Inventory Analytics | 5 mins read

Inventory Analytics Definition, Benefits, and Metrics to Track

inventory analytics definition benefits and metrics to track
Chloe Henderson

By Chloe Henderson

Inventory management involves various operations and careful tracking throughout the supply chain, making it impossible to rely on guesswork alone.

Inventory analytics seeks to quantify critical performance values, allowing companies to monitor and adjust their management techniques in real-time. By incorporating inventory data into everyday processes, managers can improve their decision-making.

What is Inventory Analytics?

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Inventory analytics examines inventory to determine the amount of merchandise that a business should keep on-hand. By optimizing inventory levels, companies can reduce their expenses and improve operational efficiency.

Before inventory management software, organizations had to manually calculate their economic order quantity (EOQ) by totaling ordering and holding costs. However, this method did not consider other critical factors, including

  • Supplier lead times
  • Safety stock
  • Fluctuating demand
  • Cash flow
  • Speed and quality of service

Considering all of the factors that affect inventory management, businesses can not perform in-depth analysis with a simple calculation. Instead, companies should implement machine-learning software that examines these elements thoroughly to determine the optimal inventory levels.

With an advanced inventory management solution, businesses can

  • Monitor inventory performance (turnover, profits, income generation)
  • Rate suppliers' performance
  • Classify products based on their profitability
  • Forecast demand and prepare stock levels
  • Manage obsolescence
  • Avoid excess stock

5 Ways Data is Improving Inventory Management

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Inventory analysis relies on insights into product activity so businesses can improve their management practices. However, companies need to understand the full potential that inventory data.

1. Enhance Operational Efficiency

Finding the balance between under and overstocking product is the key to retailers' success. While both lie on the opposite end of the spectrum, they can significantly impact efficiency, profitability, and productivity. Businesses that overstock items experience

  • Inflated storage and management costs
  • Risks of developing deadstock
  • Decreased operational efficiency

On the other hand, understocking items runs the risk of

  • Lost potential sales
  • Inflated carrying costs for expedited shipping
  • Decreased customer retention

By conducting a detailed inventory analysis, businesses can prevent stock blunders and maintain operational efficiency. Product data outlines turnover rates, lead times, and average life cycle, allowing managers to determine accurate reorder points. This ensures companies can consistently meet customer demand.

2. Increase Sales and Profit Margins

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A sales analysis should also outline product performance from each sales channel, so businesses gain insight into their strengths and weaknesses. With this information, companies can determine

  • Over and underperforming product lines
  • Customer preferences
  • Consumer buying patterns

Sales data enables retailers to increase stock levels of popular, high-profit items on various channels to boost sales. This may entail transferring products from different stores based on the location's unique sales trends, saving procurement and storage costs.

3. Improve Customer Satisfaction

Inventory analysis isn't just applied to back-end services. It considers the customer experience and how businesses can reduce negative actions, such as product returns, exchanges, and refunds.

Some of the factors that have a significant impact on customer satisfaction include

  • Carrier Service- Even if a business's inventory management is perfected, their carrier's performance directly reflects their brand. Therefore, companies need to ensure their carriers provide timely and safe deliveries.
  • Product Descriptions- Many returns result from poor product descriptions that don't accurately represent the item. Managers should carefully craft descriptions to ensure that they are concise yet informative.
  • Order Fulfillment Accuracy- Unfortunately, some companies sacrifice quality for speed, often resulting in incorrect product picking. As a result, the business has to pay for the return shipment and restocking process.

By considering these factors, organizations can significantly improve customer experience and satisfaction.

4. Minimize Costs

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Companies incur many expenses by simply managing stock, and some extend beyond typical monetary costs. Common inventory expenses include

  • Warehousing costs (rent, utilities, labor)
  • Logistical costs (transportation, third-party services, handling, shipping)
  • Procurement costs
  • Storage costs
  • Risks (depreciation, deadstock, shrinkage, stockouts)
  • Insurance premiums

By balancing supply and demand, retailers can minimize waste, unnecessary fees, and inventory risks.

5. Reduce Inventory Shrinkage

Inventory shrinkage can occur as a result of theft, damage, and human error. By implementing inventory management software, businesses can improve employee accountability and eliminate manual methods, such as data entries.

Inventory software tracks users' activity, allowing managers to determine which employees were working when products disappeared, dissuading workers from attempting theft. These solutions also eliminate the need for human intervention by integrating automated tools, including barcodes and scanners, to reduce human errors.

5 Metrics to Track for Inventory Analytics

Inventory management systems also quantify critical data to generate key performance indicators (KPIs) that enable managers to quickly judge real-time performance.

There are five primary metrics that businesses should incorporate into their inventory analysis.

Inventory Carrying Cost

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Inventory carrying costs represent the amount of money the company needs to invest in a product throughout its lifecycle. Many businesses are unable to quantify this amount because it spans from procurement all the way to the final customer transaction. However, this expense directly impacts each product's profit margin.

Typically, this metric is displayed as a percentage that represents the ratio between the product's cost versus the rest of the inventory. Therefore, managers should continuously monitor the inventory carrying cost to ensure it does not exceed 25%.

Inventory Shrinkage

When unmonitored, inventory shrinkage can lead to significant discrepancies. By tracking the inventory shrinkage metric, businesses can determine the difference between physical and recorded inventory. Companies must decide on their unique shrinkage level, that once reached, requires immediate action.

Average Cost Per Unit

The average cost per unit refers to how much the company spends on a specific product line. This metric is calculated by dividing the total amount invested into a procuring a line divided by the number of units bought.

When this metric increases, it usually means that the business is procuring more expensive stock or increasing its order value.

Average Number of Units Picked

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The average number of units picked calculates how often product pickers use an item to fulfill an order over its lifecycle. This metric can be calculated per hour, shift, day, quarter, or year.

Monitoring this value enables businesses to improve their inventory ordering to meet financial goals.

Average Number of Units Put Away

The average number of units put away refers to the items received and stocked by a business. This metric applies to the receiving team as they are responsible for maintaining the inventory rotation.