Learn about the crucial role of inventory analysts in managing and optimizing a company’s inventory. Discover the different methods and best practices used in inventory analysis, including ABC, FSN, HML, and more. Understand the importance of inventory management and how it can impact a company’s bottom line. Stay ahead of the game with our comprehensive guide on inventory analysis and best practices.”
What is inventory analysis and why it is important?
Inventory analysis is the process of evaluating the stock of goods and materials that a company holds in order to optimize the balance between having enough inventory to meet customer demand and not having so much inventory that it becomes a financial burden.
It helps companies to make informed decisions about their inventory levels. By understanding the flow of materials and products through their supply chain, companies can identify bottlenecks and areas for improvement.
Additionally, inventory analysis can help to reduce costs by identifying opportunities for consolidation or elimination of slow-moving or excess inventory. Furthermore, it helps to ensure the timely availability of products, which ultimately leads to better customer satisfaction.
Inventories are a significant investment for most companies, an efficient inventory management system is crucial to the success of a business. Inventory analysis is vital as it helps organizations to make data-driven decisions to improve their inventory management processes and make better decisions.
Types and Methods of Inventory Analysis
Following are a few common types of inventory analysis. Each type of inventory analysis provides a different perspective and can be used to gain different insights into an organization’s inventory management processes. By utilizing a combination of these methods, organizations can gain a comprehensive understanding of their inventory and make data-driven decisions to improve their inventory management processes.
1. Raw Material Analysis:
It evaluates the stock of raw materials used to produce finished goods. It helps organizations to understand their raw material inventory levels, usage patterns, and supplier performance. This information can be used to identify opportunities for cost reduction and improve supplier relationships.
2. Work-in-Progress Analysis:
It examines the partially completed goods that are in the production process. This type of analysis helps organizations to understand the efficiency of their production processes, identify bottlenecks and inefficiencies, and make adjustments to improve their production times and output.
3. Finished Goods Analysis:
It examines the stock of completed products that are ready for sale. It helps organizations to understand their inventory levels, sales patterns, and customer demand. This information can be used to identify opportunities for cost reduction, improve customer service, and make adjustments to production schedules.
4. ABC Analysis:
It is a method of categorizing inventory based on its importance or value to the organization. It is used to identify which items are the most critical for the organization and should be closely managed, and which are less critical and can be managed more loosely. The inventory is divided into three categories, A, B, and C, where A represents the highest value items, B represents the medium value items, and C represents the lowest value items.
For example, for a company that sells electronic items, the A-category items could be the latest smartphones, the B-category items could be older smartphone models and the C-category items could be accessories.
5. FSN Analysis:
This is a method of categorizing inventory based on its fast-moving, slow-moving, or non-moving status. It helps organizations to identify which items are selling quickly, which are not selling well, and which are not selling at all.
For example, a retail store can use this method to identify which clothing items are fast-moving, slow-moving, and non-moving, and adjust their inventory accordingly.
6. HML Analysis:
This is a method of categorizing inventory based on the product’s high, medium, or low unit price. It helps organizations identify their high-value items and prioritize their management and protection.
For example, a jewelry store can use this method to identify which pieces of jewelry are high-value items, medium-value items, and low-value items, and adjust their security measures accordingly.
7. VED Analysis
VED (Vital, Essential, and Desirable) analysis is a method of inventory management that categorizes products based on their importance to the organization. It helps organizations to identify which products are vital to the organization’s success, which are essential for maintaining operations, and which are desirable but not essential.
For example, a hospital can use VED analysis to categorize the products they use. Vital products could be life-support equipment, essential products could be the necessary medicines, and desirable products could be the snacks and magazines for the patients.
8. SDE Analysis
SDE (Scarce, Difficult, and Easy) analysis is a method of inventory management that categorizes products based on the difficulty of obtaining or producing them. It helps organizations to identify which products are scarce, difficult, or easy to obtain or produce, and adjust their inventory management accordingly.
For example, a construction company can use SDE analysis to categorize the products they use. Scarce products could be the specialty materials that are only available from a few suppliers, difficult products could be the materials that are only available in certain regions, and easy products could be the commonly used materials that are readily available from multiple suppliers.
9. Reorder Point Analysis:
This is a method of determining when to order more inventory. It considers the lead time for the supplier to deliver the inventory and the rate at which the inventory is selling.
For example, a grocery store can use this method to determine when to order more apples from the supplier based on the lead time and the rate at which apples are sold.
10. Economic Order Quantity (EOQ) Analysis:
This is a method of determining the optimal order quantity to minimize total inventory costs. It takes into account the cost of placing an order, the cost of holding inventory, and the cost of stockouts.
For example, a manufacturing company can use this method to determine the optimal quantity of raw materials to order in order to minimize the total cost of inventory.
11. Safety Stock Analysis:
This is a method of determining the amount of inventory to keep on hand to protect against stockouts. It considers the lead time for the supplier to deliver the inventory, the rate at which the inventory is selling, and the desired service level.
For example, an online retailer can use this method to determine the amount of safety stock to keep on hand for a particular product to ensure they don’t run out of stock during peak sales periods.
12. Material Requirement Planning (MRP):
It is a method of planning and managing inventory based on the demand for finished goods. It considers the bill of materials for each product, the lead time for the supplier to deliver the inventory, and the rate at which the inventory is selling.
For example, a furniture manufacturer can use MRP to plan and manage the inventory of raw materials and components needed to produce finished goods.
13. Bill of Material (BOM) Analysis:
It is a method of analyzing the inventory required to produce a specific product. It takes into account the materials and components required, the quantities required, and the lead times.
For example, a car manufacturer can use BOM analysis to determine the inventory required to produce a specific model of car.
It’s important to note that these methods of inventory analysis are not mutually exclusive, they can be used in combination to gain a comprehensive understanding of inventory management processes and make data-driven decisions. Additionally, some of these methods may be more suitable for certain businesses or industries, it depends on the specific needs and constraints of the organization. However, by understanding the different methods available, organizations can choose the ones that work best for them and adapt them to fit their specific needs.
Key Metrics for Inventory Analysis
Inventory turnover
This metric measures how many times a company’s inventory is sold and replaced in a given period. It helps organizations to understand how quickly their inventory is moving and take appropriate action.
Days of supply
This metric measures how long it will take for a company to sell its current inventory at the current rate of demand. It helps organizations to understand how long their inventory will last and plan accordingly.
Carrying cost
This metric measures the costs associated with holding inventory, including storage, insurance, and financing. By analyzing the carrying cost of inventory, organizations can identify opportunities to reduce costs and improve their bottom line.
Gross margin return on investment (GMROI)
This metric calculates the profitability of a company’s inventory by taking into account the gross margin and the investment in the inventory. It helps organizations to understand the profitability of their inventory and make decisions accordingly.
Stockout rate
This metric measures the frequency of stockouts, or instances where a product is out of stock. It helps organizations to understand the impact of stockouts on their operations and customer satisfaction.
Lead time
This metric measures the time it takes for a supplier to deliver an order after it has been placed. It helps organizations to understand the lead time for different products and plan accordingly.
Order fill rate
This metric measures the percentage of customer orders that are filled on time. It helps organizations to understand their ability to meet customer demand and identify areas for improvement.
Safety stock
This metric measures the amount of inventory that is kept on hand as a buffer against stockouts and unexpected demand. It helps organizations to ensure that they have sufficient inventory to meet customer demand.
Order point
This metric measures the point at which an organization should reorder inventory. It helps organizations to ensure that they have the right amount of inventory on hand to meet customer demand.
Stock coverage
This metric measures the number of days that inventory will last based on the current rate of demand. It helps organizations to understand how long their inventory will last and plan accordingly.
Holding costs
This metric measures the costs associated with holding inventory, including storage, insurance, and financing. It helps organizations to understand the costs of holding inventory and identify opportunities to reduce costs.
Obsolete inventory
This metric measures the amount of inventory that is no longer useful or in demand. It helps organizations to identify and dispose of obsolete inventory and minimize carrying costs.
Productivity
This metric measures the efficiency of inventory management processes and the effectiveness of inventory management techniques. It helps organizations to identify areas for improvement and optimize their inventory management processes.
Inventory Analysis Best Practices
Implement an inventory management system:
Having a systematic and organized approach to inventory management is crucial for effective inventory analysis. Invest in an inventory management system that can automate and streamline inventory tracking, reordering, and reporting.
For example, a retail store can use a software system to track inventory levels, sales, and reorder points, which allows them to automatically reorder products when stock runs low.
Set clear inventory goals:
Define the objectives of inventory management, such as reducing carrying costs, improving customer service, or increasing productivity, and use these goals to guide your inventory analysis and decision-making.
For example, a restaurant can set a goal to reduce food waste by better managing their inventory and implementing a just-in-time inventory system.
Conduct regular inventory analysis:
Regularly analyzing inventory levels, movements, and trends can help identify patterns and issues that need to be addressed.
For example, a manufacturing company can conduct regular inventory analysis to identify slow-moving products, which can then be phased out or sold at a discount to make room for more in-demand products.
Use multiple inventory analysis methods:
Different methods of inventory analysis can provide different insights into inventory management.
For example, a company can use ABC analysis to identify which products are most important to the business and prioritize them, and use FSN analysis to identify slow-moving or non-moving products that need to be phased out.
Communicate with suppliers:
Maintaining good communication with suppliers can help ensure timely delivery of inventory and reduce the risk of stockouts.
For example, a retailer can work with suppliers to establish a just-in-time inventory system, which minimizes inventory holding costs and maximizes customer service.
Use inventory optimization techniques:
These techniques can help organizations to optimize inventory levels to minimize costs and maximize customer service.
For example, a company can use economic order quantity (EOQ) to determine the optimal order size and reorder point for each product.
Monitor and measure performance:
Regularly monitoring and measuring performance against inventory goals and objectives can help organizations to identify areas for improvement and make data-driven decisions.
For example, a company can track inventory turnover, days of supply, and carrying costs to understand how their inventory management practices are impacting their bottom line.
Continuously improve:
Continuously review and improve inventory management processes and techniques, to ensure that they are in line with business objectives and market conditions.
For example, a company can conduct regular audits of its inventory processes and make adjustments as needed, to improve efficiency and reduce costs.
Challenges and Limitations of Inventory Analysis
Inaccurate data:
Inventory analysis relies on accurate data, such as inventory levels, sales, and demand patterns. However, errors or inconsistencies in data can lead to inaccurate conclusions and poor decision-making.
Difficulty in predicting demand:
Inventory analysis involves forecasting future demand for products, which can be difficult due to the uncertainty and unpredictability of market conditions.
Complexity of inventory management:
Inventory management can be complex, involving multiple factors such as lead times, carrying costs, and safety stock. It can be challenging to take all of these factors into account when making inventory decisions.
Limited resources:
Inventory analysis can be time-consuming and resource-intensive, requiring dedicated personnel, software, and equipment. Organizations may not have the resources to conduct regular inventory analysis or implement advanced inventory management techniques.
Difficulty in balancing inventory levels:
Finding the right balance between having enough inventory to meet customer demand, and not having too much inventory that ties up resources and results in carrying costs is a challenge for many organizations.
Difficulty in identifying the root cause:
Inventory analysis can identify problems, but it may be difficult to identify the root cause of the problem. This can make it difficult to implement effective solutions.
Difficulty in measuring the effectiveness of inventory analysis:
It can be difficult to measure the effectiveness of inventory analysis, as inventory management is a complex and dynamic process that is influenced by multiple factors.
Difficulty in keeping up with the technology:
With the fast-paced technological advancements, it can be challenging for organizations to keep up with the latest inventory management software, and analytical tools.
Conclusion and Future Directions for Inventory Analysis
In conclusion, inventory analysis is an essential process for managing a company’s inventory levels and ensuring the success of a business. It’s important to regularly review and update inventory data, use accurate forecasting methods, and implement an inventory management system. With advances in technology, companies are now able to access more advanced inventory analysis tools such as AI-based systems, which will help them to improve their inventory management processes and make better decisions.
