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Comprehending and enhancing inventory performance is one of the typical reasons to supervise inventory analytics. This article will give you an in-depth meaning of inventory analytics, its types, different inventory metrics, ways to analyze inventory performance, types of inventory analytics, and more related aspects.
What Are Inventory Analytics?
Inventory analytics are the tracking metrics that estimate the company’s performance and undertaking of physical products. The inventory evaluation process offers enough insights necessary to optimize stock availability. Therefore, the company can fulfill demand and keep storage expenses to a minimum.
With the help of inventory analytics, the company can decrease risks and usual challenges about inventory. For example, they can reduce risks like stock-outs or dead stock accumulation. Moreover, they can use processes and technology to guarantee high inventory accuracy.
In other words, inventory analytics is an essential component of dealing with logistics operations. Moreover, it can improve profitability, supply chain efficiency, and inventory control.
Which Inventory Metrics Are Important To Track And Analyze?
If a company can track its inventory data and stock metrics constantly, it can detect trends. Moreover, it can give enough insights to assist in making better decisions for its inventory.
The question may arise, i.e., how to fetch the value from the inventory analytics? Well, it is possible by using inventory metrics. It is vital to continuously supervise inventory numbers so that you can assimilate them into the process of business decisions.
Inventory analytics focuses on creating a robust supply chain and fulfilling customer expectations. Also, it focuses on tracking inventory performance throughout the supply chain for effective inventory planning.
Accomplishing inventory analytics relies on the business tools you use. Automating the collected data and then analyzing them provides enough inventory insights.
Inventory carrying costs
Also known as carrying costs, inventory carrying cost is an accounting term that classifies overall business expenditures associated with storing unsold goods.
The total inventory carrying cost includes various expenses. These are warehousing, transportation and handling costs, salaries, insurance, taxes, shrinkage, opportunity costs, and depreciation. Moreover, it includes the cost of damaged goods.
Usually, total carrying costs are represented as a percentage of the complete inventory of a business in a specific period. Companies use this figure to assess the amount of income earned according to the prevalent inventory levels.
To calculate total inventory carrying costs, you must add all inventory expenses. Now divide this value by your current inventory value. Consequently, it gives you a percentage of the amount you pay to retain merchandise.
Inventory Carrying Costs = Storage Costs + Opportunity Costs + Employee Salaries + Depreciation Costs) / Total Annual Inventory
Inventory shrinkage is the difference between the actual stock available and the amount of stock recorded on paper. Its value shows a drop in inventory that isn’t generated by sales. Typical shrinkage causes are shoplifting, employee theft, administrative inaccuracies, and supplier deception.
Here is the formula to calculate shrinkage:
Shrinkage = Ending Inventory Value – Value of Physical Inventory Count
Shrinkage can be denoted in the form of a percentage,
Shrinkage (%) = Shrinkage / Sales x 100
Inventory turnover ratio
The inventory turnover ratio calculates the number of times a company sold the average stock in a particular period. This ratio indicates how competent a company is at handling inventory. Also, this ratio shows how efficiently a company sells its products.
The formula to calculate inventory turnover ratio (ITR) is:
ITR = COGS (cost of goods sold) during a particular period / Average inventory in that period
In this formula, the average inventory value = (Beginning inventory + Ending inventory) /2
A backorder happens when a sale is made; nonetheless, the corresponding inventory is unavailable in stock yet. As a result, it delays the shipping process and order fulfilment. This ultimately delays the delivery to end customers.
Because of the unavailability of the item, it would be delivered late to customers. Backorders can take place because of the huge demand for products. However, frequent back-ordering leads to poor customer contentment.
Its formula is: Backorder rate = Total back orders / total orders x 100
Inventory reconciliation is when physical inventory counts are compared with digital records of inventory. If these two don’t match, stock discrepancies must be resolved.
- Typical reasons for discrepancies are:
- Manual error in calculation
- Wrong cycle counts
- Absence of inventory software
The benefits of inventory reconciliation are:
- High accuracy
- Increased efficiency
- Improved business functionality
- Consistent data
Total units in storage
Total units in storage refer to the metric that continuously varies as the company sells and reorganizes units, incorporates new products, and gets e-commerce returns.
If a company has more SKUs, it must be more careful about overstocking, storage costs, and capital secured up in inventory. A lot of businesses overpay for SKUs they don’t require. But this pointlessly inflates its stock holding prices.
Average fulfillment cost per order
Average fulfilment cost per order lets you determine the amount you are spending to collect, pack, and dispatch an order. Generally, fulfilment costs differ based on whether you fulfil in-house or collaborate with a 3PL.
In some cases, retailers consider that it is cost-effective to be able to constantly fulfil a high volume of orders. However, hidden fulfilment costs need to be taken into account.
Gross margin return on investment (GMROI)
Businesses involved in sales use this metric to evaluate how efficiently they are converting inventory into profits. This metric informs business owners of the money they obtain for each dollar spent on the merchandise. In other words, it measures its profit return for the funds capitalized in the stock.
GMROI also tells how profitable your inventory is in a specific period. Moreover, it provides you with correct product pricing per your profit targets.
The formula is: GMROI = Gross profit margin/average cost of inventory on hand
Its value must be more than 1.0, meaning you sell goods for a price higher than what you paid. On the other hand, its value below 1.0 denotes that your business is incurring a loss because it sells goods for a price lesser than the cost price.
To better understand, for example, a retail store records a gross margin of $50,000 and its average inventory cost is $30,000. So, its GMROI is 1.83, which suggests that the store earns $1.83 for each dollar in the inventory.
How Do You Analyze Inventory Performance?
One of the common causes for supervising inventory analytics is understanding and improving inventory performance. Generally, an inventory executive is held responsible for monitoring key performance indicators (KPIs) of inventory management. It helps in identifying areas performing efficiently and areas that need improvement.
Several businesses today define KPI objectives and periodically assess progress. The data required to supervise inventory management is usually available in an inventory management system. With this system, it becomes easy to track products all over the supply chain i.e., from the acquisition of raw material to its sale.
The motive behind inventory performance measures is to prevent over-stock or under-stock circumstances. The corresponding inventory management systems store past, real-time, and customer data.
What Data Can You Find In An Inventory System?
The inventory data accessible from the inventory management solutions cover data regarding products, orders, suppliers, and procurements.
The following lists show inventory data for each of these terms:
Inventory data for Products:
- Product ID
- Item numbers
- Item name
- Item location
- Measurement units
- Beginning inventory
- Minimum necessary items
Inventory data for Orders:
- Product ID
- First name
- Last name
- Order date
- Number shipped
Inventory data for Suppliers:
- Supplier ID
- Supplier name
- Supplier phone
- Supplier email
Inventory data for Procurement:
- Supplier ID
- Product ID
- Purchase date
- Number received
Types Of Inventory Analytics
Some companies use objectives to classify inventory metrics, whereas,some other companies use these metrics to supervise the performance of a department.
The common types of inventory analytics are:
- Inventory by category
- Today’s volume
- Average time to sell (in days)
- Out-of-stock items
Inventory Analytics Categories
The inventory analytics categories are classified based on the value provided by the data. These categories are descriptive, predictive, diagnostic, and prescriptive inventory analytics. Let’s go through the details of each of them:
Descriptive inventory analytics
Descriptive inventory analytics indicate the process taking place in inventory management. It is easiest to obtain these analytics. Most inventory management solutions provide predetermined descriptive analytics.
The metrics used by these analytics are usually available on dashboards. These metrics are cost per unit and the number of inventory items on hand.
Predictive inventory analytics
With these inventory analytics, inventory executives stay informed regarding what will happen in the future. They help make adjustments to fulfill customers’ demands.
Inventory experts can conduct predictive analysis considering the cyclic demands from the past year. Alternatively, they can use their knowledge of an event like Brexit.
For example, the global pandemic was not forecasted to manage PPE production. As a result, it was challenging to chase the rise in demand from healthcare providers.
Diagnostic inventory analytics
These analytics depict the reason behind the happening of events. They are useful when presenting data.
For example, simply looking at the monthly growth of a company is not beneficial. Inventory executives should know the causes for the growth. Knowing these reasons helps them implement relevant growth strategies for the success of other departments.
Prescriptive inventory analytics
These analytics represent a more innovative inventory analytic method. They inform inventory executives about what needs to be done.
For example, by having the correct data, inventory management solutions can offer enough quantities of items to fill most of the orders’ demand in less time.
How Can Tracking And Analyzing Key Inventory Metrics Benefit Your Business
Tracking and investigating key inventory metrics benefit a business in the following ways:
Uphold enough stock levels
Two fundamental approaches can improve stock visibility: conducting inventory audits periodically and tracking metrics (like shrinkage and total units in storage). The clear perspective of inventory levels at different times keeps you informed about the amount of stock to order and the time for reordering.
If you can hold sufficient inventories to fulfill customer demand and prevent obsolete or excess stock, you attain more control over your business.
Prevent inventory waste
All items purchased should be recorded if you aim to set up a maintainable supply chain. Decreasing inventory write-downs and write-offs can increase the worth of a company’s inventory and revenue. This way, inventory waste can be prevented.
Reduce inventory costs
Nearly 30% to 50% of your resources would be reserved in inventory. The inventory cost will also increase when held in storage for an extended period.
The choice of the correct analytics lets you recognize the reason for higher inventory holding costs, inventory service costs, capital costs, and inventory risk costs. Depending on the data, you can solve these issues to increase the profit of your business.
Determine the time to order more inventory
Demand can fluctuate continuously; therefore, inventory refill can be a complicated process. It is essential to analyze the schedule of goods delivery from the factory to the warehouse and the inventory turnover rate. They help the company to make smart decisions on when to restock inventory with the help of the following reorder point formula:
Reorder Point (ROP) = Safety Stock + Demand During Lead Time
Bound the number of backorders
Plenty of backorders negatively influence your business. To increase stock availability, you require data and inventory insights in real-time. These aspects let you make intelligent stocking decisions.
Inventory reconciliation is an accounting process that SMEs, SMB owners, startup owners, and respective accountants must perform. With this process, they stay confident that their accounts record accurate balances.
Inventory analytics helps an organization attain customer satisfaction and maximize profitability. To set up a robust supply chain and fulfill customers’ expectations, tracking inventory flow and performance is a crucial part of inventory planning. Regularly supervising and inspecting key inventory metrics is essential for successful inventory management.
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Inventory analytics is the foundation of supply chain analytics. Efficient inventory analytics can improve the revenue of a company by enhancing product availability and variety. Excessive inventory is controlled to accelerate the cash cycle and reduce costs.
To analyze inventory data, business professionals usually employ different financial ratios. These ratios help them evaluate whether a company faces any issues with manufacturing and quickly sells its inventory.
One of the well-known methods of assessing the average time a company can transform its inventory to revenues is Days sales of inventory (DSI). With the help of inventory turnover, business analysts can analyze the pace at which the stock is being used over a particular period.
Here are the types of inventory analysis:
- ABC Analysis – classifies items depending on their annual consumption value).
- FSN Analysis – classifies inventory depending on the consumption rate, quantity, and frequency of problems and uses.
- VED Analysis – where classification is done according to the user’s experience.
- HML analysis method – classifies inventory as per unit price of products.
- SDE analysis method – classifies inventory as per the availability of items.
- Material Requirements Planning (MRP) – manufacturers would order inventory depending on stock data and sales forecasts from different segments of the company.
- Economic Order Quantity (EOQ) – evaluates the sales frequency for an item.
- Fast, Slow, and Non-moving (FSN) – classifies inventory into three buckets i.e. fast-moving, slow-moving, and non-moving inventory.
- Custom Par Levels – fixes an inventory amount at which the company should re-order every item.
EOQ (Economic order quantity) is used in cost accounting to measure the number of optimum product inventory levels that must be retained to avoid understocking and overstocking. This quantity is also recognized as the optimum lot size. It is a tool that computes the precise stock levels.
Supply chain analytics can recognize acknowledged risks and assist in forecasting future risks by identifying patterns and trends throughout the supply chain. They can help an organization make quicker, smarter, and more proficient decisions. Supply chain analytics boost planning accuracy, complete the lean supply chain, decrease costs and boost margin, and better comprehend risks.