What is Aging?
Inventory aging is an e-commerce metric used to calculate the total age of inventory on average. It enables companies to find out how long a Stock Keeping Unit (SKU) can remain in a warehouse before it goes up for sale. In a nutshell, it is used to determine how many days a company takes on average to sell its stock. It is a very important KPI (Key Performance Indicator) that can help businesses set benchmarks and plan to avoid the least amount of losses possible.
Importance of Aging in E-commerce Shipping and Delivery
Companies that deal with manufacturing and selling tangible products have to take inventory aging into consideration. It is one of the most vital parts of inventory management.
Calculating inventory aging can help businesses manage inventory better, avoid merchandise piling up in a warehouse or storage and even take profitable revenue-based decisions. Some of the best advantages that businesses can reap by effectively calculating inventory aging are:-
- Determine how fast products are selling
- Determine which products or slow-selling
- Calculate the risk of products becoming obsolete
- Come up with effective sales plans
Companies generally aim to lower the inventory age by encouraging customers to buy more of their products and implementing merchandising strategies to clear stock. Some advantages of lowering inventory age are:-
- It helps companies avoid long-term storage costs
- Helps companies offer freshly manufactured products to customers
How Aging Works and Its Prerequisites
The formula for calculating inventory aging is given below:-
Total inventory value / Cost of goods sold (COGS) x Number of days
Use Case With Aging
To help understand the concept of inventory aging better, let us look at an example.
If a company owns inventory valued at 3 million AUD and the total cost of goods sold (COGS) is 8 million AUD and wants to calculate the annual inventory age,
The average inventory age will be
3 million / 8 million x 365= 137 days (rounding up from 136.875)