Given that inventory has a significant impact on your cash flow and profitability as a wholesale distributor, it’s imperative that you review inventory-related analytics to ensure you are on the right track.
Maintain too much inventory and you tie up cash flow that could be used in other important areas of your business. Stock too little and you upset customers by being out of inventory when they need it most.
This is how inventory analytics comes into play as a useful strategy to ensure your business is healthy and growing. By utilizing targeted analytics, you’ll get the insight you need to take action.
To help, we’ll cover the following in this article:
Inventory analytics are used as a tool to improve profits and customer satisfaction. Inventory analytics also help you remove the guesswork out of inventory management. Instead of making decisions based on gut instincts, inventory analytics help you use data to make the right decisions for your wholesale distribution business.
1. Demand Forecasting
To help prepare for spikes or drops in demand, demand forecasting is ideal to help curb this common problem. The foundation of this technique requires human judgement but technology as well. By reviewing prior year sales data, you can plan for similar scenarios in the coming year. This requires that someone review the data and make a judgement call based on the prior year sales figures. This method also requires that you factor in what sales is forecasting for the coming quarter. Your inventory management software can help you track prior year sales data.
2. Inventory Carrying Cost
This metric is tough for every business. Your inventory carrying costs don’t just include the cost of inventory itself, it also includes the costs associated with storing inventory. It includes costs to keep your warehouse operating, like software applications, scanners, conveyors, insurance, utilities and depreciation. Typically, these costs are calculated by year and represented as a percentage of the cost of your inventory. To calculate your inventory carrying costs, add the annual carrying costs to the costs of your actual inventory.
3. Inventory Shrinkage
Inventory shrinkage is a problem today for any business that stores products in a warehouse. Inventory shrinkage is defined as a loss of goods due to damages, theft or human error. Your inventory and order management software may state that you have it in stock, but you discover inventory is missing after a physical count. Such an incident is what’s known as inventory shrinkage.To determine you inventory shrinkage, evaluate the manual count of inventory and subtract it from the inventory cost listed in your books. Or, determine inventory shrinkage as a percentage of inventory cost by dividing the difference by the amount of stock on the books.
4. Average Cost Per Unit
The average cost per unit is also known as the unit cost. Calculate your average cost per unit by dividing your inventory costs by the number of units on hand. This analytic helps you determine if your overall internal costs are rising or it may be attributed to the fact you are stocking higher-priced items in your warehouse.
5. Gross Margin Return on Inventory (GMROI)
GMROI is a ratio that helps you analyze your ability to turn inventory into cash above and beyond the cost you paid. You can calculate your GMROI by dividing your gross margin by your average inventory cost. This analytic allows you to see which product lines are the most profitable or least productive.
6. Reorder Point Formula
A reorder point is the threshold, or lowest point, of your safety stock. Your reorder point should also include the lead time you need to bring additional stock into your warehouse. Essentially, your reorder point indicates when it’s the right time to place an order for new stock. Reorder points are an extremely important inventory management practice, which helps you to maintain the right levels of stock, thus keeping your buyers happy. To calculate your reorder point, multiple the maximum daily usage by the maximum lead time in days and add your safety stock in days.
7. Cash Conversion Cycle
This cash-flow analytic demonstrates how much time it takes your company to convert your inventory investments into cash. In other words, your cash conversion cycle determines how long cash is tied up in inventory until the inventory is sold and paid for by customers. Calculate your cash conversion cycle by adding the days inventory outstanding to the days sales outstanding and subtracting the days payable outstanding.
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Categories: Inventory Management