Stock analysis. Methods compared.
Stock analysis. Depending on the business you run and the types of inventory you have, you can use different methods. Here the different most well-known methods.
ABC analysis
ABC analysis is the most well-known method of inventory analysis. It is based on the Pareto principle, which states that for many events, about 80% of the consequences come from 20% of the causes.
ABC analysis makes inventory analysis easier by putting all your inventory into three categories, giving you a better understanding of the type of inventory you have in storage.
– A stock: this stock has the highest value, usually the highest profit margins or sales revenue. It should be your highest priority and rarely, if ever, stockout.
– B stock: stock that sells regularly but does not have as much value as A stock. Often inventory that costs more to hold than A inventory.
– C stock: this is the rest of your inventory that doesn’t sell much and generates the least revenue, and accounts for most of your inventory costs.
ABC analysis allows you to separate your most important inventory from the rest so you can spend more time and focus on it, increase profits and control costs. This allows you to reduce obsolete inventory, optimize inventory turnover rates, and your demand forecasting becomes more accurate.
VED analysis
VED analysis is based on inventory value and how important it is for an item to be in stock. This method is useful for manufacturing companies that have many components and parts in stock. It differs from ABC analysis in that it considers only how necessary an item is for the ongoing operation of the business.
– Vital [vital]: Stock that must be in stock
– Essential [essential]: A minimum quantity of these items is sufficient
– Desired : These are optional items.
HML analysis
HML analysis is measured by the unit price of an item. It differs from ABC analysis because it considers only the cost and not the sales value of items. HML analysis is useful for controlling costs and staying within budget.
– High cost [high]: item with a high unit value
– Average cost [medium]: item with average unit value
– Low cost [low]: item with a low unit value
SDE analysis
This inventory analysis method is based on the scarcity of items on the market or how quickly you can acquire them. It is usually used in companies dealing with raw materials or items with long lead times.
– Scarce[ scares] : scarce or imported items with long lead times.
– Difficult[ difficult]: Stock with lead times of weeks to 6 months
– Easily [easy] available: items that can be obtained easily
Safety stock analysis.
Safety stock is the inventory the company holds to reduce risk and prevent stockouts. Companies can use a safety stock formula to make data-driven decisions about managing inventory levels to maximize profits.
The safety stock formula is the difference between your maximum daily usage and throughput and your average daily usage and throughput:
(Maximum daily usage x maximum lead time) – (Average daily usage x average lead time)
As you can see, there are different ways to analyze your inventory depending on the type of business you run, but the underlying principle remains the same. By simplifying your inventory analysis method, you can easily prioritize where you want to spend your time and attention, increasing the efficiency of your operations.
GMROI
GMROI [gross margin return on investment] is an inventory analysis formula used by retail companies to measure a certain portion of their profitability. It measures the gross profit a retailer makes each year for every dollar of inventory they have purchased. The formula is:
Gross profit margin ÷ average existing inventory cost
After performing this calculation, the number should be at least greater than one. If it is lower than one, it means you are losing money on your inventory and are not a profitable business. A GMROI of 1.50 means that you are making 150% of your costs profit on your inventory.
There is no specific measure of GMROI. It depends on your industry. Industry-specific store associations are good sources for these types of benchmarks, as is the Retail Owners Institute.
Available to promise
Available to promise (ATP) is an inventory formula used to analyze order fulfillment. It helps analyze customer demand and adjust operations to meet it. For example, every time you order a takeaway through a food delivery app, the app goes through the available to promise formula to determine how long it will take for your food to arrive.
In formula form:
ATP = available quantity + delivery (scheduled orders) – demand (sales orders).
The ideal promise time depends on customer expectations and varies by industry.
Stock Turn Rate
Your stock turnover rate shows how effectively you manage your inventory. It measures how often your average inventory was sold during a given period.
This inventory formula is calculated by dividing the cost of goods sold by the average inventory for a given period. So if your average inventory last year was $1,000 and your cost of goods sold was $10,000, your inventory turnover rate would be 10, meaning you sold your inventory 10 times. Ideally, you want to keep this rate as high as possible because it shows how quickly you can sell your products and proves that you are not buying too much stock and wasting capital.
Storage Costs
Storage costs are costs incurred in storing and maintaining inventory. These can include insurance, warehouse space, equipment, security and labor costs.
An example of storage costs might be a forklift needed to move inventory around the warehouse. Holding costs are represented by the cumulative dollar value of these various costs. They can be accounted for separately or grouped together.
Average number of days to sell inventory.
This statistic indicates how long it takes a company to buy or create and sell inventory. The average number of days to sell inventory is calculated as follows:
(Inventory cost of sales) x number of days in the year
The average days to sell stock alerts the business owner how long, on average, it takes to sell each stock item.
Stockout percentage
The stockout percentage is the ratio of a company’s total stockout losses to total orders, expressed as a percentage. This statistic measures how effective a company is at managing inventory.
Suppose you are a clothing retailer and want to calculate your stockout percentage. One way to calculate your rate is to divide your total after-order sales by your total sales.
So if you did €100,000 in sales, but €10,000 of those sales were for items that were on back order, your stockout rate would be 10%, which is high. You would want to look at why and make sure you had enough stock on hand the next quarter to lower that percentage.
For your most in-demand and profitable inventory, you want your stockout percentage to be as close to zero as possible. A high stockout percentage can hurt customer satisfaction.
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