Inventory Analysis | 3 mins read

Inventory Analysis- 5 KPIs All Businesses Should Track

inventory analysis 5 kpis all businesses should track
Hanh Truong

By Hanh Truong

Carrying and managing the optimal volume of stock is the key to maximizing company sales and output. However, this process can pose challenges for businesses with widespread clientele or startups with limited resources.

Becoming a dependable source of finished goods for customers relies heavily on proper supply chain inventory management. Through detailed inventory analysis, organizations can control stock based on consumer demands, manage purchasing budgets, and monitor performance KPIs.

What's an Inventory Analysis?

Inventory analysis helps business owners manage their cash flow and budget. These figures allow them to see exactly how much stock has been sold, which products are likely to go obsolete, as well as the final profits.

The analysis can take many forms. However, organizations will monitor basic business inventory metrics during this process, including historical sales data, inventory turnover, order fulfillment accuracy, and the gross margin return on investment.

Many companies have been investing their time and resources in producing accurate inventory analyses to prevent profit losses and missed opportunities due to over or understocking crucial items. Tracking inventory levels helps businesses maintain productivity, as it allows management teams to assess trends in customer demands and react appropriately to enhance cash flow.

Goals of Inventory Analysis

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Conducting proper inventory analysis will allow business owners to efficiently meet a variety of goals, such as-

  • Reduce Waste - Inventory management will prevent products and money from going to waste. Having procedures for warehouse management will make it easy to view which products are best sellers and which items lack demand. Business owners can then gauge the appropriate quantity they need to reorder to keep up with their customers' demands. This will also prevent unsold products from piling up in the warehouse.
  • Increase Profits - Unsold inventory can become obsolete and take up unnecessary space in the warehouse, leading to increased holding costs. Performing inventory analysis can prevent an overflow of safety stock, so organizations can maximize their profits and limit waste.
  • Efficient Business Deals With Suppliers - Proper inventory procedures will help business owners narrow down which suppliers and vendors bring in the most profit for their company. Knowing this, management can prioritize building loyal relationships with these third parties and negotiate better pricing.
  • Minimize Stockouts - With thorough inventory analysis, companies can prevent stockouts, which would have resulted in delayed or canceled projects. If a store is sold out of an item, customers are more likely to shop with competitors than wait for the product to be back in stock
  • Improve Customer Satisfaction - Customers are more likely to stay loyal to a brand if the organization is reliable in providing the products and services they require on a timely basis.

5 KPIs Businesses Should Track for Analysis

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KPIs, or Key Performance Indicators, can help companies see how successful they are in meeting their goals. These universal indicators are measurable and are extracted from business management software and point of sale systems. Analyzing relevant KPIs can help businesses evaluate their profits, cash flow, and inventory control.

1. Inventory Turnover

This ratio shows how many times a product was sold and replaced during a given time period. Companies generally use this ratio yearly to assess inventory data and evaluate product performance.

The inventory turnover ratio is computed using the following formula-

Total cost of goods sold / ( ( Beginning inventory + Ending inventory) / 2 )

The total cost of items or services sold can be found in the company's yearly income statement.

2. Inventory Write-Off

This refers to products that are removed entirely from the inventory because it produces minimal profits. If a product is stolen, damaged, or obsolete, it can be classified as a write-off. This KPI will help businesses periodically check which inventory items are profitable and which are resulting in excess holding costs.

Inventory write-off is identified by the cash value of the item being removed. Companies can keep track of write-off products by inputting it into an account, such as the cost of goods sold or a write-off account.

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3. Holding Costs

Holding, or carrying, costs are the price of storing and managing items in an inventory warehouse. Holding costs can include the price of the storage spaces, as well as the labor and equipment required to move the products.

To compute this KPI, all of the different costs of maintaining inventory need to be added together.

This indicator helps to further analyze additional costs in maintaining stock, and evaluate different options to maximize or minimize inventory space.

4. Average Inventory

The average inventory shows the median cost of stock items during a specific time period. Knowing the average inventory will help business owners see the usual quantities of a product they have in the warehouse and how fast it is sold. Any shifts in average trends will reflect potential problems with sales or purchasing.

The average inventory can be calculated by using this formula-

( Beginning inventory + Ending inventory ) / Number of months in the accounting period

5. Average Days to Sell Inventory

This ratio helps organizations calculate the average number of days it takes to produce or purchase items for their inventory, and sell them to customers. Using this KPI, business owners can research ways to sell their products faster while maximizing their profits.

The average days to sell inventory can be computed using the formula-
( Inventory / Cost of Sales ) x 365 days

Incorporating KPI tracking into inventory management procedures can optimize warehouse operations and budgets. Through inventory analysis, businesses can efficiently manage their stock and monitor their profitability.