Effectively managing your inventory is a delicate balance between having enough stock on hand to meet customers’ needs without paying extra to store the excess. With these inventory analysis tips and techniques, you’ll learn how to manage your stock to maintain excellent customer service without wasting money.
Importance of Inventory Analysis
An inventory analysis helps you better serve your customers, quickly and consistently fulfilling orders while avoiding stock-outs and back orders. An inventory analysis also helps you reduce waste and avoid excess storage costs.
Collecting and analyzing data on your inventory gives you more insights into what your customers are buying versus what isn’t moving as quickly as you thought. You can refine how you order, stock, and replenish your inventory to reduce your costs while meeting customers’ needs.
How Do You Perform an Inventory Analysis?
Analyzing your inventory involves categorization and using various methods to measure key performance indicators. The insights you gain will help you utilize your resources more efficiently and make better decisions about purchasing, production, sales, and other facets of your business.
Inventory Data Types and Collection
Before you start your inventory analysis, set goals and define your desired outcomes. Then you can prioritize data collection and choose the right type of analysis for your business. For example, if you want to increase your profits, you might do an inventory valuation. If you’re trying to reduce waste, you might assess each product’s performance to see how long different items are sitting on the shelf.
What Are the Different Methods of Inventory Analysis?
Choose one of the following inventory analysis methods based on your goals and the information you need to accurately manage your inventory.
ABC Analysis
An ABC inventory analysis involves classifying your inventory based on how important different items are to your business. Category A refers to your core inventory. You need to control this inventory tightly, and you need accurate records to consistently fulfill orders.
Category B refers to inventory that requires a moderate amount of control. Ideally, you would have the right amount of stock on hand, but these items aren’t business-critical, so you can manage them more loosely. Category C refers to inventory that’s not as important to your business. You can use simple controls and fewer records to manage this category.
This method helps you prioritize your workflows and allows your inventory managers to focus most of their attention on your most critical inventory.
VED Analysis
Similar to an ABC analysis, the VED method is a way to categorize your inventory based on its importance to your business.
The “V” refers to vital inventory that you need for production or other business-critical processes. Category E is essential, meaning that if you run out of this inventory, it could hamper your operations, but it won’t necessarily shut them down entirely. Category D stands for desirable, which is inventory that will cause only minor issues if you run out. Category D inventory is also usually easier to replenish.
HML Analysis
Under the HML analysis method, you categorize your inventory based on value. Category H refers to the most valuable items in your inventory. Category M refers to items of medium value. Category L refers to items with a low value.
To determine the right category for an item, calculate its annual consumption value by multiplying its annual demand by its unit price. For example, if you sell 10,000 units of an item annually and price it at $20 per unit, you’re earning $200,000 a year on that item.
SDE Analysis
An SDE analysis is a great tool for planning your supply chain. Under this analysis method, you classify your inventory based on how easy it is to get. The “S” stands for scarce, which usually refers to items that are imported and take a long time to procure.
“D” means difficult, which refers to items that are available domestically but may still take a long time to procure. For example, if you need lithium batteries for your products, you can get them in the U.S., but the supply may be limited.
Category E refers to items that are easy to procure.
Safety Stock Analysis
A safety stock analysis assesses your ability to manage your inventory levels and avoid stock-outs. You calculate it by multiplying your maximum daily usage by the maximum lead time. Next, multiply the average daily usage by the average lead time in days. Subtract the average number from the maximum number to determine the likelihood of a stock-out.
Key Performance Indicators in Inventory Analysis
Once you’ve categorized your inventory, track the following key performance indicators to manage your inventory:
- Inventory turnover rate: the rate at which inventory is sold, used, or replaced
- Gross margin return on investment (GMROI): refers to how much profit you make for each dollar you spend on your inventory
- Days inventory outstanding (DIO): refers to how long you tend to hold a piece of inventory before you sell it
- Stock-out rate: refers to the percentage of your inventory that’s unavailable when a customer wants to buy it
Using Inventory Analytics Tools and AI
A proper analysis in inventory management requires digging through volumes of data and making multiple calculations. You need high-quality data to get an accurate analysis, and doing it manually or with various spreadsheets and programs often leads to errors.
AI-powered software can quickly assess multiple reports and run the calculations for you so you know your inventory analysis reports are accurate.
Tips for Effective Inventory Management
To best manage your inventory, use software to gain real-time visibility into your stock and how it’s moving. Choose the categorization method that works best for your business and its needs. Finally, conduct regular analyses and benchmark your performance against your historical data so you know whether or not you’re improving.
Leverage the Power of Surgere for Inventory Optimization
Start measuring your data with Surgere’s cloud-based production control and management tools. Our solutions can give you valuable insights into your inventory so you can continually meet customer demand without carrying excessive inventory.
Get started by contacting us today.
