As a retail business owner, it is essential to invest in inventory management software to track stock levels, orders, sales, deliveries and avoid overstocking and product shortages.
Effective inventory management software makes it easy to process large amounts of data from past sales. It allows you to predict future demand for your inventory based on your company’s seasons and delivery times.
Therefore, inventory management software analytics are paramount in monitoring and analyzing your company’s product base. The best inventory management software can provide analytics for all retailers, including retailers with huge databases, and helps manage everything, including inventory availability, sales demand, and product returns.
By streamlining your inventory management with inventory analytics, you can better understand inventory and your overall operational efficiency. This guide will help you understand what inventory analysis is as well as the key metrics and inventory techniques that an inventory management software can provide for your business.
What Is Inventory Analysis?
Inventory analysis is any calculation that helps a company better understand its inventory levels, which helps improve cash flow, reduce out-of-stocks and excess inventory, and operate efficiently.
A thorough inventory analysis provides accurate data on the profitability of your inventory. It allows you to better respond to changes in customer demand and acquire the right mix of products based on customer demand. Inventory analysis is fundamental to increasing sales and controlling costs, while also improving your supply chain management.
Inventory Management Software Analysis Metrics to Track
To get into a detailed and in-depth inventory analysis, you’ll use a series of key performance indicators (KPIs) that will feed directly into how your business is doing.
The most effective KPIs you should track for better inventory analysis are inventory turnover ratio, inventory write-offs, gross margin ROI, days of inventory outstanding, rate of return, and stock-out rate.
These key inventory metrics let you evaluate different segments of your business, allowing you to uncover blind spots, optimize your operations and increase your profits.
Table of Contents
1. Inventory Turnover Ratio
The inventory turnover rate is a financial ratio that determines how many times a company has sold its average inventory in a given period. The inventory turnover rate is an index to evaluate the quality of your inventory management and the efficiency of your business – a higher turnover rate means a higher sale of goods.
However, low turnover means low sales and possibly excess inventory, also known as overstocking. This may indicate a problem with the merchandise offered for sale, the result of poor marketing, or mispricing an item. Inventory turnover is the rate at which inventory is sold, used, and replaced. Calculating inventory turnover can help businesses improve their pricing, marketing, and new inventory purchasing decisions. You can calculate the inventory turnover rate yourself by using the following formula:
2. Inventory Write-Offs
Inventory write-off is the process of formally recognizing that a portion of a business’s inventory is no longer of value. Companies have two methods of writing off inventory: the direct write-off and the allowance method.
The direct method is to directly charge your cost of goods sold (COGS) account.
The allowance method involves offsetting the inventory asset account to a contra-asset account, commonly referred to as an allowance for obsolete inventory or inventory reserve. Inventory write-offs usually occur when your store’s inventory becomes outdated, spoiled, damaged, stolen, or lost. If you are writing off inventory, it is a sign that you are experiencing losses, and you will need to find a way to make up for them.
3. Gross Margin Return on Investment (GMROI)
It is sometimes axiomatic that increased sales lead to increased profits in retail. But this is not always the case. That’s why gross margin return on investment (GMROI) is one of the retailers’ most significant profitability metrics. GMROI tells business owners how much profit they get for every dollar spent on inventory. In other words, GMROI measures the return on your profit for the money you put into your inventory.
You may also want to read: How to Calculate Gross Profit Margin
To calculate the GMROI, you can use the following formula:
4. Stockout Rate
Stockout rate refers to the percentage of items not present on the requirement date requested by the buyer. This key performance indicator underscores a company’s inability to deliver products in stock within the specified time frame due to insufficient inventory.
Stockout rate is often used to determine the effectiveness of inventory replenishment in distribution networks. When expressed as a percentage, it is preferable that this number be less than 10% and as close to zero as possible. This is especially true for a company’s most popular items. To calculate the stockout rate, you can use the following formula:
5. Available to Promise (ATP)
Available to Promise is a metric that allows businesses to gain insight into the amount of stock they have or will have available to meet customer needs. In other words, it is the unused quantity of inventory and planned production that is held in the master schedule to meet customer needs.
It allows a company to keep the minimum quantity of a given product to efficiently use inventory space. The company can use this metric to set a customer’s delivery date or forecast the next order when buying wholesale from their suppliers. You can use this formula to calculate the ATP:
6. Days Inventory Outstanding (DIO)
Days inventory outstanding is a working capital management ratio to determine the average number of days a company holds inventory before turning it into sales. The lower the number, the shorter the period of time cash is tied up in inventory, and the lower the risk of inventory becoming obsolete. The number of days of inventory outstanding is also known as days of inventory sales (DSI) and days in inventory (DII). There are two ways to calculate this formula:
Inventory Management Software Analytics Techniques
There are several techniques available to retailers to perform inventory analysis. While there are several techniques to evaluate inventory, some are better suited for the retail business. Here are the most common techniques or methods used in the retail industry:
1. ABC Analysis
One of the most widely used techniques in the retail industry is ABC or Always Better Control analysis. This method allows retailers to classify their inventory based on the consumption value of each item and its effect on the annual cost of inventory. The ABC approach divides inventory into three groups:
(1) Inventory A: the most profitable products, which make the greatest contribution to profits.
(2) Inventory B: “inter-class” goods, falling between the most valuable and the least valuable products.
(3) Inventory C: these are the small products that are vital for collective profit margins, but whose average cost does not matter much at the individual level.
The objective of ABC analysis is to enable you to give more time and attention to your most essential products, thereby increasing your revenues and controlling your costs. This technique also helps minimize deadstock, streamline inventory turnover, and facilitate demand forecasting.
Note: Although there is a formula to calculate the ABC inventory analysis, you don’t need to get your hands dirty before knowing the quality of the products that sell the best or the least. There is software out there to help you. KORONA POS integrates ABC analysis as part of your point of sale, allowing you to get the most detailed product reports in the industry. It also allows you to check out other metrics, like product return rate, average customer spend, conversion rates, etc.
2. Reorder point (ROP)
A reorder point is a specific level at which your inventory must be replenished. In other words, it allows you to know when to place an order to avoid being out of stock. As a retail business owner, knowing when to order more inventory is of the utmost importance. If you order while you still have a lot of inventory, the extra inventory will build up, which will increase your holding costs and ultimately leave you with excess inventory.
If someone places an order when you have no stock, you will not be able to make sales during the time it takes to receive the order. Plus, the longer it takes for your supplier to deliver the products, the more sales you will lose. Therefore, setting an ROP helps you streamline your inventory, replenish your stock of individual items at the right time, and meet your customers’ demands without running out of stock.
It is therefore imperative to invest in a point of sale system that integrates inventory management software analytics and breaks down your sales metrics in an understandable way. This way, you know what changes need to be made and can set optimal replenishment levels for each of your products so that your store never runs out of your best-selling items.
3. Open to Buy (OTB)
This advance planning technique allows a retailer to know how much product to purchase in dollars for a specific time period. The objective is to ensure sufficient supply and generate positive cash flow. The open-to-buy formula will help you create projections for your OTB plan.
However, you should know that your open-to-buy figures are projections, so they may not be perfectly exact. But a great way to check your numbers is to see if your actual month-end inventory is within 5% of your prediction.
Get The Most Out of KORONA POS Inventory Management Software Analytics
The right technology is critical to achieving the highest efficiency in retail inventory management. What you need is the ability to see all products, across all channels, in a single view and apply smart order management to your purchases to offer customers an exceptional shopping experience.
Having the right solution for your business allows for easier expansion. KORONA POS is the best inventory management software for all types of retail businesses. With KORONA POS, you have access to an amazing array of inventory management features:
- Reorder Levels
- Order Cycles
- Shipment Tracking
- Inventory Management Notifications
- Theft Prevention
- Mobile Retail Inventory Management
- Automated Counting by Your POS, and many more.
In addition, KORONA POS is a cloud-based pos system, meaning that it is designed so that you can have a complete view of all operations taking place on your premises without your presence.
See related: Why Every Store Needs a Cloud-Based POS?
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