How to conduct an inventory analysis: methods, tips and KPIs

A list is an important aspect of any business. This is one of the key factors that will make your business profitable as long as you can meet customer demand.

Therefore, you must have a clear picture of your inventory.

To do this, you essential to perform regular inventory scan reviews.

But what is an inventory analysis, and how is it carried out?

Let’s take a closer look.

What is inventory analysis?

Inventory analysis is the process that enables a company to understand its inventory levels.

An inventory analysis aims to improve cash flow, reduce stock-outs, and make all aspects of your operation more efficient.

Conducting regular and detailed inventory analysis is key. This means you can focus on the front-end aspects of your business instead of worrying about your inventory and stocks.

It’s also a great technique to spot trends and then help you gauge your future orders based on customer demand.

How is inventory analyzed?

When analyzing stocks, companies usually use various financial ratios. This help assesses whether the company is having problems producing or selling its inventory.

There are some methods you can use to analyze your inventory. We will focus on the two that attitude out from the rest as the best and most general.

ABC analysis is possibly the most popular analysis method.

ABC, or Always Better Switch, aims to simplify your inventory by dividing everything into three categories.

  • A-Inventory: Your most valuable inventory.
  • B inventory: Inventory sold regularly but not worth the same as A.
  • C-Inventory: Inventory that doesn’t sell much and makes the least income.

ABC lets you separate and prioritize your greatest valuable holdings. This means you can take the necessary steps to increase your profits and control costs.

It also allows you to identify your underperforming or stale stock. This means you can optimize your inventory turnover rate and forecast future customer demand.

computer analysis

VED analysis measures the value of your inventory and considers demand more.

It is a method oriented to manufacturing companies with a large inventory of different types.

It differs from ABC in that it only considers how important an item is to your business.

VED can be divided into three categories:

  • Vital: Inventory that needs to be in stock.
  • Essential: Important stock, but it is possible to work with a minimum quantity.
  • Desirable: These are optional items that can remain considered profitable but not essential.

VED analysis is great for determining your customer demand and adjusting your inventory based on demand and the importance of having an item in stock.

performance metrics

Key Performance Indicators or KPIs are habits to measure and monitor your business.

These fall into five common categories:

1. Stock turnover

The frequency by which your inventory is sold and replaced.

2. Average Selling Days

How long does your business take to buy or build inventory and then sell it for a profit?

3. Average inventory

This shows how quickly stock is selling.

4. Inventory depreciation

Inventory that no longer has any value. This can include outdated or damaged inventory.

5. Maintenance Costs

Your inventory cost is the cost of storing and maintaining your inventory.

When you analyze your inventory, writing down your KPIs is an easy way to extract key data that can help optimize your process.

the central theses

To run a profitable business, regular inventory analysis is essential.

Businesses can lose money by carrying unwanted inventory and not maintaining optimal inventory levels.

By analyzing your inventory, you can highlight important items and regulate your stock levels to keep up with customer demand.

Therefore, finding a method to manage and analyze your inventory efficiently is crucial.

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