Inventory analysis is the technique to determine the optimum level of inventory a firm should maintain. The most common inventory analysis method is ABC analysis. Let’s go through a few important metrics that can assist you in finding the right amount of stocks at hand to meet demands.
Metrics and Calculation Formulas for Inventory Analysis
Inventory turnover is the metric to measure the number of times a manufacturer’s inventory is sold, replaced, or turned over during a specific period of time, usually one year. However, the measurement can also take place on a quarterly or monthly basis.
Basically, inventory metrics measure how properly the inventory is managed.
A higher inventory turnover indicates efficient inventory management, and a poor turnover indicates excess or obsolete inventory in stock.
Formula To Calculate Inventory Turnover:
Inventory Turnover= Costs of Goods Sold/ Average Inventory
This inventory analysis KPI helps to track the percentage of orders that could not be delivered on time. It shows how many orders were not fulfilled at the time a customer placed an order.
The Back Order Rate KPI indicates how well you forecast, replenish and track your inventory. In brief, a higher backorder rate points to poor demand forecasting and planning. It affects customer satisfaction.
Formula for Calculating Back Order Rate:
Back Order Rate= (Total Backorders/ Total Orders)x100
There are many reasons due to which a company might have a high backorder rate. For instance, not purchasing inventory according to demand, not re-ordering the stock on time, and poor tracking of multichannel inventory.
Sell Through Rate
Sell through rate compares the amount of inventory a retailer received and the amount of inventory it sold over a given period of time.
Formula for Calculating Sell Through Rate:
Sell Through Rate= (Number of Sales/ Stock-in-hand)x100
Sell through rate determines the percentage of units sold over a specific period of time and demonstrates your supply chain’s efficiency.
Average inventory is the amount of inventory that a company keeps in hand during a period.
Formula to Calculate Average Inventory is:
Average Inventory= (Beginning Inventory + Ending Inventory)/2
This metric gives you an overall view of how much stock the company has on an average during a specific period of time. In other words, the purpose of the average inventory is to ensure that the company has a consistent average inventory over the course of a year.
Gross Margin Return on Investment
Gross Margin Return on Investment is the gross profit a company made for every dollar of purchased inventory. Specifically, the metric aims to measure how efficiently a company buys and sells its products.
Formula for Calculating Gross Margin Return on Investment (GMROI):
GMROI= Gross Margin/ Average Inventory Cost
Days Inventory Outstanding
This inventory metrics tells you the time taken to convert inventory into sales. If days inventory outstanding is low, it indicates the inventory is moving efficiently. In case it is high, it means excess inventory is sitting on the shelves.
Formula for Calculating Days Inventory Outstanding:
Days Inventory Outstanding= (Average Inventory Cost/ Cost of Goods Sold)x365
To sum up, this article has given you a definition of inventory analysis and the various metrics used to determine the suitable level of inventory for a firm.