Inventory analysis holds a special role in managing businesses that handle physical products. It examines inventories inside the warehouse and determines the exact amount of inventories a company should carry to avoid stock-out problems.
There are various inventory analysis methods, such as ABC, XYZ, and economic order quantity. Businesses need to adopt one of them according to the type of product they hold for selling to customers.
Proper inventory management analysis can reduce dead stock and fulfil orders within a specific time frame. It helps to increase brand reputation and customer satisfaction.
What is inventory analysis?
Inventory analysis means analysing the stocks in the Company warehouse and determining the optimal amount of inventory the business holds to meet customer demand.
It can improve the organisation’s overall efficiency by reducing warehouse storage costs, minimising wastage and enhancing customer experience.
Let’s discuss inventory analysis with an example. Apple is quite popular today in the world for its innovative products. But no one knows about the reasons for the success. The Company uses advanced inventory analysis tools for demand forecasting and always keeps the right amount of products to satisfy customers.
Simultaneously, Toyota Company is even popular for its efficient inventory management systems. It uses kanban cards and inventory forecasting software to track stocks. The Company always keeps the right amount of products on hand and reduces waste.
Benefits Of Effective Inventory Analysis
1. Avoid Stockout
When a product runs out of stock, it leads to unsatisfied customers and encourages them to buy from competitors. Inventory analysis does stock analysis at periodic intervals and prevents stockout problems.
2. Avoid Overstocking
Buying too many products from the seller and storing them in the warehouse can increase the costs of a business. The products can get spoiled or outdated with time.
Simultaneously, it unnecessarily occupies the warehouse’s storage space and raises holding costs. Inventory analysis can track reorder points and determine the inventories that are not selling fast. Hence, you can avoid purchasing them from sellers.
3. Determine Inventory Performance
Inventory analysis determines the inventories that are selling too fast. It helps a business focus on best-selling products and avoids consuming time and effort on slow-moving inventories.
4. Improves Cash Flow
An inventory analysis improves the cash flow of a business. It frees up capital that a company can use in product development.
5. Enhances Customer Satisfaction
Keeping the right amount of products in the warehouse can fulfil customer orders immediately. It increases brand reputation and improves customer satisfaction.
How Business Need To Do Inventory Analysis?
- Businesses need to list the items that are stored in the warehouse. The list should include the item name, quantity of items stored, cost price and selling price.
- You must track the stocks periodically and determine which items are best-selling and slow-moving. There may also be some inventories that have not been sold at all.
- You can use ABC analysis to divide inventories. Classify highly valuable and fast-selling items under A. Next, you need to categorise the moderate-value items under B and low-value items under C. ABC inventory classification will allow a business to focus on best-selling products.
- A business should calculate the dead stocks and inventory turnover ratio.
- Businesses should provide discounts to sell out slow-moving items.
- Modern businesses use advanced software to track, analyse, and manage inventories.
Importance Of Inventory Analysis In Business Operations
Inventory analysis plays a significant role in streamlining business operations. A small business owner usually has limited storage space and capital. The inventory analysis helps these small businesses avoid storage costs and invest more in demanding and fast-selling products.
Inventory analysis techniques are even crucial for large enterprises. Applying these methods improves forecasting, reduces holding costs, and ensures constant product availability for customers.
Inventory control and Analysis are essential in manufacturing industries. The techniques manage raw materials, semi-finished and finished goods efficiently. It ensures that production will run smoothly without having a material shortage.
Key Techniques And Methods Of Inventory Analysis
There are various types of inventory analysis techniques. Each method has its unique purpose. So, the kind of analysis you choose will depend on your business type and the products it carries.
1. ABC Analysis
ABC analysis is one of the most popular inventory classification methods. Here, the inventories are categorised based on A, B, and C factors like sales revenue and demand frequency.
Class A: Highly valuable and most demanding inventories in the market are categorised under class A. They account for 10 per cent of the total inventories in the warehouse. But they contribute 70 per cent of the total consumption value.
Class B: Inventories that are sold on a regular basis but are not as valuable as class A items fall under this category. They account for 20 per cent of the total inventories in the warehouse.
Class C: The inventories that are not sold much and generate the least revenue are classified under Class C.
ABC analysis allows a business owner to identify the most valuable and high-sell inventories from the bulk. Thus, a business can focus more on it to drive profit and control costs. Simultaneously, ABC inventory control and Analysis reduces outdated products in the warehouse storage and optimises the demand forecast.
2. VED Analysis
Healthcare and medical supply businesses usually use the VED inventory analysis method. This technique classifies inventories based on the user experience.
V (Vital)- It comprises stocks that must be kept in the warehouse at sufficient levels. For example, if a healthcare business does not have some particular drugs, then it can lead to life-threatening situations.
E (Essential) – It is composed of inventories that a business should keep in minimum amounts.
D (Desirable) – These inventories are convenient but optional. Business operations can be done without these inventories.
A business does VED Analysis in the following ways.
- It lists all the items that need to be analysed.
- Collect data on each item based on usage, impact on business operations, and availability in the warehouse.
- The business then assigns the inventories according to the V, E, and D classifications.
3. XYZ Analysis
The business classifies the inventory here based on demand predictability. XYZ analysis improves forecasting accuracy and reduces overstocking and stockout problems.
- X items -These inventories have stable and predictable demand.
- Y items – These inventories exhibit demand variability because of new trends or seasons.
- Z items – These inventories have the highest variation in demand.Â
4. FSN Analysis
It classifies inventories or stock-based only consumption rate and usage.
Fast moving – The inventories are frequently used and have a high turnover rate.
Slow moving – They have low demand compared to fast-moving stocks.
Non-Moving – They have low or almost no demand. The business needs to offer discounts to sell these items or discard them.
Key Performance Indicators In Inventory Analysis
1. Inventory Ratio
It explains how often a business sells and replenishes a product in the warehouse for a specific period. When the inventory turnover ratio is high, it indicates that the business is performing well and selling products effectively in the market. However, a low inventory turnover ratio indicates overstocking problems.
2. Days Inventory Outstanding (DOI)
It indicates the average number of days the inventory is stored in the warehouse before it is sold.
A high DOI indicates that the warehouse has excess inventories or slow-moving goods.
Low DOI indicates the business efficiently manages inventories and sells products quickly to its customers.
3. Reorder Point
The reorder point indicates that the business must restock a particular item before it is stocked out of the warehouse.
Challenges in Inventory Analysis
- Inaccurate projection of demand can result in excess and stockout situations in the warehouse.
- Lack of real-time visibility in multiple channels and warehouses can create problems when managing stock.
- Inefficient systems or poor integration of ERP with inventory and sales software will make it impossible to obtain reliable analytical information. In this case, businesses are always at risk of getting incomplete reports or delays in inventory changes.
- Managing the returns is quite complex, specifically in an ecommerce business. It can distort available stock figures if not properly handled.
- Nonetheless, having the right tools is insufficient. However, many companies have no professional analysts with the right skills to analyse inventory data and make effective data-driven decisions accurately.
Best Practices For Implementing Inventory Analysis
1. Adopting Inventory Management Software
Businesses must be equipped with advanced software for managing inventories inside the warehouse. The software will offer real-time data tracking, reordering, and forecasting, which can reduce errors to a greater extent. It even increases the visibility of the products stored inside the logistics warehouse.
2. Conducting Regular Audits
Businesses must conduct regular inventory audits, either annually or biannually, to ensure that the product mentioned in the system matches those stored in the warehouse.
3. Train Staff
Businesses need to train Staff in inventory management software and inventory classification methods.
4. Monitor Inventory Metrics
The Staff needs to monitor inventory analysis metrics like inventory turnout ratio and stockout rate.
Conclusion
Practical inventory analysis in warehouse management is highly essential for a business. It can help a company determine the adequate amount of materials present in the warehouse to meet customer demands. Companies can achieve this by leveraging advanced software and training Staff to classify warehouse inventories. Simultaneously, 3PL companies should continuously improve inventory analysis practices to stay competitive, reduce logistics costs and maximize profitability.
AAJ Supply Chain Management
