Planning your business strategy, marketing budget and projected profits are often mind-boggling tasks. You need to know where you stand in comparison to your competitors while ensuring maximum profits and minimum expense. Performing a comprehensive inventory analysis is key to achieving these objectives.
Inventory analysis allows you to glean basic metrics on assets and stock performance. These metrics will deliver valuable information on turnover, stock-outs as well as customer service levels.
Inventory turnover is a basic indicator of the number of times inventory has been replaced over a specific time period. Usually, inventory turnover is calculated on an annual basis to determine how the inventory competes in the market.
When performing an inventory analysis, it’s important to look at your turnover because it provides crucial insight into both business performance and ROA (Return On Assets).
To calculate the turnover divide the cost of goods and services of your company with the inventory average.
Usually, if turnover is high, your company is selling more. High inventory turnover means restocking should occur on a faster basis. Low turnover suggests it is time to rethink the number of inventory levels currently maintained.
When performing inventory analysis, make sure to discount backorders, direct shipments and non-stock sales from your turnover calculations. These factors might inflate turnover rate needlessly. Constantly restocking inventory due to an underestimate of required stock suggests a need to rethink your business strategy.
Number of Inventory Stock-outs
The number of inventory stock-outs demonstrates the times your business was unable to supply a demand using available inventory. To calculate the number of stock-outs, add the number of times backorders were required to the length of time it takes to replenish the stock.
Tracking the number of times a business runs out of stock is imperative for an appropriate inventory analysis. Recurrent stock-outs are indicators of problems with your supply chain or market assessment. If the number of back orders is high, but the length of time it takes to cover your shortage is low, then you’re probably not storing enough stock. However, if you’re running out of a particular product and it takes too much time to restock it, then there is a problem with your supply chain.
While it’s very rare to eliminate stock-outs entirely, minimizing stock-outs optimizes business performance. Keeping a close eye on your stock-out rate during inventory analysis is the pillar of proper inventory management system.
Inventory analysis on Customer Service Level (CSL)
Customer service levels measure your ability to satisfy customer demands with the stock you have in inventory. To calculate CSL, divide the number of 100% completed orders with the number of orders received.
To ensure your inventory meets the demands of your customers, CSL is a requirement for appropriate inventory analysis. It’s important to note that CSL is comprised of orders optimally completed. In other words, only calculate the orders where customers received the exact amount of products ordered on or before the estimated delivery date.
You shouldn’t calculate any partial deliveries, backorders, drop-shipments or special orders. That would inflate your CSL and skew your inventory performance analysis. The number may be brutal, but necessary in order to measure the needs of your customers. You may stock the best products at the best price, but unhappy customers will not remain loyal to your business.
Even though it might be tiring work, a proper inventory analysis goes hand-in-hand with your inventory management ability. You need to assess if your inventory meets the needs of the market while remaining cost-effective, and looking at these metrics can start you on the road to inventory optimization.
Having an Inventory Management Software providing you with daily, monthly and yearly reports on the ins and outs of your inventory goes a long way in helping you determine how to manage and analyze your inventory.