Managing inventory is not simply about knowing how much stock is available. Businesses also need to understand which products are selling quickly, which are slow-moving, how much stock should be maintained and where inventory-related costs are increasing.
This is where inventory analysis comes in handy.
Inventory analysis helps in making informed decisions regarding warehouse stock, purchasing and replenishment by analysing the inventory and sales or demand data. When done right, it can assist with decreasing overstocking, pinpoint stock-out threats, enhance working capital efficiency and support speedier and more effective customer fulfillment.
What is Inventory Analysis?
Analysis of inventory is the study of inventory data to gain an understanding of inventory movement, stock levels, demand patterns and performance.
It assists businesses to respond to questions like:
- Which products are selling quickly?
- Which SKUs are slow-moving or non-moving?
- How much inventory should be maintained?
- When should stock be replenished?
- Which products are tying up working capital?
Inventory management is the control and movement of inventory, whereas the inventory analysis is the understanding of inventory data and its application in decision making.
Why Is Inventory Analysis Important?
Reduces Excess Inventory
Slow moving stock is occupying warehouse space and capital is tied up. Analysis can find products that aren't moving as they should.
Helps Prevent Stockouts
The study of demand and replenishment pattern enables the businesses to get acquainted with the products that might require to be reordered before the available stocks are depleted.
Improves Working Capital
Having greater visibility of the inventory allows businesses to not invest too much into products that are not selling.
Supports Better Fulfilment
Maintaining appropriate stock levels makes it easier to fulfil customer orders without unnecessary delays.
Helps Make Better Business Decisions
The analysis of inventory can help in purchasing, pricing, promotions, inventory allocation, product assortment decisions, etc.
How to Perform Inventory Analysis
There are five steps in a practical inventory analysis process.
1. Collect Relevant Data
Use trusted information including SKU information, stock levels, sales history, quantity purchased, supplier lead time, inventory costs and returns.
2. Classify Inventory
Products can be classified on the basis of their value, importance, predictability of their movement or demand. Products can be prioritized by value using ABC analysis and fast, slow and non-moving inventory can be identified using FSN analysis, for instance.
3. Identify Inventory Patterns
An asset that is:
- Fast-moving
- Slow-moving
- Seasonal
- Frequently out of stock
- Overstocked
- Nearing obsolescence
4. Measure Performance
Use inventory KPIs to understand whether current stock levels and movement are aligned with business requirements.
5. Take Action
The analysis should result in decisions about reorder points, quantity to order, moving stock and promotion to move slow-moving items.
Key Inventory Analysis Methods
There are many techniques that have different uses for different problems in inventory.
ABC Analysis
ABC Analysis is the classification of products according to their value or importance to the business. A items are those that are given the most attention; B items are those that need moderate care; C items are those that are generally less intensively managed.
XYZ Analysis
XYZ analysis groups inventory based on the predictability of demand:
- X: Stable demand
- Y: Variable or seasonal demand
- Z: Highly unpredictable demand
It can play a role in adapting forecasting and safety-stock policies for businesses.
VED Analysis
VED classifies inventory into, Vital, Essential and Desirable, depending on the significance of the operation. It can be especially helpful when some items are not available, which may impact business operations.
FSN Analysis
Based on consumption/movement, FSN analysis categorizes products as Fast-moving, Slow-moving or Non-moving. It can be helpful in determining what inventory needs to be redistributed, promoted or disposed of.
Economic Order Quantity
Economic Order Quantity (EOQ) is a technique that aids in determining the most economical order quantity by minimizing the ordering and inventory holding costs.
Practical Examples of Inventory Analysis
Example 1: Fashion Inventory
A fashion company realizes that winter items are still available in the inventory when the season has ended.
These products are tagged by FSN analysis as slow moving. The business can react by offering specific discounts, by redistributing stock or by reducing purchases in the future.
Example 2: Ecommerce Stockouts
An online ecommerce business realizes that one of the SKUs is constantly running out of stock on the weekends. The business can use this comparison of sales patterns with supplier lead times to adjust their reorder point and safety-stock levels, to minimise future stockouts.
The excessive working capital position of a firm.
Example 3: Excess Working Capital
A distributor discovers that a number of SKUs are not turning over quickly and have high inventory costs. The business can keep levels lower and question if those products are necessary to be carried in the assortment and, if not, then cut back on the amount they buy of that product.
Inventory Analysis with Business Dashboards
When sales channels and inventory are spread out over several warehouses, it can be challenging to manually check a spreadsheet. A business dashboard gathers all-important inventory information into a single visual context.
An inventory dashboard can include:
- Stock on hand
- Inventory value
- Inventory turnover
- Days inventory outstanding
- Stockout rate
- Fill rate
- Slow-moving SKUs
- Reorder alerts
- Warehouse-level inventory
For instance, a supply chain manager could observe:
Warehouse A: stable inventory
Warehouse B: excess stock in several SKUs
Warehouse C: repeated stockouts in fast-moving products
The manager can go straight to the areas of concern since they are not having to compare individual reports. A dashboard isn't just a place to see data. It's enabling teams to turn inventory data into quicker decisions.
Key Inventory Analysis KPIs
Inventory Turnover: A ratio that indicates the number of times inventory is turned over in a given time.
Days Inventory Outstanding: Represents the average time that stocks are held in the business prior to sale or consumption.
Reorder Point: Specifies when more should be ordered due to the demand and lead-time.
Stockout Rate: Measures lack of availability of products when there is demand.
Fill Rate: Summarizes the extent to which the customer or order demand can be satisfied with inventory available.
Challenges in Inventory Analysis
Inaccurate Data: Inaccurate inventory records can lead to wrong analysis and wrong buying or replenishing decisions.
Unpredictable Demand: When customers demand a sudden surge, it increases the difficulty of the forecast. A sudden surge in customer demand can create forecasting challenges, especially for seasonal products or even those with a trend.
Multiple Warehouses and Channels: It becomes challenging to manage inventory at multiple locations and sales channels without having timely, consolidated inventory information.
Poor System Integration: Incomplete or delayed information can be caused by disconnected ERP, inventory, warehouse and sales systems.
Lack of Analytical Capability: Having data is not enough. Teams also need appropriate tools and analytical skills to turn inventory information into useful decisions.
Best Practices for Effective Inventory Analysis
Use reliable data: Make sure inventory, sales and purchasing data are accurate and consistent.
Segment inventory: Use ABC, XYZ or FSN analysis according to the business question.
Monitor trends: Don't just take a single throw of the market at any given instant, but keep an eye on the performance of a stock over time.
Use business dashboards: Provide visibility to supply chain, warehouse and management teams of metrics that are relevant to them.
Act on insights: Analysis of the inventory should result in action and change whether it be in purchasing, replenishment, pricing, allocation or warehouse operations.
Review regularly: Inventory patterns shift so analysis should be a continuous activity and not a once a year activity.
How AAJ SCM Can Support Inventory Analysis
AAJ Supply Chain Management leverages technology to enable warehouse operations and provide inventory visibility and analysis. It can integrate WMS for inventory tracking, have real-time inventory visibility, classify inventories, analyse demand, lead times and report. These capabilities can aid businesses in comprehending how inventory is shifting and making better choices concerning inventory levels and also warehouse functioning.
Conclusion
It is not only about having a stock that inventory analysis helps businesses go beyond. It gives you an understanding of what's moving, what isn't, where there's potential for stock issues and where stock decisions impact cost and fulfilment.
The approach of ABC, XYZ, VED, FSN and EOQ can be used to assess inventory in a variety of ways, making the insights easier to monitor and act on via KPIs and business dashboards.
The best way to achieve this is by leveraging accurate data, the right analytical techniques, meaningful KPIs and actionable dashboards, which help to continually refine inventory decisions.
