and offer promotions. (The same premise applies for online stores).
Manufacturing: A business may use it to identify the amounts of raw materials, work-in-progress, and finished goods they have on-hand. This helps manage the supply chain, reduce waste, and optimize production.
Healthcare: A hospital or healthcare facility may need to know which medical supplies and equipment are frequently used, which items need to be replenished, and which items can be discontinued. This helps them reduce costs, improve patient care, and ensure lifesaving supplies never run out.
Food and beverage: Used to identify the most frequently used ingredients and those that have high waste or spoilage rates to cut back on wasted food and optimize menu offerings.
Service industry: A law firm or consulting company may analyze which services are in high demand, or those that are less profitable for better pricing, staffing and service offerings.
Average Inventory
When inventory over a period of time is totaled and divided by the number of periods evaluated, the result is an average amount of inventory, that being the median between the high and lows throughout that same period.
Luckily, the inventory analysis process doesn’t have to be as tedious as it sounds. Without inventory analysis software, it can be difficult to decipher reality from volumes of data produced by different departments. No matter which indicators are most important to your business, SOS Inventory can provide clear, concise feedback of performance for easy evaluation. SOS provides analysis of data in a timely and easy-to-use manner. Because everyone works from the same integrated set of data, inventory counts, costs and sales figures are the same across all the departments. There is just one version of the truth.
Inventory Management Analysis Tools
SOS Inventory offers extensive reporting which includes purchasing, inventory, sales, fulfillment, production, accounting and custom reports. Inventory performance analysis is facilitated by the details provided in SOS Inventory reports.
Inventory performance analysis report types include:
- Bin Contents
- Inventory Aging
- Inventory Stock Status
- Inventory Summary
- Inventory Turnover
- Inventory Value
- Item Analysis
- Item Movement
- Items in Bins
- Lot History
- Lot Stock Status
- Lot Traceability
- Lots In Bins
- Overstock / Understock Report
- Physical Inventory Worksheet
- Serial Unit History
- Serials In Bins
Your ability to make important decisions about your inventory levels, where to invest money or which products to keep or phase out depend on the depth of information provided by the reports you generate. This has been the year of dramatic changes, challenging one’s ability to quickly adapt. To adapt, you need the most updated information about product performance, changes in demand and activity in your supply chain. SOS Inventory empowers you with the information you need when you need it.
Arm yourself with a powerful inventory analysis tools for easy, quick, and productive upgrades for your entire team. No matter which inventory analysis methods you choose, you can manage them effectively with SOS Inventory.
