Inventory Turnover Ratio: Definition, Importance, Calculations and 10 Inventory Turnover Optimisation Techniques in 2023

Inventory Turnover Ratio: Definition, Importance, Calculations and 10 Inventory Turnover Optimisation Techniques in 2023

Inventory is the primary asset of a business. A seller purchases the required amount and wishes to sell it as soon as possible. A product may fly off the shelf at any time on its own merit, even though there is no major discount offered on it. In most cases, though, products float somewhere in the middle, necessitating the need for all businesses to keep track of what is in demand and how fast it is selling. Everything from pricing strategy and supplier relationships to promotions and the product life cycle is influenced by inventory turnover. The inventory turnover ratio measures how well a company manages inbound inventory from suppliers and outbound inventory from warehousing to the rest of the supply chain. Turnover is critical for every business, whether it is a B2B or DTC fulfillment company. A company's inventory turnover rate also relays information about its inventory forecasting, inventory management, and sales and marketing skills. A high inventory turn rate indicates that sales are robust or that inventory is insufficient to support current sales volumes. A low inventory turn rate, on the other hand, suggests low sales, low market demand or an inventory surplus. Knowing which direction the sales winds are blowing will help in inventory accuracy and achieve an accurate inventory turnover ratio. What is Inventory Turnover? Inventory turnover refers to the amount of inventory that a company purchases and has sold for a particular time period. A complete inventory turnover rate shows that a company has sold all of the stock it bought, excluding any items lost due to expiry or damage. Inventory turnover is common in successful businesses. However, it varies by industry and product category. Inventory management issues such as shifting client demand, poor supply chain planning and overstocking can all have an impact on the inventory turnover rate. Definition of Inventory Turnover Ratio The inventory turnover ratio is the number of times a company's inventory has been sold and re-stocked in a certain period of time. The method is also used to determine how long it will take to sell the present inventory. The inventory turnover ratio is calculated using a formula that divides the total cost of items sold by the average inventory during the same time period. A higher ratio is preferable to a low ratio since a high ratio indicates robust sales. Effective inventory control, also known as stock control, where the organization has a strong understanding of what it has on hand, is required to determine your turnover ratio. Examples of Inventory Turnover Rate Inventory Turnover Ratio (ITR) = Cost of Goods Sold (COGS) / Average Inventory For example, if your COGS was 100,000 rupees in the last fiscal year and your average value of inventory was 25,000 rupees, your inventory turnover ratio would be 4. Inventory Turnover = Number of Units Sold / Average Number of Units On-Hand  If you sell 100 units in a year while having an average of 20 units on-hand at any given time during the year, your inventory turnover rate is 5. Why is Inventory Turns Important? Inventory turns or inventory turnover is important for a variety of reasons. A sluggish turnover may imply that there is lower market demand for certain things, allowing sellers to adjust pricing, offer incentives to drain inventory faster or change the mix of goods available for sale in the future. These are all critical decisions for a business to make in order to stay financially healthy and competitive. A company's product mix must be aligned with its client's demand. Fast inventory turns are a signal that a company's purchasing strategy is not syncing up with market demand and that there are delays somewhere in the supply chain or that demand for a specific item is increasing. This data can aid a business in determining whether to raise prices, increase orders, diversify suppliers, sell a product more prominently or purchase additional related inventory. Material requirements planning (MRP) is a related technique for determining inventory needs while balancing supply and demand. You Can Also Check: What is ERP Inventory Management System? How to Calculate Inventory Turnover Ratio? You can figure out how to calculate the inventory turnover ratio by doing two things - determining COGS and average inventory. Let’s assume you already have the figure for your COGS.  Average Inventory The estimation of the value (in monetary terms) or number (units) of particular categories of inventory at any given time throughout a set time period is known as average inventory. If you don't know how to calculate average inventory, here's how you can do it: (Inventory at the Start + Inventory at the End) / 2 It is the sum of beginning inventory and ending inventory — from a certain time period — divided by two. Inventory Turnover Ratio Formula The inventory turnover ratio formula is simple if you have your COGS and average inventory. It is as follows: Inventory Turnover Ratio (ITR) = Cost of Goods Sold (COGS) / Average Inventory Alternate Ways to Use the Inventory Turnover Ratio You can use the inventory turnover ratio to analyze how fast an organization is selling its inventory and compare its efficiency in doing so against industry standards. For most industries, the best inventory turnover ratio falls between 5 and 10. However, the average inventory turnover rate varies from one industry to another, depending on the complexity of the business environment and the nature of its products. Inventory turnover is mainly used to analyze the inventory sales speed of an eCommerce business and compare its efficiency with the industry standards or competitors. There are a few more ways by which inventory turnover ratios are utilized. A few of them are: Trending Turns to Manage ITR Inventory turnover ratios are one of the best approaches to spot market demand-driven patterns as well as outmoded or slow-moving inventory. That way, you will have a head start on deciding whether to scale up or decrease any product line or brand. You'll have far better inventory control and a higher harvest of sales possibilities as a result of this. At the same time, you will be searched and visible on trending platforms which will help your brand attain new customers. SKUs and Segments For strict controls on specific stock levels, inventory turnover is generally measured at the SKU (stock-keeping unit) or segment level. Inventory segmentation is the process of categorizing or segmenting SKUs based on parameters that make sense for your company. Inventory turnover can also be employed at an aggregated level when divergent goods are grouped based on factors such as the geographic location of retail outlets. Using the Pareto Principle The Pareto principle or 80/20 inventory turnover ratio rule suggests that 80% of your company's sales revenues are generated by 20% of the SKUs you carry. The idea specifies selling a few products for low or negligible profit. It will persuade buyers to purchase more and, at the same time, enables sellers to store more profitable goods. It is important to understand what stock segment you are dealing with, so you can maintain the appropriate amount of goods in hand. What is an Ideal Inventory Turnover Rate? For the eCommerce industry, a lower inventory turnover rate may indicate sluggish sales and dwindling market demand for a product. So generally, the greater ratio number is supposed to be better, as it reflects robust sales most of the time.  There are certain exceptions to this theory. Luxury products have a low inventory turnover rate. On the other hand, sometimes, a high inventory turnover ratio is self-defeating. In case you order a small amount of inventory but the frequency is high, the inventory turnover rate will increase, which means you are not purchasing enough inventory to support the rate of sales. So in that instance, you may not be making as much profit as you could be, so you need to check whether gradually increasing pricing stabilizes the ratio while raising unit margins. High Inventory turnover is common in high-volume, low-margin businesses. Low-volume, high-margin sectors, on the other hand, tend to have substantially lower inventory turnover percentages. The ideal inventory turnover ratio is between 5 and 10, implying that goods should be sold and restocked every one to two months. For perishable goods companies like florists and grocers, the recommended ratio will be higher to avoid inventory losses due to the risk of spoilage. Top 10 Techniques of Inventory Turnover Optimization Make the Supply Chain More Efficient Source To do this, low-cost logistics partners could be the best option. Faster delivery is important but assurance of the delivery of an undamaged product is more important for any seller. If a damaged product is delivered, it will be returned, which will not be counted as inventory turnover and will also lead to more expenses. Eliminating inefficiencies in the supply chain will boost your sales, revenues and total margins. Make Changes to Your Pricing Approach Source Adjust your product pricing to gain higher profit margins on high-demand items and free up capital by getting rid of outdated inventory, commonly known as dead stock or obsolete inventory. If items are proving difficult to sell, consider donating them to charity and receiving a tax deduction or selling them through a secondary channel. Check Your Rank in the Industry Source Is your inventory turnover rate high or low compared to the rest of your industry? When you notice growing tendencies in your inventory ratios, are there opportunities for you to steer a stronger strategic position on competitive items? By effectively answering these questions and managing your inventory, you can get a greater market share and improve your industry rating. Comparing yourself with competitors will enable you to analyse what you are doing right or wrong and you can use some of their best practices to gain an advantage. Improve Your Forecasting Skills Source Sales figures and inventory reports provide useful concrete data for more precise inventory forecasts. This information can also aid in future sales planning, such as recommending methods to improve your product mix or creatively bundling things to move slower inventory at a better margin. Either way, forecasting inventory is a necessary tool that eCommerce retailers need to employ in order to achieve an optimum inventory turnover ratio. Automate Your Purchase Orders Source Automation improves efficiency and has the potential to reduce expenses on its own. However, when you combine it with an order management system that allows for easy reordering of popular inventory so that it is constantly available, you gain even more benefits. Consider adopting an inventory system that generates purchase orders automatically to save yourself time and effort. The result will be better control and fewer errors. Use Technology Source Use the latest technology to optimize inventory turnover. With the help of technology, you can place inventory items strategically, such as high-demand items being placed in a more accessible way and bulky items being placed close to cargo bays. Humans are susceptible to making errors that technology simply doesn’t, so it will make your overall business operations more efficient.  Hire Experts or Train Your Employees Source An expert inventory planner can save you a lot of time and money by saving taxes, optimizing the storage of your inventory and generally employing the best practices to increase your inventory turnover rate. They can handle every situation, whether it is inventory shortage or overstocking and can suggest a better way to free your inventory. These processes can then be followed by your employees to make inventory management more effective. Encourage Sales of Old Stock Source When you have a huge quantity of old and outdated stock, you need to get rid of it as soon as possible because it not only freezes your capital but also takes up storage space, loses value and defames your brand’s name. If they are sold through a sale, inventory turnover increases rapidly. The brand gets more visibility and increased sales velocity. This enables you to not only prevent a loss due to outdated products but also to generate more revenue from sales that you may not have been expecting. Encourage Your Customers to Pre-Order Source You can have instant and guaranteed sales of your items if you can convince your clients to preorder and register for certain products. This will enhance your turnover but be sure you have enough inventory to handle the requests you receive. Smart marketing and high-demand products are often required to entice buyers to pre-order, so try creating a specific sales and marketing plan around preorders for popular items and see what happens. This will also help you more accurately forecast the amount of inventory you require in advance. Employ Effective Marketing Source To improve your inventory turnover rate, you will require a strong marketing plan. You should concentrate on underperforming products and connect with elusive clients. You can achieve your goal of boosting sales and thereby improving your inventory turnover rate by pursuing new markets and utilizing all available marketing channels. In order to attract new clients and keep existing ones engaged, businesses can use social media, SEO, paid advertising, content marketing and email marketing. Inventory Turnover vs Days Sales of Inventory Inventory turnover measures how rapidly the inventory of a company can be sold. Days sales of inventory (DSI) measure the average time it takes for a company to convert its inventory into sales. The inverse of inventory turnover for a given period is DSI, which is calculated as (inventory / COGS) X 365. DSI is the number of days it takes to turn inventory into sales, whereas inventory turnover is the number of times inventory is sold in a year. Improving Inventory Turnover with Inventory Management Software Moving average inventory can be used by companies that use the perpetual inventory technique rather than a periodic inventory system to compare mean inventory levels over vast periods of time. To facilitate a more realistic comparison of the performance, moving average inventory adapts pricing to the current market standard. For improving inventory turnover rates, inventory management software has several features that can assist you in modernizing and optimizing your inventory management policies and practices. Such software enables your organization to switch to the constant inventory methods of accounting with a continuous real-time inventory record. Automated point-of-sale systems and company asset management software will immediately reflect changes in inventory by tracking sales, inventory depletion and restocking frequency. It enables you to set a demand formula after gathering data and forecasting upcoming demand. At the same time, you can apply the formula with respect to your inventory and optimize ordering costs. Inventory management software, when used in combination with an ERP system, can assist in optimizing your supply chain, assigning and managing SKUs, automating purchase orders and much more. This will reduce errors, increase efficiency, give you more control, boost customer satisfaction and make your business more profitable overall. Suggested Read: How to calculate Inventory to Sales Ratio? Conclusion: How Can InventoryLogIQ Help to Manage Your Inventory Turnover Ratio? Inventory turnover is an important metric for businesses to track and manage. It measures how quickly a company is able to sell its inventory and is calculated by dividing the cost of goods sold by the average inventory during a given period. A high inventory turnover ratio indicates that a company is able to efficiently sell its inventory, while a low ratio may indicate excess inventory or slow sales. The inventory turnover ratio is one of the most important yet fairly less talked about metrics. Lately, we are seeing some leading brands in the US making headlines due to mismanagement of this metric. Lululemon is ending the year with $1.7 BN of unsold inventoryAllbirds has a 20% drop in margins owing to the $11.6 MN inventory write downAbout 23% of brands lost buy-box on Amazon last year due to stock-outs As financial fundamentals take the center stage, 2023 will be the year when a brand’s ability to efficiently manage its inventory asset will determine its ability to survive/dominate its market segment. As an intelligent fulfillment platform, we have this asset under our management and help our brands outperform by striking the right balance between managing stock-outs and excess inventory through our proprietary algorithms. If you need assistance with managing your inventory turnover ratio, InventoryLogIQ has smart technologies for inventory management. We check what is your current inventory turnover ratio and suggest the accurate amount of inventory to keep in order to maintain the perfect inventory turnover ratio and prevent any shortages or overstocking situations from occurring. When you have a facility to give you a better customer experience and tackle other lengthy eCommerce processes, your business starts generating more returns. InventoryLogIQ resolves most of the problems and takes care of each step involved in efficiently storing your inventory.  Suggested Read: What is Inventory Valuation? Importance, Objectives, Methods, and Challenges in 2023 Inventory Turnover Ratio: FAQs What factors affect the inventory turnover ratio?Turnover rates often rise during a new product launch and growth phase, peaking as the product approaches maturity. Sales and inventory turnover eventually fall due to market saturation, advancements in existing technology and changing client preferences. What does the inventory turnover ratio tell you?The inventory turnover ratio is a calculation of how frequently inventory is sold over a specific time period. Why is it important to analyze the inventory turnover ratio?The inventory turnover ratio is a productivity metric that determines how successfully a company manages its inventory. Higher rotation rates minimize storage and other holding expenses so achieving a high ratio is important. Should inventory turnover increase or decrease?Companies seek higher inventory turnover ratios in general. When the stock turnover ratio falls below industry requirements, it is necessary to improve it. What does high inventory turnover indicate?If the inventory of a company's turnover is high, it reflects that its product is in high demand. It could also reflect that the company ran a successful advertising campaign or a sales promotion that resulted in an increase in sales. In any case, it shows that the business is effectively transferring inventory during normal business operations.

December 13, 2022

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Inventory Position: Definition, Importance and 3 Ways To Position Your Inventory In 2023

Inventory Position: Definition, Importance and 3 Ways To Position Your Inventory In 2023

To be a successful eCommerce company, you need to ensure that your inventory is optimized in every way, be it in management, tracking, or storage. Inventory is the key sellable component of your business so it needs to be taken care of. The way inventory is stored and organized can have a huge impact on the speed of fulfilling orders. It is key for businesses to focus on attaining a productive inventory position. The inventory position is important for businesses because it can affect the company's ability to meet customer demand, as well as its costs and overall profitability. A business with a large inventory position may have higher inventory carrying costs, such as storage and insurance expenses, but it may also be better able to fulfill customer orders without delays. On the other hand, a company with a small inventory position may have lower carrying costs, but it may be at risk of stockouts or other disruptions to its operations. We will take a closer look at the meaning of inventory position, its importance and the methods used to do it. What is Inventory Position? Definition The word inventory position refers to where and how inventory is housed on storage racks, as well as where inventory units are stored throughout the supply chain such as in stores, warehouses, and production lines. When inventory placement is optimized, SLAs for order fulfillment are satisfied while logistics and inventory costs are kept low. Whether it is in-plant, regional, or field warehouses, inventory positioning refers to the strategic placement of distinct commodities in the product line. Because inventory positioning affects facility decisions, it must be taken into account in the logistics plan. eCommerce organizations can enhance warehouse efficiency and fulfillment speed by utilizing the correct inventory placement strategy to know where to put their goods so that orders are delivered on time and without errors. Inventory position in operations management may also be used to determine the overall amount of inventory possessed by a store in the context of inventory accounting. To calculate inventory position, use the following formula: Inventory Position = (On-Order Inventory + On-Hand Inventory) – Backorders Goal The need for inventory arises for sellers who want to sell and deliver products to customers within the stipulated time. Companies must understand that they need inventory to sell. Businesses cannot request finished products from a manufacturer after a customer has already placed an order. Keeping inventory enables retailers to instantly fulfill orders. [contactus_gynoveda] Importance of Inventory Position in Operations Management Your operational efficiency, operating expenses, and capacity to please consumers are all affected by where and how you store your goods, both in terms of storage and in your supply chain. Physically situating your products to be easy to discover and easily accessible at the warehouse level makes selecting easier, which increases the overall fulfillment speed. It also reduces the chances of current goods being misplaced or forgotten, resulting in less wastage and reduced average inventory holding costs. On a supply chain level, having an inventory position in operations management that reduces lead times allows you to better fulfill consumer demand. You can prevent stockouts that anger clients and, instead, enhance their overall experience by making sure that your product is available in the locations and channels you need it to be. Some of the major ways in which Inventory position is important are as follows:  Inventory positioning provides safety stocks that are retained to offset any changes in demand and supply, thus preventing stock-outs.Inventory positioning improves customer service standards by supporting the marketing department's function, i.e., if demand is generated, inventory must be available and accessible to meet it.Unit costs are at their lowest when production is done in extended runs with consistent volumes that are provided by inventory positioning.Inventory positioning provides for purchase and transportation economies based on the inference that lot sizes lower purchase and transportation expenses.Inventory positioning helps in hedging against price fluctuations. This aspect reduces the impact of supplier price increases during times of high inflation.Inventory position in operations management mitigates demand and lead time uncertainty. Logistical problems are unpredictable and proper planning should be done to counter them.Proper inventory positioning leads to effective inventory planning against unplanned contingencies that might disrupt operations, such as labour disputes, fires, floods, and other natural disasters. 3 Ways to Position Your Inventory in 2023 Ensure Easy Reachability of High-Volume Products Source Having a proper inventory position entails that the products which are utilized the most and are likely to be in demand should be stored in a way that is easily accessible so that they can quickly be identified, picked, packaged, and shipped. This allows firms to speed up order fulfillment for products that have the best chance of being sold. This method can be followed for other products in order of their demand and sales volumes during prior seasons, with the highest selling items kept in a more accessible location and lower selling items stored in more hard-to-reach places, to make the best use of the available storage space. Doing this infers that goods are organized in a specific way and on the rare occasions that lower-demand products are ordered, employees will instantly know where they are by aligning the demand of that product with a specific placement in the warehouse. Forecast Demand for Proper Inventory Planning Source Estimation of demand based on historical patterns or particular events is quite imperative to stock positioning. If an incorrect estimation of upcoming demand occurs, then even with high stock availability, there can be shortages and delays in delivery, which can cause an inadequate customer experience. On the other hand, inaccurate estimation of demand can also cause an inventory surplus, leading to significantly higher storage and operational costs, which can have a negative impact on the profit margins of a business. Many businesses often tend to base their stock replenishment strategy on forecasting done historically, hoping the pattern would repeat. Ideally, it should be taken with a grain of salt as markets are dynamic and forecasting should be done keeping the current factors in mind. Demands go through cyclical trends and various unforeseen events also affect it, so every factor should be thoroughly analyzed in order to achieve the required level of inventory. Therefore, inventory analysis is a must. Suggested Read: What is the Benefit of Inventory Forecasting? Store Larger SKUs on Lower Shelves for Easy Accessibility Source Having your heaviest or least-movable Stock Keeping Units at the top or rear of your warehouse racks makes no sense for various reasons. They should not be placed on shelves where they are difficult to gain access to. The sheer weight of them can also cause the shelves to lose their structural integrity and succumb to the pressure caused by large objects that they were not designed for. Ideally, they should be kept as near to the ground as possible so that getting to them isn't a safety issue or an overtly challenging task. Simultaneously, modify positioning for bulky SKUs based on their popularity. Make sure they're stored in a convenient position if they are frequently ordered. However, the general rule for large items is that they are stored in a convenient location and as close to a transit bay as possible so that they can be dispatched with minimal effort. Conclusion: How Can InventoryLogIQ Help to Position Your Inventory in 2023? Although inventory position is difficult to perfect, it is crucial to provide a positive customer experience. Overall, effective inventory management is crucial for businesses to maintain a healthy inventory position and maximize profitability. By using inventory management software, inventory forecasting techniques and other strategies, businesses can avoid the costly consequences of over- or understocking and keep their inventory position at an optimal level. A dedicated inventory management solution like InventoryLogIQ can help a company's warehousing practice and ensure professionalism in safely and securely storing and positioning products in the warehouse and can coordinate the delivery of your items and inventory to our facilities, where our team will store your items and handle all of the technical aspects of managing and organizing them.  InventoryLogIQ can intelligently suggest the placement of products across our vast network of fulfillment centers, based on areas of high customer demand or proximity to transit facilities. Depending on the product, each SKU will have its own storage location, such as on a shelf, in a container, or on a pallet, based on the demand and nature of the product. Our warehouses are equipped with advanced facilities such as a custom OMS to monitor your inventory, automating processes such as picking products when an order is confirmed, placing inventory based on the type of product, and much more. The features offered by InventoryLogIQ make inventory management and placement a breeze, are mentioned below: Custom OMS that tracks Inventory levels across multiple warehouses in real-time.Automatic reorder point alerts to help you keep track of when you need to restock.Enhanced demand forecasting capabilities to help you determine the appropriate stock you need for each product type.Intelligent inventory placement that suggests which fulfillment center would be the best option to fulfill orders based on customer demand, geographical locations, etc. All these processes can help in inventory optimization and improve inventory position and can drastically improve efficiency and cost-effectiveness in all your warehousing and order fulfillment processes. Inventory Position: FAQs How can you determine the position of your inventory?Your inventory can be positioned based on a variety of factors, such as the nature of the product, demand, availability, weight, dimensions, and much more. What is the goal of the inventory position? Inventory position is done in order to methodically organize inventory and make the best use of space so that higher-demand inventory can be easily accessed for faster order fulfillment. Is inventory position a part of inventory management?Yes, inventory position is one of the multiple processes that is encompassed by inventory management in order to make the entire process of ordering, storing, counting, and delivering inventory to be as seamless as possible. How can InventoryLogIQ help to position your inventory?InventoryLogIQ uses an advanced WMS that consists of features that provide data, analytics and suggestions to efficiently place your inventory in the most strategic way, both in terms of which warehouses they are stored in and their position in their respective warehouses.

December 12, 2022
What is Inventory Carrying Cost? How To Calculate it and Save on Inventory Holding Costs in 2023?

What is Inventory Carrying Cost? How To Calculate it and Save on Inventory Holding Costs in 2023?

Inventory is a non-liquid asset that must be transformed into cash through sales for firms that sell physical goods. A company's profitability is determined by how well it controls this process. Inventory carrying cost is essential to monitor since it accounts for 15-30% of a company's total inventory value. The expenses incurred by a corporation to retain inventory products for a long time before they are used to complete orders are referred to as inventory carrying costs. A firm may limit carrying costs closer to 15% of total inventory and optimize earnings using effective inventory management techniques. However, inventory carrying costs can approach or surpass 30% of the complete inventory and eat into profitability if inventory control is inadequate. Understanding and measuring your business's carrying costs and implementing optimal inventory control procedures are necessary to achieve the former. What is Inventory Carrying Cost? The sum of all costs involved with keeping inventory or goods in storage or warehouse is known as inventory carrying cost, also inventory holding cost or simply "carrying cost." It covers both hard and soft expenditures, such as your product investment, physical warehouse or storage space, transportation expenses, and distribution fees, taxes, insurance, and the employees required to handle the goods. Inventory carrying expenses are a fact of life for everyone who sells a tangible commodity. For example, selling a physical item will need to be retained as inventory at some point before reaching the end customer. Inventory carrying costs are an essential metric to use when analyzing whether or not your company is lean. For example, high carrying costs might indicate that your company has more inventory on hand than it needs to meet demand, that you need to change the frequency with which you make orders with manufacturers or distributors, or that you could improve your stock movement. Capital expenses, storage costs, service costs, and inventory risk costs are factors that add up to get inventory carrying costs. Capital expenditures include money spent on things and any interest and fees incurred if the goods were purchased with a loan. Storage expenditures, like a store/warehouse mortgage, might be set or variable, much like labour, utilities, and administrative costs. Service charges include taxes, insurance, and inventory management software, and inventory risk includes inventory shrinkage, depreciation and product obsolescence. Why do Businesses End Up Spending on Inventory Carrying Costs? Businesses suffer inventory carrying costs as a result of the necessity to have goods on hand because of the following reasons: Anticipation Inventory, Safety Stock and Buffer Stock: This is the total amount of merchandise maintained on hand to adjust for supply and demand changes.In-transit Inventory: All inventory is in transit from one point in the supply chain to another.Dead Stock: Dead Stock is stock that is no longer available. Stock that has reached the point of expiry, obsolescence, or any other quality or demand decline makes it unusable.Cycled Inventory: Inventory that is maintained on hand to meet regular sales orders. What is a Reasonable Annual Carrying Cost for Inventory? The average inventory carrying cost is determined by the industry and the company's size. Therefore, the cost of maintaining inventory varies greatly depending on the business. However, we can provide some rough averages. A frequently acknowledged optimal yearly inventory carrying cost, according to a 2018 APICS research, is 15–25 per cent. However, depending on the sector and the organization, annual inventory carrying costs might range from 18 per cent to 75 per cent. Why Should You Calculate Inventory Carrying Cost in 2023? According to ASCM, more than 65% of businesses do not calculate inventory carrying costs and instead rely on estimations. Inventory holding costs may account for up to a quarter of total inventory expenditures. As a result, they can impact a company's overall financial health. For example, it may have cash flow issues if a company cannot quantify the cost of maintaining goods on hand, such as through an inventory or stock control system. A firm might miss out on a lucrative investment or expansion opportunity because it has too much money locked up in inventory—without its management recognizing how much carrying expenses are holding it back. Calculating inventory costs is also essential for the following reasons: Production Schedules Inventory carrying costs assist your company in rethinking and planning production for the best advantage. For example, if you know how much you spend on inventory storage, you can plan to arrange the manufacturing process and store it appropriately. You can only maintain a certain amount of things in stock that can be created rapidly. Similarly, you might stockpile more of the products that take longer to make. In this manner, the warehouse space is not taken up by everything. At any moment, only essential items with lower inventory carrying costs are held in the warehouse. Accounting Knowing your inventory carrying costs makes you less likely to run into cash flow problems. To guarantee that you know your working capital, you must understand the cash flow. Cash flow analysis can provide information about a company's liquidity. Carrying expenses for inventory are also high costs that many organizations overlook. This is why assessing the expenses is critical: if you know the exact price of retaining inventory, you can take steps to reduce those costs while increasing earnings. It will also guarantee that you can create more accurate financial accounts. Profits Inventory carrying costs allow you to determine the value of each item. Because you know the price of storing inventory and how much you collect when you sell it, this statistic may help you estimate the profitability of each item. Knowing how lucrative your inventory is can help you choose how much inventory to maintain and whether to keep additional stock. It also allows you to consider ways to increase earnings, allowing you to boost profits. The Main Components of Inventory Carrying Cost Many expenses enter the equation of inventory holding costs, and when added together, they amount to a popular way for firms to lose money. Let's have a look at each component inventory holding cost includes: Opportunity Cost One of the essential components of inventory holding costs is opportunity cost. When you spend more money on inventory than is required, you miss other chances. That money might be spent on things like better marketing to generate more leads and hiring more staff to increase efficiency, among other things. If you believe you are overspending on inventory storage, consider how you may save money. Operational Cost Administrative expenditures, which are included in inventory carrying costs, account for a significant portion of the total. It covers things like equipment depreciation, cleaning, and transportation. When you have a lot of inventory, your administrative costs will likely rise since you'll need more room to keep it all and manage it. However, to make the most of the space provided, you must keep administrative expenditures to a minimum. Capital Cost One of the most expensive components of inventory carrying costs is the cost of capital. The interest and product price, as well as any additional charges, are included in the cost of capital. Businesses may reduce capital costs by precisely predicting with the right technology and structuring their purchases for maximum efficiency. To keep expenses down, try to negotiate pricing with your long-term suppliers. Insurance and Tax When you have more merchandise, your insurance and taxes are more significant. This indicates that it's advisable to maintain a small number of goods on hand to fulfil demand. Therefore, the first approach is to prioritize items constantly in demand and store them in the warehouse, followed by the next most in-demand product. You may save money on insurance and taxes, lowering inventory carrying costs and improving cash flow. Employees' Cost Another expense that is included when determining inventory carrying costs is labour. You'll need workers to organize your items in the warehouse and transport them to various locations according to the specifications. Automation can help you save money on labour by bringing the most important objects closer to your grasp. Additionally, you can ensure the warehouses are designed for high productivity. Problems With Innovation There isn't enough time to think about innovation when you're continuously preoccupied with your inventory. Your clients may be asking for a certain modification, but you won't be able to focus on it if you're just focusing on the inventory you currently have. You may lose valued consumers as a result of this. One approach to guarantee you're concentrating on product innovation is to make sure your stock levels are optimized. Storage Cost It's also important to consider where you store your inventory because products take up precious warehouse space, which you'll have to pay for. The storage technique is particularly important since larger storage boxes and bins take up more room, resulting in higher overall storage expenses. If you have a warehouse, reconsider how you keep your items so that they are easy to find and fit snugly without taking up too much room. Handling Cost Many costs are covered by product handling. For example, the shipping label, product damage, and machinery are all included. When attempting to reduce handling expenses, consider if you really need all of the machinery you now have. You should consider if all of the equipment is required or whether you can get by with only some of it. You may reduce the inventory carrying cost by reducing handling costs. Obsolete Inventory Cost It's possible that your merchandise will become obsolete at some point. That is, when you sell it, it has no value since it is no longer helpful. When this happens, you'll need to get rid of it, which will come at a cost. If you don't want to end yourself in this situation, sell your merchandise while it's still valued. This can be accomplished through discounts or donations, ensuring that inventory does not go to waste. Shrinkage Shrinkage occurs when merchandise is lost after it has been purchased but before it is sent to the consumer. This might happen if there has been a theft or if the merchandise has been damaged in transit. When you have more stock, there is more likely to be shrinkage. You have the option of firing the employees who stole the stock. If inventory shrinkage is caused by damage, make sure the items are handled with care and transported with incorrect packing. Inventory Carrying Cost Formula and Calculation There are two methods for calculating your company's holding expenses: Formula 1 Inventory Carrying Cost = Total Annual Inventory Value divided by 4 Let's imagine a company's inventory is worth $100,000 every year. The carrying cost of inventory is $100,000/4 = $25,000.  Retail or gross profit can be used to calculate your ending inventory. This method will provide you with a general approximation of your company's carrying cost. It is preferable to utilize the second calculating approach for a more precise result. Formula 2 Carrying Cost (percentage) = Inventory Holding Sum / Total Value of Inventory x 100 However, you'll need the inventory holding total to use the formula. Calculation of Inventory Carrying Costs Inventory Holding Sum = Capital Costs + Warehousing Costs + Inventory Costs + Opportunity Costs  This is the proportion of total inventory value divided by total inventory value multiplied by 100 to get the inventory carrying cost percentage. Let's take a look at how it all fits together using an inventory carrying cost estimate as an example. Let's say the Annual average inventory cost is $1 million. Step 1: Compile a List of Inventory Holding Totals Costs of Capital: $20,000 Costs of Warehousing: $120,000 Cost of Inventory: $75,000 Opportunity Costs: $25,000 Step 2: Determine the Amount of Inventory You Have on Hand Inventory Holding Sum = Capital Costs + Warehousing Costs + Inventory Costs + Opportunity Costs Inventory Holding Sum = $20,000 + $120,000 + $75,000 + $25,000     Inventory on hand is $240,000  Step 3: Calculate Inventory Carrying Costs Inventory Holding Sum / Total Value of Inventory x 100 = Carrying Cost (percentage) Carrying Cost (percentage) = $240,000 divided by $1,000,000 multiplied by 100 Carrying Cost (percentage) = 24% 5 Reasons a Company Holds Inventory It's not easy to get the perfect inventory balance. Many businesses believe that having too many things is preferable to running out and perhaps losing a transaction or damaging a client relationship. Here are a few other reasons why companies keep too much stock on hand, driving up their inventory carrying costs: Safety Stock Stocking only enough stock to meet predicted demand might be dangerous. That's why most businesses keep some safety stock, or excess inventory, on hand to deal with unforeseen circumstances like an increase in demand, a supplier delay, or a broken shipment. It's a good idea to have some safety stock on hand for popular commodities but do so sparingly because too much safety stock will result in needlessly high holding costs. Demands That Are Cyclical or Seasonal Retail inventory management is especially crucial since many businesses—particularly retailers—earn the majority of their yearly income in only a few months. In the months leading up to the winter holidays, and electronics merchant may notice a spike in order volume, but an inflatable pool toy maker may conduct most of its business in the spring and early summer. These businesses may build up big inventory reserves before the busy season begins in order to be prepared for that critical stretch. Inventory Cycles A corporation purchases cycle inventory after making sales estimates. This is the stock necessary to meet predicted demand for particular items; unlike safety stock, it is not intended to cover the unexpected. To keep up with consumer demand and produce sales, any products-based firm needs cycle inventory, also known as working stock. To store the proper quantity of cycle inventory, accurate predictions and cycle counting are essential. Inventory While in Transit Products that have been purchased but not yet received are referred to as in-transit inventory. Lead periods might be many months, depending on where a supplier is situated and the type of goods. Thus inventory could remain in transit for a lengthy time. Businesses must account for these commodities in transit when planning future purchases, but because they aren't yet in the warehouse, it's easy to ignore them. This is especially true if you don't have a system in place to track the progress of all purchase orders. Obsolete Inventory Obsolete inventory is sometimes known as "dead inventory." These are things that a business no longer feels it can sell and is generally written off as a loss. Dead inventory may sit in a distribution centre or back room, quietly and steadily increasing inventory carrying costs without the knowledge of executives. 5 Ways Businesses Fail to Lower Carrying Costs in 2023 There are several main sources of needlessly high holding costs, and any of them might make it difficult for firms to reduce this cost. Look at these potential difficulties if your inventory expenses appear exorbitant and you're not sure why: Using Excel and Old-School Techniques Because of their limited usefulness and lack of automation, spreadsheets soon become obsolete for businesses. Inventory reports generated using Excel spreadsheets, paper records, or other archaic tracking techniques are frequently erroneous and cannot be updated in real-time. And if a company doesn't know what it already has, it's more likely to overspend or buy the incorrect things. Rather than strategy and evidence, decisions are governed by gut instinct or best estimates. Demand Forecasting That Isn't Up To Date High holding costs are frequently caused by poor inventory demand predictions. If a corporation bases its estimates on faulty data, it may anticipate a surge in demand for a certain SKU and stockpile inventory, only to have sales fall significantly short of expectations. It may also make the mistake of assuming that just because a product was a great seller last quarter, it will continue to fly off the shelves for the following two. In either case, the corporation is left with a lot of surplus inventory that takes up precious space and costs money that might be spent elsewhere. Consider the term opportunity cost mentioned above. Failure to Recognize Trends Not only does proper inventory and production planning require correct data, but it also necessitates individuals who can successfully evaluate and understand that data. Employees must be able to see patterns in data and evaluate the implications. For example, if a purchasing manager fails to notice that sales for numerous goods fell off in the final month of the third quarter, he may make a large order for the fourth quarter, resulting in outdated inventory. Leaders must also consider how industry developments or larger economic movements may impact demand for their products. Low Inventory Turnover Ratio and Overstocking The inventory turnover ratio is a crucial indicator that indicates how frequently specific goods are sold and refilled over the course of a year. Purchasing choices are based on this ratio. When an organization has a poor turnover ratio for too many items, it faces high inventory carrying costs and, eventually, outdated inventory. This results in an overcrowded warehouse full of merchandise that is neither moving fast nor as valuable as it previously was. Flawed Inventory Management/Order Fulfillment Processes Those without a thorough inventory management plan, including those who utilize Excel or other old systems, will over-order to protect themselves. It's inescapable without a system that gives real-time visibility down to the SKU level and shows reorder points based on lead times and current demand. Inefficient eCommerce fulfillment methods, however, can drive up labour expenses, while bad warehouse management systems or architecture or storage procedures can drive up storage costs and make it easier to ignore current inventory. As a result, there is outmoded inventory, depreciation, and increased insurance, tax, and administrative expenditures. 10 Ways to Reduce Inventory Carrying Costs in 2023 Companies may reduce inventory carrying costs in a variety of methods, some of which take little time and effort. The following are some smart ways to save money while keeping things in stock: Keep an Eye Out for Order Minimums Source A supplier's minimum order quantity (MOQ) is the smallest order size that they will accept. Lowering the MOQ implies you'll have less stock on hand but will be able to purchase more frequently, lowering your inventory carrying costs. Smaller, more regular orders allow your company to be more flexible when demand changes. Developing strategic partnerships with your main suppliers is the greatest way to lower MOQ. When suppliers perceive that you are serious about building a long-term, mutually beneficial business relationship with them, it is simpler to negotiate cheaper orders. If you know another business owner who needs the same stock, you may pool your funds and divide the shares among yourselves. Another option to lower your MOQs is to offer to pay your supplier a little more for less inventory, which might save you money in the long run and lower your inventory costs. Determine Reorder Points Source Your inventory will not fall below your safety stock levels if you choose an optimal reorder point. It helps you save money on storage by notifying you when you need to get extra goods from your vendors. You will prevent shortage expenses, which is the danger of losing a client order owing to low inventory levels if you use a reorder point. You'll know when it's time to order additional shipments if you know what your reorder point is. It should be noted that as your company expands, this will get more difficult, as the reorder point for each product variety is different. Knowing your reorder point can assist you in avoiding ordering too much and risking obsolescence, as well as ordering too little and risking stock-outs, lowering your inventory carrying costs Reduce Supplier Lead Time Source The lead time in inventory management is the time it takes from the time an inventory order is placed until the products are delivered by the supplier. In other words, it's time it takes a supplier to complete an order. When supplier lead times are long, you'll need to have additional safety stock on hand in your warehouses to ensure that all of your customers' orders are fulfilled. As a result, you'll have higher holding expenses because you'll need to keep more goods. You may reduce inventory levels and, as a result, inventory costs by shortening supplier lead times. Developing solid ties with your suppliers is the best way to achieve this. Remember to emphasize that if they can minimize the lead time, you'll be placing more orders more frequently, which should benefit you. When it comes to replenishing goods, you may gain additional flexibility by negotiating shorter supplier wait times. The advantage is that it allows you to keep less inventory, which lowers your carrying costs and eliminates the long-term risk of retaining things that may become outdated. You'll need to adjust your order size and frequency to achieve this efficiently. Demand forecasting - the use of previous sales data to produce an estimate of a projected prediction of customer demand – is one approach to do this. It helps you to fulfil demand while reducing holding costs by not carrying too much inventory. Get rid of any merchandise that is no longer in use. Obsolete inventory is a problem that many internet companies face. When you overestimate a product's potential, you risk having a large number of goods that don't sell owing to a lack of client desire. The drawback is that it raises your holding expenses because you're maintaining merchandise that can't be sold and takes up precious warehouse space that might be better utilized. Monitoring the product life cycles of each of your items and making better predictions when purchasing are two ways to mitigate this issue. Get Rid of Obsolete Stock Source Obsolete inventory is a problem that many internet companies face. When you overestimate a product's potential, you risk having a large number of goods that don't sell owing to a lack of client desire. The drawback is that it raises your holding expenses because you're maintaining merchandise that can't be sold and takes up precious warehouse space that might be better utilized. Monitoring the product life cycles of each of your items and making better predictions when purchasing are two ways to mitigate this issue and reduce inventory carrying costs. After you've gotten rid of the outmoded stock, you'll want to keep it from resurfacing. You may achieve this by changing your demand forecasting depending on predicted future sales, ensuring that you purchase the right amount of stock. This allows you to significantly lower your inventory carrying costs while also ensuring that you are neither overstocking nor understocking. Improve Your Warehouse's Layout Source A structured warehouse allows you to arrange your products more effectively and enhance the general architecture of your facility, which lowers your carrying expenses. A chaotic warehouse, on the other hand, is more likely to have misplaced or damaged inventory, as well as higher travel costs, which is especially true in big warehouses where workers must traverse thousands of square feet for a single product. Putting your high-volume products up front in the staging area is the most efficient way to arrange your warehouse, as it will streamline your pick, pack, and ship process. Determine your fast-moving products by analyzing your inventory flow-through rates (or things that demand regular replenishment). By identifying these factors, you can prioritize putaway (the process of removing products from a receiving shipment and storing them in your warehouse) and choose warehouse sites that bring fast-moving commodities closer to staging areas. You may cut travel time and other related carrying expenses like forklift truck maintenance, labour hours, and more by strategically organizing your warehouse. Implement a Just-in-Time Inventory (JIT) System Source JIT inventory management refers to having the correct items and materials in the right place at the right time, as well as the proper number of materials to manufacture a product. To put it another way, JIT is a strategy of holding practically minimal inventory in your warehouse and instead ordering what you need as soon as you need it. It's a type of lean manufacturing that reduces inventory costs by ordering things and supplies just when they're needed rather than weeks or months ahead of time. Furthermore, because you will only be storing a small amount of merchandise, you will not require a huge warehouse, lowering your eCommerce warehousing expenditures. JIT isn't ideal for every retail organization, but it is a tried and true approach to drastically decrease inventory holding expenses. Use Consignment Inventory Source You may use consignment inventory to leave a portion of your inventory with your supplier until it is sold. As a result, your inventory levels are lower, and your inventory costs are reduced. Furthermore, because online sellers who use consignment inventory don't buy it until it's sold, unsold items can be returned. In general, things supplied under the consignment model are seasonal or perishable in nature. When client demand is unclear, it is extremely helpful to online sellers. Furthermore, by carrying the product on consignment, the online merchant assumes a lower financial risk because the commodity is not paid for until it is sold. Utilize Precise Demand Forecasting Source Using precise demand forecasting is another approach for lowering your inventory carrying costs. Real-time monitoring of your business helps you know when you're running low on stock and need to purchase more. You may also figure out what your best-selling things are, as well as what your worst-selling items are and what demand patterns are. In other words, using accurate information to estimate demand allows you to buy exactly enough inventory to meet demand throughout the year, lowering your overall inventory costs by avoiding overstocking or understocking your warehouse. Once you've identified your slow-moving merchandise, you can concentrate on what's selling — the trick is to use tools to measure data correctly. Predictive data analysis assists you in inventory forecasting the right quantity of inventory based on prior months' data, allowing you to make better business decisions in the future. You won't order too much and run the risk of running out of stock this way. Furthermore, constantly monitoring sales patterns allows your retail organization to minimize the amount of extra stock it carries, lowering storage and handling expenses. Consider Implementing an Economic Order Quantity System Source Ordering a large number of items each month will reduce your order frequency and cost, but it will raise the amount of inventory you have on hand and your carrying expenses. Making modest but regular product orders throughout the month, on the other hand, will reduce your stored inventory and holding expenses while increasing your order frequency and cost. The Economic Order Quantity (EOQ) approach can be used to balance both of these results. The EOQ is the number of units a firm should add to its inventory with each order in order to reduce overall inventory carrying costs. The EOQ method is most commonly used as part of a continuous review inventory system, in which inventory levels are constantly checked, and a predetermined amount is purchased if a product's stock level exceeds a certain reorder threshold. Try To Keep Your inventory From Being Overstocked or Understocked Source Overstocking occurs when you purchase more merchandise than you can sell, lowering your profitability. This occurs because you're investing in a stock that you won't be able to recoup through sales. Because you're storing stuff that can't be sold, your holding expenses will rise. By anticipating sales based on previous data, you may limit the risks of overstocking and understocking — and thereby save your holding costs. Based on how successfully your sales went in a prior period (e.g. monthly), you may guarantee that you will keep more precise stock levels in the future. You may also set up automated notifications to notify you when your stock reaches a specific level, letting you know when it's time to restock. An inventory and order management system can help you do this. How Does Inventory Management Software Reduce Inventory Carrying Cost? Investing in an inventory management solution is a strong way for organizations to decrease inventory carrying costs. This programme provides a variety of options for inventory optimisation, optimizing inventory levels and lowering all of the above-mentioned costs. The visibility that an inventory management system provides is invaluable to any goods organization, as it allows buying, operations, and supply chain experts to make more informed decisions. Not only can the solution manage current stock levels, but it can also track the status of any outstanding purchases and client orders. There will be no more "forgetting" about merchandise in a shipping container en route to your facility. This system will also provide standard receiving, putaway, and fulfillment procedures, ensuring that each item can be tracked from the time it reaches your warehouse to the time it is delivered to the consumer. Inventory management software allows businesses to be proactive, allowing them to change purchase orders, sales strategy, warehouse layouts, and other factors to solve issues before they become costly. An inventory management solution's reporting features are also quite useful. For example, a company may see their inventory turn or sales data for a certain product category or SKU at any moment. It can keep track of how much money is lost to depreciation or spent on taxes and insurance over the course of a quarter or year. This information provides decision-makers with the information they need to keep inventory carrying costs under control. A buying manager could look at the sell-through rate for the previous month and decide to cancel a few forthcoming orders, redirecting the funds to a fast shipment for an item that has seen sales treble in the last two weeks. This data also aids finance and operational management in developing more precise estimates. Leaders should be very cautious about the things they maintain in their stores and warehouses, as well as the quantity they keep. In the end, the more strategic an organization's inventory management is, the cheaper its holding costs will be. In the end, avoiding out-of-stock and overstock situations requires ongoing balance. Even with best-in-class forecasting skills, getting inventory planning just right is nearly hard. However, tying an inventory management system to a bigger ERP management platform is a vital step in lowering holding inventory costs since it allows for improved forecasting and provides the real-time information that any products-based company requires to make informed inventory choices. Conclusion: How Your Business Can Benefit From Lower Inventory Holding Costs With InventoryLogIQ in 2023 Don't leave your firm in the dark when it comes to the expense of inventory storage. You may detect and reduce inventory inefficiencies and develop benchmarks to guide future business choices by calculating inventory carrying costs on a regular basis. More favourable profit margins and increased cash flow are aided by lower carrying expenses. This money may then be re-invested in your company to help it develop, with the advantages being passed on to your consumers. Controlling inventory holding costs is good for your company's financial health and may help you improve a variety of elements. Reducing inventory carrying costs InventoryLogIQ is a Bangalore-based company that specialises in the intelligent management of your inventory. Listed below are some of the key benefits of partnering with InventoryLogIQ: Increases Operational Flexibility: We will help you quickly adapt to constant industry changes.Boosts Sales and Prevent Stock Shortages: We will help you concentrate on the products that are selling and employ auto-replenishment to prevent stockouts situations.Avoids Bloated Inventory: We assist you in flagging slow-moving, overstocked items to prevent inventory dilation.Simplifies Inventory Management: We provide automatic parameter settings so every task will be straightforward to accomplish. Inventory Carrying Cost: FAQs Why is it vital to figure out how much it costs to have goods on hand?Knowing the inventory carrying costs helps your company to identify areas for improvement and maybe modify your processes to increase cash flow. Are inventory holding and inventory carrying costs the same?Yes, inventory carrying costs and holding costs are both computed in the same way and encompass the overall expenses of retaining unsold merchandise. How can I figure out inventory carrying costs?To calculate your inventory holding costs, you'll need to know the cost of your storage solution, the cost of staff pay, the cost of inventory depreciation, and the cost of opportunity expenses. Your holding costs percentage is calculated by dividing the entire cost of these four items by the total value of your annual inventory.

December 10, 2022
What is Inventory Shrinkage in Retail? Definition, Causes, Formula, Impact on Business and Ways to Prevent Shrinkage of Inventory in 2023

What is Inventory Shrinkage in Retail? Definition, Causes, Formula, Impact on Business and Ways to Prevent Shrinkage of Inventory in 2023

Inventory plays a major role in the ability of eCommerce retailers to fulfill orders. Without enough inventory in stock, many problems can occur that ultimately lead to a disruption in the order fulfillment process, leading to unhappy and dissatisfied customers. A common occurrence that leads to this is inventory shrinkage. There are several factors that can contribute to inventory shrinkage, including employee theft, shoplifting, vendor fraud, and errors in inventory management. Employee theft is one of the most common causes of inventory shrinkage, as employees may be tempted to take inventory for personal use or to sell it for profit. Shoplifting is also a common problem, as customers may attempt to steal inventory without being noticed. Vendor fraud can also lead to inventory shrinkage, as vendors may manipulate their invoices to overcharge for items or deliver less inventory than was ordered. Inaccurate inventory management can also contribute to shrinkage, as mistakes in counting or recording inventory can lead to a discrepancy between the actual amount of inventory on hand and the amount recorded in the system. Read further to understand what inventory shrinkage is, how to calculate it, its causes, impacts, and preventative measures. What is Inventory Shrinkage? Inventory shrinkage is a common issue that plagues businesses and results in losses in different departments for companies. Inventory shrinkage can lead to a profit drop in your business unless it is addressed properly. Inventory shrinkage refers to inventory that is reported in accounting records but does not exist in the physical inventory. It is essentially the unplanned loss of inventory due to a variety of factors, some of which are listed below: Inventory theft, damage, miscounting, improper units of measure, evaporation, and other difficulties can lead to high inventory shrinkage levels.Supplier fraud can also create inventory shrinkage in retail when a seller pays a supplier for a particular number of products to be supplied but the supplier does not dispatch all of the goods. As a result, the recipient records the entire cost of the products on the invoice but has fewer units in stock; inventory shrinkage is the disparity between the records and the actual stock that the seller has.Shrinkage also causes profit loss. This is especially problematic in retail, as firms typically run with minute margins, have significant turnover, and are required to sell a large number of goods to remain profitable. Losses arising out of shrinkage will result in merchants being unable to repay the cost of that proportion of inventory. This is because there is no inventory to be sold or returned due to inventory shrinkage. How to Calculate Inventory Shrinkage? Source Inventory shrinkage is determined by subtracting the total inventory received after the cycle count from the total financial worth of all inventory for the fiscal year or quarter. Inventory shrinkage is most commonly computed using the inventory shrinkage rate formula. The following are some of the most important factors to consider while calculating the inventory shrinkage rate: Determine how much inventory you have on hand.Physically count the number of items in your inventory.Subtract the total from the sum in your accounting journal.Divide the amount by the value of inventory to arrive at a percentage. The inventory shrinkage formula is as follows: Inventory Shrinkage Rate = (Inventory Shrinkage / Recorded Inventory Count) * 100 To understand it better, consider the following example: Suppose your business has 7000 pieces of a given commodity. During a physical check, you realize that there are only 6200 units. Thus: Inventory Shrinkage = 800 [7000 (Actual Inventory) – 6200 (Physical Count)] Inventory Shrinkage Rate = 11.4% (800(inventory shrinkage) /7000(actual inventory)) *100 Thus, your inventory shrinkage is 11.4% which implies that you have lost 11.4% of your inventory due to shrinkage. 6 Prominent Causes of Inventory Shrinkage in Retail Fulfilment Inventory management is a crucial aspect of running a business. It can have a significant influence on the financial health of a company. Inventory is the means by which a business generates money, which appears as an asset on its financial statements. Inventory shrinkage reduces a company's potential revenue and profit. Shrinkage can also lead to price increases, reduced employee bonuses, and a drop in total sales. The primary causes of Inventory Shrinkage are as follows:  Vendor Fraud In organizations with complicated supply chains, inventory is sometimes managed directly by suppliers and vendors which are external parties that are not directly affiliated with the firm. Theft might happen while the items are loaded or unloaded while being transported from the supplier's storage units to the business premises. Deliveries should be monitored and documented each time they enter or depart from the business premises as pilferage can easily occur, especially if the inventory is not being monitored by the business directly. Administrative and Paperwork Errors Even though most firms have switched from paper and spreadsheets to more advanced digital record-keeping, administrative and paperwork mistakes remain one of the biggest causes of shrinkage. Pricing errors, unintentional reorders, missing or extra zeros, and decimal point omissions are all examples of administrative errors that can occur even on digital systems if they are not entered properly initially. Even if the organization relies on automated systems, inventory should be physically tallied and re-counted to reduce mistakes. Damage Anything that causes the inventory to become unsellable and not be in the same condition that it left the manufacturing line is referred to as damage. This covers things like shattered packaging, splits, rips, and water damage, among other things. Often, the inventory can be damaged while in transit. Products also suffer damage when they expire. If any of these incidents occur, sellers are forced to either sell what was once a perfectly serviceable good as a refurbished product or if the damage is severe, there are chances that it needs to be scrapped entirely, which means that the seller has incurred the expense of producing that unit but cannot recover the amount by selling it. Human Error Miscounting, inaccurate measurement units and improper portioning of food, drinks, and other types of inventory are all examples of typical human mistakes that lead to inventory shrinkage. Employees may store items inappropriately by mistake, resulting in waste or harm. This can even occur with advanced inventory management software in place if the person who is entering the numbers makes a mistake. This leads to confusion further down the supply chain and can have an impact on order fulfillment. Waste and Spoilage Although not all of the products that are damaged are discarded, some of them are perishable and once they are expired or spoiled, they can never be recovered. Perishable commodities include health care, food, dairy, medication, and various other categories of inventory. When a product is not sold before its expiration date, it goes to waste. Because you cannot sell expired products, the expense is accounted for as inventory shrinkage and it results in a loss for the business. Theft Employees must not only protect the business from inventory shrinkage but from other dishonest employees that might steal from the company. Employees may steal some of the company stock to make up for issues related to underpayment, lack of appreciation, or undervaluation they believe they are receiving. They may be able to rapidly conceal inventory theft since they are corporate insiders that know the inner workings of every operation. When one item vanishes from a large supply of over a thousand products, the employer is likely unconcerned and the incident goes unnoticed until inventory is counted. Instead, the employer/accountant will believe that the merchandise went missing due to administrative mistakes when packaging or loading products onto a vehicle and will mark it as such. Impacts of Inventory Shrinkage in Retail Loss of Money Profit margins are eroded as a result of shrinkage. Whenever an incident of theft, damage, miscounting, or other factors that lead to inventory shrinkage occurs, the business loses out on the opportunity to generate revenue and cash from those items. It also impacts your earnings because you must absorb the price of acquiring the items while making no profit on that item in return. Because retailers rely on thin margins to stay competitive, any event affecting profitability will likely have a negative impact. Loss of Inventory Buying items for your business and having a few of them stolen or damaged is an inexplicable feeling. Companies that lose things owing to inventory shrinkage can never retrieve them. This could occur in multiple ways whether it is employees or delivery personnel stealing unnoticed items, goods being damaged due to human error or while in transit or there is a miscommunication while counting inventory. Every unit of inventory is valuable for a business because it is the means by which they recover their expenditure and if any of it is unaccounted for, the business loses out on that revenue. Miscalculations in Tax and Accounting Missing goods due to shrinkage may result in miscalculations in accounting procedures. Audit and tax issues might arise when accounting books are not aligned, which could have dire financial and legal consequences for the business. Thus, if you have inventory shrinkage issues, be cautious with your accounting books and ensure that they tally. Suggested Read: What is Inventory Accuracy? How to Avoid Inventory Shrinkage in 2023? Though inventory shrinkage in retail is a persistent problem, it can be curbed and dealt with in several ways. Irrespective of whether you have a warehouse or your store, any combination of these measures below may be effective in reducing inventory shrinkage Use Inventory Tracking It is not difficult to track products. Tracking your inventory can help determine whether a piece of merchandise has vanished from the warehouse or the retail floor and due to what reasons. There are several methods for keeping track of your inventory. You can begin by labeling each product with a tagging system. You can follow the movement of any product by using this method, even if you are not physically present.RFIDs are another option that can aid in decreasing shrinkage due to theft. RFID tags are becoming increasingly popular because they allow businesses to track goods as they move about the store and even trigger an alert when they leave the premises.  Have Periodic Counts of Inventory A periodic count of inventory can help you keep track of your stocks on a routine basis to save time.  Instead of using Excel, which is standalone and not synchronized to anything, it is advisable to employ techniques such as inventory management software, that can maintain inventory counts which are updated in real-time.You might use inventory cycle counts to do this. Inventory cycle counting is a method of having your pickers perform inventory counts on segments of your stock on a regular basis.It is frequently associated with the use of a barcode inventory management system.It allows you to keep a more precise stock count at all times. Conduct Audits If you conduct periodic inventory audits, your employees will understand the importance of inventory to the company's profitability and bottom line. Management might perform inventory audits on smaller amounts of merchandise more often, sometimes daily, to keep personnel on their toes. This form of audit is known as "cycle counting" and is an excellent approach to daily inventory tracking.You can also use accounting to compare the amount of available stock at your physical location to the amount of stock recorded in your accounting system. This process is known as stocktaking and ensures that the physical inventory count and the accounting records are in sync. This sort of audit does not have a specific time frame. Use Strict Security Measures A robust surveillance program can help reduce inventory shrinkage while assisting with inventory audits.  Try installing and positioning surveillance cameras around all of your stock locations.The theft warning signs will assist you in reducing inventory shrinkage.The most comprehensive security for your inventory stockpiles is CCTV and warning indicators.You will have a complete awareness of what's going on in your shop if you use video monitoring. You may also identify who stole from your business using video recordings, giving authorities a place to start their investigation in case of any theft.  Since your employees know they are being watched and tracked, they will be less inclined to steal if you install video surveillance. Divide Responsibilities If one person has access to receipt recording and processing, they may feel compelled to falsify the reports for their gain.  You may avoid this by delegating receipt recording and processing to various staff or at the very least, for quality control purposes.By doing this, you can spread the responsibility and accountability for proper inventory management to minimize inventory shrinkage. Make Employees Aware Employees may be unaware of the consequences of inventory shrinkage in retail inventory management. They must understand that a minor mistake or error can have a significant financial impact which may also impact their pockets if the business goes under. Use this as your chance to explain how shrinkage impacts them, both directly and indirectly, such as how it reduces promotions, salaries, and employee profit-sharing, among other things.However, as an employer, you are responsible for providing them with the tools they require to reduce mistakes and carelessness.This entails having simple inventory systems that don't need much technical expertise to learn. You can then provide general training and offer sufficient onboarding for new employees. Partner With a 3PL Third-party or 3PL logistics companies assist eCommerce businesses by storing goods in various fulfillment centers, picking and packing service procedures, and shipping orders. They have the resources to keep your goods safe and secure while allowing you to outsource fulfillment, which may be costly and inefficient to operate in-house.Most 3PLs offer comprehensive information and technology to assist you in keeping track of stock levels and reducing inventory shrinkage.Small and medium-sized businesses often do not have access to such advanced infrastructure so employing can instantly limit errors and reduce inventory shrinkage.They help in ERP inventory management, ABC analysis, keeping track of inventory management KPIs, and inventory optimization. Inventory shrinkage may be eroding your revenues without your knowledge. It can have several negative consequences for your company and may impact the relationships between your company and suppliers and also between members of your team. Hence, it is essential to prevent inventory shrinkage to the maximum extent possible. To that end, you can utilize the services of 3PLs such as WareIQ, which offer several professional services like inventory management and order tracking, to ensure that you are constantly aware of your stock flow which is especially useful for companies that are expanding and are finding it difficult to manage eCommerce operations on their own. Suggested Read: Inventory Position: Definition, Importance and 3 Ways To Position Your Inventory In 2023 Conclusion: How Can AI-Driven Inventory Optimisation Platform Like InventoryLogIQ Minimise Inventory Shrinkage in 2023? Inventory shrinkage is the loss of inventory that occurs for various reasons, such as theft, damage, or simply inaccurate record-keeping. It is a common problem for businesses, as it can lead to decreased profits and a lack of inventory on hand to meet customer demand. To combat inventory shrinkage, businesses can implement several strategies. These include implementing security measures, such as surveillance cameras and security guards, to deter theft and catch perpetrators. Conducting regular inventory counts and audits can also help identify any discrepancies and allow for corrective action to be taken. In addition, implementing strict policies and procedures for inventory management and tracking can help prevent errors and ensure that inventory levels are accurately recorded. Building strong relationships with vendors and regularly reviewing their invoices can also help prevent vendor fraud. Overall, inventory shrinkage is a significant problem for businesses, as it can lead to decreased profits and a lack of inventory on hand to meet customer demand. By implementing effective strategies and staying vigilant, businesses can minimize shrinkage and protect their inventory. Inventory LogIQ, an intelligent inventory optimization solution has helped multiple leading fashion & lifestyle brands (Blissclub, TCNS (Aurelia, W, Wishful), Future Group, Aditya Birla Group, Leemboodi Fashion, Flipkart Fashion, Siril) to minimise inventory shrinkage that has helped to: Decrease inventory holding costs by 40%Increase product availability to 99%+Make faster deliveries for over 70% of the demand We can assist in managing your inventory turnover rate and lowering your inventory carrying expenses to save money for your company.We have a state-of-the-art IMS that can keep track of your inventory across multiple platforms and fulfillment centers to prevent inventory shrinkage and can also integrate with multiple eCommerce selling platforms. Suggested Read: What is Inventory Valuation? Importance, Objectives, Methods, and Challenges in 2023 Inventory Shrinkage: FAQs What is an acceptable inventory shrinkage level?Generally, there should not be any tolerance for inventory shrinkage and it should be limited to below 1% if possible. Who’s responsibility is it to control inventory shrinkage?It is the responsibility of the company and all its employees to work in tandem to stamp out inventory shrinkage as it not only affects the business’s profits but also employees’ salaries and bonuses. What are some examples of inventory shrinkage?Inventory shrinkage could occur through theft, damage, expiry, accounting errors, and many other ways. How can Inventory LogIQ’s IMS help prevent inventory shrinkage?By keeping an accurate track of every transaction of inventory, automatically performing periodic inventory counts that can be customized by users, and automating many inventory management tasks, the chances of inventory shrinkage occurring are instantly lowered by Inventory LogIQ.

December 08, 2022
What is Distributed Inventory? How It Works & When To Consider Adopting Distributed Inventory Systems Using Multiple Fulfillment Centers?

What is Distributed Inventory? How It Works & When To Consider Adopting Distributed Inventory Systems Using Multiple Fulfillment Centers?

Every owner of an online store aspires to reach as many clients and geographical areas as feasible. All businesses prioritise expanding their markets and selling to consumers all over the nation. The eCommerce industry is constantly changing. Online goods and services sales are predicted to exceed $5 trillion globally in 2022 and $6 trillion by 2024. Retailers have flocked to online commerce in record numbers as they continue to follow customer demand. An estimated 12–24 million eCommerce sites exist worldwide, and new online retailers are opening up daily to remain competitive in this industry. As a modern online store owner, one must continuously change tactics and procedures. Distributed inventory is one of the most effective techniques to guarantee maximum reach while remaining competitive. You might assume multiple warehouses will make order fulfilment by a 3PL more complicated. However, there are numerous benefits to working with a single 3PL with various locations. Being close to your consumers is one of the most crucial factors to consider when choosing the site of your fulfilment centre. Using a single fulfilment facility can make it nearly hard to effectively reach the vast majority of your clients as they probably don't all live in the same area. The fulfilment centre nearest to the consumer will immediately complete the order when a customer places one on your website instead through distributed inventory management. Let's examine distributed inventory in more detail and see if it is the ideal inventory and transit management system for your business. What Is Distributed Inventory Management? Distributed inventory is an order fulfilment methodology that physically stores merchandise in multiple warehouses to be closer to more consumers to reduce shipping distance and time. In a distributed inventory model, a company spreads its inventory among many carefully chosen warehouses or fulfilment centres, holding a portion in each one (depending on where its customers reside). Most retailers must work with a third-party logistics provider, or 3PL, to distribute inventory in this way because it is not feasible for one company to handle one (or more) fulfilment centres. Compared to self-fulfilment, outsourcing saves time and spares you the expense of purchasing the staff, infrastructure, equipment, and supplies required to run a fulfilment centre (such as renting a warehouse or buying property). Although a 3PL's fulfilment network can enable your company to use the distributed inventory approach, you must first understand how it works to decide if it is appropriate for your company. With less shipment distance, transit time, and shipping expense, orders can be picked up, packed, and dispatched from the fulfilment centre that is most convenient for their final destination. How Does Distributed Inventory Work? A producer or supplier stores its products in a centralised warehouse under a traditional inventory model. After a consumer puts in an order, it is processed for delivery at the hub and then delivered to the customer. When a customer places an order, the warehouse or fulfillment center closest to them has all the items in stock or can fill the demand for the least amount of money and will prepare and dispatch the order. When there is an unexpected spike in demand for a particular product, these fulfilment centres can also assist others in the network. Any inventory management system's main objective is to ensure the proper amount of inventory is available at the appropriate location and time. The precise amount of inventory required in a specific place is challenging to predict, but machine learning and artificial intelligence are increasing the predictive data process. The widespread use of this technology makes it feasible for inventory distribution to be as precise and customer-focused as possible. Retailers generally work with a 3PL (third-party logistics provider) to set up a distributed inventory system to accomplish this goal. Together, they determine the retailer's primary consumer base and what those customers want. Then, depending on the amount and location, the optimum way to distribute inventory can be determined using predictive analytics and purchase history. When To Consider Distributed Inventory Management System? An eCommerce seller might benefit significantly by distributing their inventory around several fulfilment centres, a practice called distributed inventory. Working with a 3PL with numerous warehouses allows you to benefit from their experience and knowledge without paying the high up-front costs associated with setting up your infrastructure. If you experience the problems stated below, you should consider hiring a 3PL to obtain the benefits of distributed inventory system. Your Products Are Heavy In Weight When a shipment is heavier, it will cost less to ship since it will go farther or via fewer delivery zones. Your products will probably be more accessible to your clients if you have distributed inventories. You will be able to cut back on shipping expenses, which can quickly mount with heavier shipments. You Deliver A Lot Of Orders When your business is just off the ground, a single warehouse can be all you need because it will probably be too expensive to run out of many fulfilment centres. However, it will be more cost-effective to distribute your goods around fulfilment centres if your business grows to the point that shipping expenses outweigh the price of extra warehouse space. You can deliberately pick locations close to your consumers by using numerous warehouses. Because orders will be transported from a nearby location, keeping inventory close to your customers can reduce shipping expenses. Similarly, rather than keeping inventory for every item you sell, sending only your most well-liked or best-selling products to different warehouses might make sense. By doing this, your less popular products won't take up warehouse space and hang about collecting dust without selling, saving you from having to pay for storage. Not All Of Your Consumers Are In The Same Region Not all of your clients are concentrated in one region of the world. Where your consumers reside ultimately determines where your fulfilment centre should be situated. This is because orders are delivered more quickly and inexpensively when your packages travel a shorter distance. Therefore, it's advisable to determine how many customers might profit from an additional warehouse before investing in one. You Want To Provide Inexpensive 2-day Shipping Consistently Consumers today are used to expecting two-day delivery when they order online. A large number of fulfilment centres enables quicker delivery. When a customer buys something online, the order is instantly filled from the warehouse that is closest to the customer. This could allow your business to provide Prime-like service with quicker delivery times to fulfil client expectations. Top 10 Advantages Of Distributing Inventory Through Multiple Fulfilment Centres in 2023 Source A distributed inventory model presents several possible commercial benefits. Benefits range from tactical to strategic, and they can enhance a company's profitability and client pleasure. Capability for High-Volume Orders Shipping expenses that exceed warehousing costs are likely to be encountered by retailers looking to expand their companies. The most economical course of action in this situation is to manage activities from many fulfilment centres. Utilizing strategically positioned warehouses is a wise approach to managing inventory because top-selling things may be stored and shipped from different warehouses. At the same time, less-favourite products don't have to sit around at the company's expense. High-volume online retailers can also benefit from better inventory management since 3PLs with numerous warehouses often have their inventory management software for efficiency and transparency. Distribute The Risk Natural disasters and other calamities frequently hinder shipping companies from reaching the fulfilment facility or cause delays while in transit. Some of your orders may eventually be affected by a flood, wildfire, hurricane, earthquake, snowstorm, or other natural disasters. You will have backup inventory in other locations if you divide your inventory among different geographic areas. It can be preferable to be safe than sorry to avoid delays or lost inventory. Shipping of Oversized and Overweight Products More warehouse and truckload space is typically required for larger and heavier goods, which adds to the already high cost of these spaces. Retailers can cut storage and delivery expenses by using distributed inventory because their products will pass through fewer shipping zones and are less likely to get trapped in warehouses. While there isn't a single best strategy to handle inventory and shipping management, retailers considering order volume and regional market location can make better 3PL provider selections. Distributed inventory can boost eCommerce conversion rates and hasten business growth with a thorough cost-benefit analysis and knowledge of market geography. Reduced Costs For Shipping and Transportation Goods are situated closer to clients in a distributed inventory scenario, which lowers transportation costs. This is crucial for overweight and oversized products because they cost more to ship over long distances. Customers may receive some of these savings through cheaper (or even free) Shipping, or the savings may be kept as profits. Reverse Logistics Gets Simpler A company has to handle the process of either throwing away the products or adding them back to inventory when a consumer wishes to return something. Those who take advantage of distributed warehouses can reduce the cost and effort associated with these reverse logistics operations. Accepting returns in any place is the ultimate objective. Less Delivery Across Borders International markets offer sellers a wealth of opportunities, but Shipping across borders has several drawbacks, including higher costs and customs issues. Working with nearby warehouses or fulfilment facilities is an efficient way to lessen or eliminate such problems. Faster Order Shipping Today's customers anticipate their items to be delivered within a day or two, making quick delivery even more important. You'll be closer to your clients by distributing your inventory and may complete orders faster. You can opt to store your inventory close to your customers' locations and deliver the goods the same day or the next day using 3PLs like Inventory LogIQ. Minimize Issues Of Damaged Products Products are less likely to be lost or damaged in transit because they do not have to travel as far. Savings are generated for the business that makes those products as a result. Improved Inventory Management Organizations that supply their scattered warehouses can better manage the inventory in their structures when combined with knowledge of product demand and client location. As a result, they can operate with less excess inventory than companies that adopt a centralised strategy. Opportunity To Expand Into Other Markets A company can enter new markets by being able to send more goods at less money via new locations. Ideally, you would have established a distribution hub before attempting to make sales in the region. Challenges Faced In Distributed Inventory Management A distributed inventory strategy has numerous benefits, but there are also some drawbacks that businesses should be aware of. One is cost, particularly for new businesses looking to expand. Different locations frequently result in higher costs, whether from investing in more fulfillment centers or outside logistics companies. For this strategy to succeed financially, businesses must also have excellent inventory forecasting capabilities. Another element to think about is management. It may be necessary for some firms to collaborate with many 3PLs, which can make partner and customer relationship management more difficult. Working with many vendors could also necessitate the usage of diverse technology by the organisation, such as order management systems. Success depends on effective communication and standard performance measures, which should reduce these problems. Lastly, it might be challenging for businesses to overcome inventory management obstacles and possess all the inventory intelligence necessary to support a thriving distributed inventory environment. For example, working with 3PLs requires excellent demand planning and supply chain analytic skills to prevent carrying too much or too little stock. Conclusion It may be necessary for some firms to collaborate with many 3PLs, making partner and customer relationship management more difficult. Working with many vendors could also necessitate the usage of diverse technology by the organisation, such as order management systems. Success depends on effective communication and standard performance measures, which should reduce these problems. Lastly, it might be challenging for businesses to overcome inventory management obstacles and possess all the inventory intelligence necessary to support a thriving distributed inventory environment. For example, working with 3PLs requires excellent demand planning and supply chain analytic skills to prevent carrying too much or too little stock. Related Article: 5 Benefits of Inventory Data Analysis for Your Business in 2023 Benefits Of Partnering With WareIQ & Inventory LogIQ For Better Distributed Inventory Systems in 2023 By cooperating with WareIQ, a 3PL partner, eCommerce enterprises who don't want to manage warehouse management can streamline supply chain management. Self-fulfilment is time-consuming and expensive, requiring a lot of effort, training, certifications, resources, safety precautions, and other costs that make it unattractive. On the other hand, WareIQ's supply chain management professionals know how to optimise operations and stay current with emerging supply chain trends and technology. WareIQ processes orders for numerous eCommerce firms through its extensive network of fulfilment facilities distributed around the nation, allowing businesses to concentrate on marketing, product development, and other activities. Inventory LogIQ is WareIQ's AI-based eCommerce inventory optimization tool that enables efficient inventory planning & regional utilization via distributed inventory and smart inventory placement across fulfillment centers and warehouses located across the country. How Inventory LogIQ enhances your inventory control and distribution system is as follows: Improved Inventory Control Inventory LogIQ gives you the data you need to manage inventories without even visiting the FCs where your products are stored. For example, you may set up automated reorder notifications to ensure you never run out of stock and that all product inventory levels are tracked in one place. Distributed Inventory With the help of Inventory LogIQ, you can smartly place inventory across FCs/warehouses closer to your customers and with WareIQ's shipping partners, you can deliver your items to clients faster and economically. You can reduce your fulfilment expenses by sending orders from facilities close to the customer. As a result, higher customer satisfaction and repeat purchase rates can be anticipated with lower shipping costs and quicker fulfilment. Order Management With automated order processing and real-time order visibility via the WareIQ dashboard, you can keep consumers informed while quickly accessing order management analytics and fulfilment performance. Distributed Inventory FAQs (Frequently Asked Questions) What does distributed inventory mean?Distributed inventory refers to the idea of splitting up shipments of merchandise that needs to be supplied to retailers. To meet the retailer's needs, these shipments are dispatched individually. Inventory can be transported to all the locations where it is required by splitting it up into numerous shipments. What challenges does distributed inventory face?Extra locations frequently result in higher costs, whether from investing in more fulfilment centres or outside logistics companies. For this strategy to succeed financially, businesses must also have great demand forecasting capabilities. What is the purpose of a distribution centre?A building that stores and ships goods is known as a distribution centre. Warehouses and fulfilment centres are other names for distribution centres. A distributed inventory strategy uses numerous warehouses or distribution facilities across various regions. A single distribution centre controls everything that comes in and goes out in a consolidated inventory strategy. What does distribution management mean?Controlling how things are transported from a supplier or manufacturer to the point of sale is referred to as distribution management. It is a general phrase that covers a wide range of operations and procedures, including supply chain management, inventory management, warehousing, and packaging. When To Consider Distributed Inventory?When you encounter any of the following circumstances, distributed inventory should be considered. - 1) The Weight Of Your Products Is Heavy2) You Fulfill Many Orders3) Your customers are not all located in the same area.4) You want to offer affordable 2-day shipping consistently.

November 29, 2022
What is Inventory Valuation? Importance, Objectives, Methods, and Challenges in 2023

What is Inventory Valuation? Importance, Objectives, Methods, and Challenges in 2023

When you become an eCommerce seller, inventory becomes your biggest asset and a majority of your capital investment goes into procuring it and storing it until it gets sold and starts to recover your expenditure. The value of the assets of any business provides insight into the financial condition of that business. A business is believed to be in good condition if its balance sheet shows that it has more assets than liabilities. It can be calculated if the business has kept records of every asset, sale, order, profit margin, liability, etc.  In terms of business, these records are referred to as inventory valuation. The most important aspect of calculating inventory is knowing how much your inventory is worth during a financial time period like a quarter or fiscal year. It impacts the cost of goods sold (COGS) which ultimately determines the overall financial health of your business.  In this guide, we will review the critical aspects of inventory valuation, the different methods used, and how to control inventory. What is Inventory Valuation? Inventory valuation is a term used for calculating the value of inventory a company has during a particular time period. Inventory is a prime asset of an organization and to record it in the balance sheet, it needs to have a monetary value. This value can help you measure your inventory turnover, which will help you to plan your purchasing decisions. It is based on the total costs incurred to acquire the inventory and get it ready for sale. You can find out yours by evaluating your cost of goods sold (COGS) and ultimately, your profitability. The most widely used inventory valuation methods are WAC (Weighted Average Cost), FIFO (First-in, First-out) inventory valuation, and LIFO (Last-in, First-out) inventory valuation. [contactus_uth] Why is Inventory Valuation Important for Businesses? The cost of goods sold (COGS), gross income, and the monetary worth of inventory remaining at the end of each accounting period are all affected by how a company conducts inventory valuation. As a result, inventory valuation has an impact on a company's profitability and prospective value as shown in its financial accounts. A few points that stress the importance of inventory valuation are listed below: Impact on the Cost of Goods Sold If the volume of goods sold is high at the end of the period of calculating inventory valuation, the total cost of goods sold will also be higher which means that most products from the inventory have been sold. Alternatively, if inventory has a lower valuation, holding costs will increase which will also lead to a higher overall cost. As a result, it has a significant impact on the profit levels reported. Impact on Multiple Records If the inventory valuation is not calculated correctly and on time, the errors may be recorded repeatedly for the next quarter/fiscal year. Because of the incorrect ending balance in the first period, it will be carried forward into the beginning inventory balance of the next reporting period, causing multiple errors in reported profits in two consecutive quarters or years, because of which, the balance sheet will not tally as more assets will always be shown. Impact on Loan Ratios If a business owner wants to take a loan for their business, the lender will base the loan on the company valuation and after passing it successfully, a restriction on the permitted proportions of current assets to current liabilities may be included in the loan agreement if a business has received a loan from a bank or lender. The lender has the option to cancel the loan if the entity fails to satisfy the target ratio. Inventory valuation is important because inventory is often the major component of the current ratio. Impact on Income Taxes When the balance sheet is involved during company valuation, the amount of income tax paid can be affected by the inventory valuation method used. The LIFO (Last-in, First-out) approach is widely used to lower income taxes paid during periods of rising prices. LIFO matches current sales and current costs of those sales with historical sales. If the production costs of an item increase due to inflation, the cost of goods sold is increased under LIFO, which creates a higher cost of goods sold tax deduction and thus, a lower taxable income. What Are the Objectives of Inventory Valuation? The term inventory refers to products that are for sale. It covers raw materials, semi-finished items, and finished goods. At the end of each fiscal year, inventory valuation is performed to determine the cost of goods sold and the cost of unsold inventory. This is critical because any excesses or shortfalls in inventory have an impact on a company's production and profitability. There are various reasons to evaluate inventory. A few of them are: To Evaluate the Capital Invested in the Business You must have spent a lot of capital on your business, like most other retailers. Some of that money must have been spent on fixed assets like stores, warehouses, furniture, computers, etc., and most of it on assets that are variable in nature. Getting the value of fixed assets is a relatively simple task but knowing the monetary value of inventory is much more difficult so this is where inventory valuation can help.  To Get the Sales Velocity of the Company If you operate a small eCommerce business, it is much easier to conduct inventory valuation but when you provide the data of a specific time period in your balance sheet, it shows how many items you sold in that certain time period. This can give you an idea of how smartly you rotate your money on buying and selling your inventory.  To Determine the MOQ and EOQ When you evaluate inventory at the end of an accounting period, you are able to figure out how many products you have sold during that period so you know how much inventory you need to keep in stock to avoid overstocking and understocking. You can calculate the economic order quantity (EOQ) to get the ideal order size and the minimum order quantity (MOQ) so that you have an idea of the least amount of money you will need to spend on procuring inventory. To Get Help in Taking Valuation-Based Loans When a business owner wants to expand their business by adding more products to their selling list, listing the available products on multiple selling channels, and arranging for storage in multiple warehouse locations, it requires a steady amount of investment. Most of the time, sellers take loans to invest in infrastructure for expansion. So for that purpose, banks demand access to the balance sheet to check the inventory valuation of the company to determine if they are eligible for the loan or not. To Determine the Gross Income As your inventory is stored with the ultimate goal to sell it and generate revenue, inventory valuation can easily show you the money that has been invested, earned, and is held up in procuring it.  To determine the gross profit, match the cost of goods sold with the revenue of the accounting period. Cost of goods sold = Stock at beginning of the accounting period + Purchases – Stock at the end of an accounting period. The equation shows how inventory valuation influences cost and ultimately, the gross profit. To Reflect the Financial Position of the Business Inventory after closing is considered a current asset. The financial status of the business is determined by the value of the shares while filling out the final balance Sheet. Overvaluation or undervaluation can show a false image of a company's working capital and overall financial position. To Show Any Gaps Between Assets and Liabilities An asset valuation tells you about the total value of assets you have at the end of a particular time period. When you have a strong idea about the figure of the valuable assets in your business, you can compare it with the liabilities and implement processes to reduce them such as extra warehouses, removing non-performing assets, getting rid of useless supply chain partners, etc. 4 Most Prominent Inventory Valuation Methods in 2023 Source First-In, First-Out (FIFO) This strategy works with the idea that the first inventory purchased should be sold first. The remaining inventory assets are then matched and marked as the most recently purchased or produced assets. Because it is simple and easy to implement, it is one of the most commonly used inventory valuation methods by eCommerce sellers. The FIFO approach gives you a higher value of remaining inventory, a lower cost of goods sold, and a higher gross profit if there is inflation. During inflation, when prices rise quickly, the FIFO model fails to provide a realistic picture of the costs. It also does not provide any tax benefits, unlike the LIFO technique. Last-In, First-Out (LIFO) As the name suggests, this inventory valuation method works on the idea that newer goods are sold first while the older inventory remains in stock. Businesses rarely adopt this strategy since older inventory can increase holding costs and become obsolete over time. The business suffers a big loss as a result of this. The LIFO method is used at a time when eCommerce businesses expect inventory costs to rise over time because of price inflation. Businesses’ declared profit levels can be reduced by transferring high-cost inventory to the cost of goods sold which enables companies to pay less tax as a result of this. Specific Identification Method Every item in your inventory is recorded using this inventory valuation method from the time it is stocked until the time it is sold. It is typically reserved for large items that are immediately identifiable and have a wide range of features and costs associated with them. The ability to trace each item individually using an RFID tag, stamped receipt date or serial number is the most important prerequisite for this system. While this method provides a high level of accuracy in inventory valuation, it is limited to valuing uncommon, high-value items that require these extra procedures. You can read more about inventory accuracy here. Weighted Average Cost Method Under the weighted average cost method, the weighted average is used to determine the amount that goes into the cost of goods sold and inventory. The weighted average cost per unit is calculated as follows: Average Cost Per Unit = Total Cost of Inventory Goods / Sum of Total Units in Inventory The above inventory valuation method is mainly used to determine the cost for the total sum of units that are indistinguishable from one another and when it is difficult to track the cost of individual items. It can be used to calculate inventory valuation by very niche businesses though it does not provide the actual valuation of a business. What are the Challenges of Inventory Valuation? Determining the Total Cost of Inventory Use COGS for calculating the cost of your inventory: COGS = Inventory at starting + Purchases – Inventory left Therefore: Inventory left = Inventory at starting + Purchases – COGS The value of Inventory at the start and end of an accounting period may not be as simple as it appears. Anything you can't sell for MRP due to damage, obsolescence, or even shifting consumer tastes must be marked down and valued properly. This makes determining the total cost of inventory a challenging affair. Determining the Amount of Inventory Left This is more challenging than it appears. If a business has products in transit, it must decide whether or not to include them in the inventory valuation. Many businesses keep track of goods using a periodic inventory management system. Companies use this technique to evaluate inventory after each accounting period. A perpetual inventory system, on the other hand, tracks every purchase order and sale, and updates inventory to reflect those transactions regularly. Adding Other Related Costs When you evaluate your inventory, you do not only add up the costs of the products you have but also the costs of procuring it like the transportation cost, inventory holding cost, delivery cost, insurance cost, packing and picking cost, etc. Even electricity that is utilized to store your inventory can be added to your inventory valuation. Adding the exact value of these expenses with the ratio of remaining inventory can be a challenge for a seller. It is nearly impossible to determine the actual expenses that occur due to the leftover inventory and the further expenses to keep it safe and fresh for as long as possible. Calculating Depreciation Depreciation is also a big factor that affects your inventory valuation. With time, inflation not only surges but object values also depreciate. Most of the time, electronic items depreciate when the latest and updated versions come into the market. For example, if you are selling a mobile phone and after a period of a few months, the same company launches a model with more features at the same price, the product sales of the older phone will reduce or stop entirely so ultimately, the company will have to sell it at a lower price. Valuating Damaged Products Products after they occur damage are difficult to monetarily evaluate. A seller cannot command its actual price. They can try to sell it as a refurbished product during sales or sell it to a second-hand dealer like Cashify. The same thing happens with perishable products after a specific duration because storing perishable products is more expensive than the incomes they fetch in a highly competitive market space. Some perishable products demand special warehousing facilities like temperature control, special containers, etc. Identifying Stock Discrepancy The stock discrepancy is the difference between the physically available stock or inventory and the current inventory that is recorded in the system. To run a successful business, maintaining accurate stock is important but inventory discrepancy is a common scenario in real-life eCommerce operations. When it comes to inventory valuation, the stock discrepancy is a big hurdle. To find out the inventory valuation, you should have an accurate figure for your inventory. If there is a disparity in the count, sellers need to find the mismatched amount of inventory by calling the manufacturer, rechecking old bills, etc. and after that lengthy process is done, the seller may not be able to account for those missing items so it can go to waste and cause differences in the final valuation. Valuing Seasonal Items The value and pricing of seasonal items change over time. When a season ends, the manufacturers also start offering heavy discounts and when sellers take advantage and procure items, the price of the same product will vary compared to the price it was bought at the beginning of the season. For example, if you are a garments seller and you sell coats during winter but the weather doesn’t get as cold as you expected which results in lower demand for coats, you will have to store all that inventory till the next winter which can damage the products or make them obsolete as newer designs are introduced in the market. If you always keep a record of your inventory with the help of inventory planning through inventory management software, you may not find any challenges during inventory valuation. How to Choose the Right Inventory Valuation Method in 2023 and How Can Inventory LogIQ Help? When choosing the right inventory valuation method, there is no absolute formula. It depends on the purpose of doing it and the type of inventory. A few things to note about choosing the right inventory valuation method are: FIFO generates the highest gross income at the present time while LIFO generates the least and WAC is somewhere in the middle. Assuming a normal inflationary scenario in which supply costs rise over time, FIFO generates the greatest taxes, while LIFO generates the lowest with WAC again in the center. It minimizes the consequences of inflation and deflation by matching recent income with recent costs. When you or your customers want to know the cost and selling price of each unit, Specific Identification is the logical solution. People who buy and sell art may be curious about how the price of a certain piece altered from the year it was last purchased to the year it was sold. LIFO, FIFO, WAC and Specific Identification are the most common inventory valuation methods. Some of the others which are used according to the preference of many sellers are: First-In, Last-Out (FILO): Seller sells the firstly stored items at last.First-Expired, First-Out (FEFO): Seller sells the earliest-expiring inventory first.Highest-In, First-Out (HIFO): Seller sells the highest-cost inventory first.Lowest-In, First-Out (LOFO): Seller sells the lowest-cost inventory first. Conclusion After getting this detailed information on inventory valuation, you must have gotten an idea of how it is helpful in the growth of your business. It is important for you to partner with a company that provides inventory management services by using the best procedures and the most advanced technology. We at Inventory LogIQ provide our partners with the count, location (warehouse or transit) as well as monetary value of their inventory. We help you know the actual value of your inventory through different inventory valuation methods, handled by experts.  InventoryLogIQ is an AI-driven inventory optimization platform, that allows multi-channel brands to stop losing revenue on out-of-stocks, release cash from overstocked items, and accelerate shipping speed. Inventory LogIQ provides the actual figure of your inventory valuation as well as the value of each and every item that is available in stock through our custom SaaS solution - IMS (Inventory Management Software). To achieve better results in inventory valuation at the end of the financial period, Inventory LogIQ can help in: Inventory planningSmart inventory placement across multiple warehousesLIFO and FIFO methodsExperts to handle every procedureDeciding MOQs and EOQsAlerts for replenishment when moving towards out-of-stock situations Suggested Read: What is Inventory Aging? Inventory Valuation FAQs (Frequently Asked Questions) How is inventory valuation calculated?Inventory values can be calculated by multiplying the number of items left in hand with the price of a single item. What is the inventory valuation formula?The formula for inventory valuation of a company is equal to the figure of its assets subtracted from its liabilities. Anything that has a monetary worth, such as real estate, equipment or inventory, is considered a business asset. Which is best for the inventory valuation method in 2023?When it comes to inventory accounting methods, the FIFO approach is most commonly used since it provides the most accurate picture of costs and profits. What is the objective of inventory valuation?The primary goal of inventory valuation is to determine the company's actual income and true financial situation. Why should inventory be valued at its cost price?Items in inventory are often valued at their cost rather than their selling prices because of the cost principle which says assets, liabilities and equity investments should be recorded on any financial record at their cost price.

November 29, 2022
What is Inventory Analytics? Meaning, Types, Inventory Analytics Metrics, 5 Benefits of Inventory Data Analysis for Your Business in 2023

What is Inventory Analytics? Meaning, Types, Inventory Analytics Metrics, 5 Benefits of Inventory Data Analysis for Your Business in 2023

It is supremely important for every eCommerce business to have an idea about their previous performance, whether it was strong or weak, to understand the factors that contributed to those results so they can either replicate it or mitigate it in the future. The main way to do this is through inventory analytics which helps retailers analyze a variety of metrics such as high-demand products, low-demand products, storage costs, and much more. In this article, we will go into depth about inventory analytics and understand the types, metrics, and benefits. What is Inventory Analytics? Inventory analytics studies inventory to estimate the quantity of a product a company should have on hand. Companies may decrease expenditures and enhance operational efficiency by managing inventory levels. Inventory analytics provides crucial insights into product management, allowing organizations to implement cost-effective solutions and improve operations. Companies cannot track items efficiently as they move through the supply chain without a robust inventory data analysis. This can lead to inconsistencies, low supply levels, and backorders.Inventory analytics aims to quantify essential performance metrics, allowing businesses to monitor and adapt management approaches in real-time.Managers may enhance their decision-making by incorporating inventory data into their daily activities.Inventory analysis ensures that you have the proper quantity of inventory on hand, lowers your operating expenses, and encourages improved demand forecasts. Types of Inventory Analytics Thanks to inventory data analysis, inventory management has become more advanced and demand forecasting can be done in an efficient manner. Inventory analytics may also reveal information about client behaviour, product performance, and channel performance. There are different types of inventory analytics, depending on the values provided by the data. These are classified as below: Descriptive Inventory Analytics Descriptive inventory analytics reveal the status of inventory in a descriptive way. This method is the simplest to implement, with major inventory management platforms supplying predefined descriptive statistics straight away. Analytics include system information, such as the number of items in stock and price per unit. The descriptive analytics stage provides visibility into inventory levels across the supply chain.End-to-end reports reveal the location of inventory in the supply chain.They can demonstrate how the stockpiles of raw materials, intermediate products, and final products cover sales.People learn to think in terms of value rather than just units. And they begin to realise how stocks at all levels pile up to satisfy the same levels of demand. Diagnostic Inventory Analytics Diagnostic inventory analytics explain the reason behind a trend that is occurring. Principle cause analysis is a diagnostic process, which is necessary when presenting information to make decisions.  For example, simply knowing that a firm grew month on month is not useful. Leaders must understand why there was this increase, in order to apply the lessons learned to other operations or products. Diagnostic analytics assists in identifying and understanding shortages and overstock.It urges managers to look beyond overall inventory value. It distinguishes between healthy and unhealthy inventory by displaying the inventory quality.To do this, the organisation needs comprehensive inventory objectives but these targets do not need to be accurate.Simple procedures are generally adequate to establish the appropriate minimum and maximum stock levels. Predictive Inventory Analytics Predictive inventory analytics attempt to forecast the future pattern of inventory. You can use these tools to plan ahead of time and make changes as needed.  For example, machine learning is all about leveraging automation to learn from historical data and predict future patterns. Professionals can employ predictive analytics to look at seasonal needs from the prior year or they can use past knowledge of why something occurred.Predictive analytics can alert you to potential shortages and hazards associated with slow-moving or outdated stocks.Algorithms can inform planners if stockpiles are approaching the end of their shelf life by combining data on inventory and demand.They can issue alerts if inventory levels go dangerously low, resulting in lost sales very quickly. Prescriptive Inventory Analytics Prescriptive inventory analytics is a highly sophisticated approach to inventory data analysis. These numbers will tell you precisely what should be done. A correct prescriptive analysis with relevant data may be able to help you determine the different stock levels to meet different sizes of orders. With the relevant data, inventory management analysis systems may estimate the quantities of an item necessary to meet 90% of requests in three days. Prescriptive analytics can give suggestions for methods to improve inventory efficiency.Such a suggestion should originate from the planning system.Inventory analytics should be able to suggest solutions that a standard planning system cannot, such as "move additional products from location A to location B to reduce the risk of expiration."  8 Important Inventory Data Analytics to Keep Track of in 2023 Once you’ve been acquainted with various inventory measurements, you need to understand how to get value out of them. It's critical to keep track of your inventory statistics on a regular basis so that you can include them in making appropriate decisions. There are various measures that should be utilised to assess performance and find opportunities for improvement. They are listed below: Gross Margin Returns on Investment (GMROI) GMROI is a straightforward ratio used to assess the profitability of your inventory over a certain time period. It calculates a retailer's gross profit for every dollar of goods acquired. The formula for figuring out your GMROI is: Gross Margin / Average Inventory Cost Any GMROI ratio less than 1.0 indicates that a firm is losing money for every dollar invested in inventory. Anything above 1.0 indicates that a company is selling things for more than it cost the company to acquire. It should be noted that this is not a measure of bottom-line profitability, because only COGS is included as a cost, not total spending. However, this provides a clear indicator of how lucrative your inventory is, based on current pricing points and purchasing practices. Average Fulfillment Cost Per Order Average fulfillment cost per order tells you how much it costs to choose, pack and ship each order. There are numerous costs to consider when looking at the full retail fulfillment process. Examine the following expenses to determine overall fulfillment costs: Receiving, storing, and controlling inventoryStandard or customised packagingPick and pack labourPostage and shipping labels Shipping supplies and expensesOutfitting and assembly (if applicable)Returns management procedure The cost of fulfillment varies depending on whether you complete processes in-house or work with a 3PL according to their pricing model. Total Units in Storage Real-time monitoring of inventory analytics accounts for all of your items across all fulfillment locations and can assist you in calculating total units in storage or total inventory. This number is continuously changing, as you sell and reorder units, add new goods, and process returns. The more SKUs you have, the more careful you need to be about storage expenses, overstocking, and the amount of capital locked up in inventory. Many organisations overpay for storage they don't need, raising their inventory holding expenses needlessly. Inventory Reconciliation A procedure for inventory reconciliation can help you eliminate stock inconsistencies and better understand why they exist in the first place. Inventory reconciliations should be performed on a regular basis to verify that you are tracking and documenting value fluctuations due to outdated inventory or shifts in product demand. Here's a quick rundown of the processes to correctly reconcile inventory: Examine your physical inventoryContrast the physical count with the inventory recordsExamine the most recent inventory deliveries and shipmentsDetermine if there are any inconsistencies Inventory reconciliations must be scheduled at regular, preset periods to ensure consistency and inventory accuracy. Backorder Rate A backorder occurs when a sale is made but the merchandise for the order is not yet available. This slows down order fulfillment and shipment, as well as last-mile delivery. The item is then supplied to the client at a later date since it is not in stock. Backorders can arise for high-demand items. However, frequent back-ordering might result in poor consumer satisfaction. The backorder rate of a corporation is the percentage of orders made that will be delivered at a later date owing to a lack of available inventory.  It is calculated as follows: (Number of Undeliverable Orders/ Total Number of Orders) x 100 A high backorder rate can indicate an unusual shift in demand, a lack of safety stock, or manufacturing delays. Inventory Turnover Ratio Source The inventory turnover ratio calculates how many times a corporation sold and replenished (i.e., turned over) its inventory during a certain time period. Because a high turnover rate is related to selling a lot of items, inventory turnover may really confirm the efficiency of your organisation. The following formula is used to determine turnover: Inventory turnover ratio = [cost of goods sold average inventory] A benchmark inventory turnover ratio of 2 to 4 is good for analysing the findings but keep in mind that it might vary depending on your business. A ratio within this range indicates: Your logistics, both incoming and outgoing, are optimised.You are replenishing inventory that corresponds to your sales cycle.You are receiving new goods on schedule, based on manufacturing and warehouse receiving lead times. Inventory Shrinkage When actual inventory levels do not match inventory records, it is referred to as inventory shrinkage. This might be due to a variety of circumstances, such as theft, shipment damage, or inventory accounting problems. Shrinkage is an inherent challenge for retailers but understanding the scope of the problem can help them gain better control over their inventory. Choosing and sticking to an inventory valuation system may promote consistency and accuracy, saving a lot of hassles during tax season. Here is a formula for calculating the rate of inventory shrinkage: {(Recorded Inventory – Actual Inventory) / Recorded} x 100 Inventory Carrying Costs Carrying costs encompass all charges that are connected with retaining or storing acquired and unsold finished goods and items. Common carrying costs include storage, labour, and insurance but they can also include opportunity and inventory depreciation costs. Carrying costs account for around 30% of overall inventory expenses and the exact costs vary depending on a variety of factors, including the number of total SKUs being stored and your typical inventory turnover rate. To get an understanding of how carrying costs are calculated, sum up all of your inventory expenditures and divide the total by your current inventory value to obtain a percentage of how much you're really spending to keep inventory. The formula is as follows: (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory What are the Benefits of Inventory Data Analysis? Achieve Optimum Levels of Inventory Stock visibility increases when you do frequent checks of inventory levels and other related indicators like total units in demand, cost of storage, etc. A comprehensive picture of stocks generated from these systems can help you in determining the number of stocks that are required to be ordered currently and the approximate time for reordering. You gain better control over your firm by retaining just enough inventory to fulfill client demand while avoiding excess or stale products. Reduce Wastage of Inventory To create a supply network that can be regarded as continual, you must account for all the purchases and sales occurring in your setup. Reduce writing off and writing down inventory in order to boost a company's inventory value and revenue. Consider establishing programs and checks that will assist you in tracking critical inventory data and making better inventory optimization decisions by utilising automation. Reduce Costs Associated with Inventory As your inventory is likely to hold 30-50% of your working capital, a lot of money is invested in it. A proper analysis can help to judge the reasons for high costs at different levels with respect to inventory. Based on the facts, you may take corrective action to improve your bottom line. Reduce the Amount of Backorders Too many backorders reflect negatively on your company. To ensure an optimal stock level, you will need data and clarity on your inventory levels at all times, to make informed and calculated decisions based on real-time data. For example, studying patterns such as previous season data might help you forecast future demand and thus, stocks to be maintained based on seasonality factors. It will also cut stockout expenses and backorders. Accurate Forecasting of Inventory Levels Dead stock is frequently the consequence of incorrect inventory forecasting, which is why an inventory analysis system is essential. A reliable inventory analysis and reporting plan will collect data on all of your SKUs, which will ultimately increase forecasting and reordering accuracy. Furthermore, this information can be utilised to modify prices and increase revenue. What Inventory Analytics Services Does Inventory LogIQ Provide? InventoryLogIQ works with eCommerce businesses ranging from startups to enterprises to handle everything from storage and inventory management to effectively, and precisely enable the availability of the right inventory at the right time. An inventory planning system can track each client's inventory conveniently, including stock availability, pallet ID numbers, serial numbers, and expiration dates. eCommerce clients of InventoryLogIQ can access this data in real-time, allowing them to manage their warehouse, inventory, and shipping operations in a hassle-free and convenient way. InventoryLogIQ, our AI-enabled inventory optimisation SaaS platform performs an in-depth analysis to gauge the health of your inventory at 3 levels: business, sales share category vs geographical zone,and individual SKU. It considers critical parameters such as inventory turnover, days of inventory on hand, geographical inventory share, etc. as part of its inventory analytics services. Our inventory management software also provides measurable inventory analytics that will help in demand forecasting and can help you ascertain how much inventory you need to keep of each product during a certain time period. Inventory Analytics: FAQs How can inventory analytics be used for inventory management?Since inventory analytics provide insights into measurable and quantifiable data, it helps businesses better determine inventory levels needed for the future, based on past performance of supply and demand. They can also analyse the highs and lows of previous periods and what caused them. How can you efficiently keep track of inventory levels?- Prioritizing inventory- Tracking product information- Auditing inventory- Analyzing supplier performance- Practising the 80/20 inventory rule- Being consistent in how the stock is received- Tracking sales- Ordering restocks yourself What is the 80/20 rule in inventory management?It is an unofficial rule that suggests that 80% of a company's profits should be met by 20% of their products How can InventoryLogIQ help keep track of your inventory analytics?InventoryLogIQ's AI enabled inventory planning and management platform keeps track of every important metric of your inventory grouped by product type, manufacturer, age, and much more to help give you an insight into every aspect of every product in your inventory catalogue to help you make more informed decisions and smartly place inventory in correct locations.

October 31, 2022
What Are the 10 Inventory Management KPIs? Why Are the KPIs Important to Track & Monitor in 2023?

What Are the 10 Inventory Management KPIs? Why Are the KPIs Important to Track & Monitor in 2023?

Inventory management refers to ordering, storing, and making the best possible use of a company's inventory. Inventory typically consists of raw materials, components, and finished products. Inventory management optimizes inventory levels (also known as inventory optimization) to avoid situations of overstocking or understocking. Materials Requirement Planning and Just in time inventory systems are critical inventory management systems. A good way to organise inventory is through key performance indicators or inventory management KPIs to be able to understand how your business stacks up based on these predetermined factors. We will be discussing inventory management KPIs in more detail including types, methods, importance, and benefits. Read along. What are Inventory Management KPIs? Inventory management KPIs are linked with inventory management supply chain metrics. It consists of various mathematical ratios compared against the established norms, which vary by industry, functional area, and the KPI itself. The variances between the actual and the benchmark ratios identify any disparities and help determine which areas of inventory management need improvement and which processes are successful.  KPIs ideally contribute to achieving the organization's goals - whether it is growth strategies or profitability targets. KPIs need to be smart, measurable, achievable, relevant, and timely.  10 Prominent Inventory Management KPIs to Track and Monitor for Your Business in 2023  Inventory Turnover Ratio This inventory KPI ratio is measured as the Cost of Goods Sold divided by the Average Inventory Value. The inventory turnover ratio measures the number of times the inventory is sold, replaced, or turned over in a year which helps businesses determine what products are successful and need constant replenishment and what products are being underutilized and taking up precious space in the warehouse. Customer Satisfaction Levels Inventory management KPIs such as this can be measured through customer feedback like when the customer assigns a score between 1-3 or 1-10 for their satisfaction level for the product or service they have purchased from your business. It is a subjective score, based on customers’ individual experiences but it can be analysed to see if there is a recurring theme of positive or negative feedback and measures can be taken to move forward accordingly. Inventory Accuracy Ratio This inventory KPI measures the number of items in stock versus the number of items showing as per official inventory records. This fraction is divided by 100. This KPI, Inventory accuracy measures the accuracy of warehouse record-keeping and identifies any disparity in the numbers, which helps companies determine if there has been any damage, breakages, theft, counting error, or any other factor that has caused it  Inventory to Sales Ratio This inventory-to-sales ratio KPI measures the total value of the inventory and analyses the organisation's sales performance. When these ratios are high, it is a cause for concern because that means there is overstocking of inventory occurring and there is a danger of the inventory becoming obsolete due to the low sales figure which can lead to increased storage and operational costs. Suggested Read: Benefits of Inventory Data Analysis Order Cycle Time Order cycle time is the time it takes to prepare and place an order with your supplier. The greater the frequency of orders being placed, the lower the stocking costs. For instance, in the case of a Just-in-Time inventory system, inventory is not stocked but repeated orders are placed in small quantities, which results in minimum inventory holding and capital costs.  Out-of-Stock Items This inventory KPI measures the effect of out-of-stock SKUs. Even one out-of-stock item can reduce customer satisfaction and have a snowball effect further down the supply chain and can affect repeat sales and lead to poor customer reviews. eCommerce stores should avoid out-of-stock items to the maximum extent possible by implementing an inventory management system where items running low on stock are automatically notified to the management so that they can be replenished instantly. Carrying Cost of Inventory There are four components to the carrying cost of inventory: Capital costs: These costs are measured as the sum of the following three costs:Cost of the stockInterest in the working capital financeThe opportunity cost of the capital invested in inventoryInventory service costs: This covers all costs, including costs relating to the inventory management system, hardware depreciation, and inventory handling.Storage costs: This relates to the warehouse rent or interest on the mortgage and regular maintenance costs such as lighting, heating, and air conditioning.Inventory risk costs: This cost deals with the loss of inventory value due to inventory shrinkage or obsolescence. Demand Forecast Accuracy This measures the gap between forecasted demand and actual demand. The more accurate the demand forecast, the higher the efficiency of inventory usage and turnover will be. This will lead to lower stockouts and lower inventory carrying costs. Many enterprises use planning system resources to help get a correct estimation of demand so that the optimum level of inventory can be stored. Supplier Quality Index This measures the percentage of the supplier’s total quality cost to the purchase price. This goes beyond just securing a low-cost supplier or getting bulk discounts on orders. It also includes the costs of communicating, transacting, resolving problems, or switching suppliers. A proactive and collaborative approach with suppliers is required to maintain a high level of the supplier quality index which will lead to higher-quality goods being delivered at a faster pace and at cheaper prices. Labour Cost Per Item Labour cost per unit itemises and collates all costs related to the labour used in managing inventory. This includes order receipts, packing, and dispatch of items ordered to the end customer. It also includes the costs of labour involved in receiving, unpacking, and storing the various items of inventory from suppliers in the warehouse. A lower labour cost per item means that businesses are running efficiently and effectively. 5 Methods to Choose the Best Inventory KPIs for an eCommerce Business Source Refrain from Using Vanity Metrics Oftentimes, many third-party KPI tools prompt businesses to choose KPIs that showcase their business to be more efficient than it actually is. These inventory KPIs are called vanity metrics because they give businesses a false sense of security that everything is all and well when in reality, it may not be. You should focus on choosing inventory management KPIs that paint an accurate picture of your business operations, even if it exposes a harsher reality because it will enable you to make the necessary improvements to those processes. Stress on Answering Business-Related Queries It is important to focus on your business and the strategy it employs. While focusing on choosing inventory management KPIs, you need to opt for ones that will give you clear insights into the actual successes and failures of your business strategies so that you can tweak them and make improvements wherever they are needed which will lead to long-term success. Always Keep Customers in Mind While choosing inventory management KPIs to focus on, make sure you choose some customer-centric ones so that you get an idea of where you are going right, in terms of positive feedback, so that you can continue to implement those processes and where you are going wrong, in terms of issues and complaints, so that you can sort them out instantly and avoid other customers having a similar negative experience. This will help your business increase its overall customer satisfaction levels and will lead to more sales and repeat customers. Track and Analyse Trends Analysing trends in your past performances through inventory KPIs will give you a vast amount of insights in terms of the success and failures of your business. You can check which products had the highest demand, during which time of the year, and whether you were running a promotion or ad campaign to enable that high demand. Conversely, you can analyse when there were slumps in sales and track the similar factors which may have led to it so you can avoid repeating those same errors in the future. Similarly, you can analyse trends in the market for similar products, price points, and business types. Don’t Bank on Statistics Alone While pure statistics and numbers play an important role in ascertaining key points about the success or failure of a business, you need to analyse some inventory management KPIs that focus on the human aspect of your business. While those KPIs are still quantifiable, they help you gauge a more accurate idea of why certain things were successful and others weren’t. Customer behaviour is an underrated trait and businesses that can successfully analyse it will often come out on top. Why Are Inventory KPIs Important to Measure in eCommerce? Tracking and measuring inventory management KPIs is important because, without inventory, eCommerce businesses could lose vital customers. Inventory KPIs also ensure that eCommerce businesses know when to restock items and maintain the optimum stock levels. Prevents Poor Customer Satisfaction It enables eCommerce stores to provide adequate customer satisfaction. Stock-outs leave a bad taste in the customer’s mouth and negatively affect online feedback and reviews provided. Avoids Overstocking and Understocking Inventory KPIs help eCommerce stores maintain optimum inventory levels, avoid high finance costs due to overstocking, and prevent stockout situations. This ensures a healthy cash flow for the business. It also enables planning for Just in time inventory or a drop shipping model, which helps an eCommerce business avoid both excess stock and stockout situations.  Assists in Framing Return Policies Proper return policies ensure return customers. When eCommerce stores do not have a favorable return policy, it does not bode well for them. It helps businesses in finding the right balance between offering returns and maintaining their profit margins. Helps in Building the Right Brand Image  Inventory KPIs facilitate efficient inventory management practices, boosting customer satisfaction and leading to positive feedback and reviews which will lead to other customers giving your business a chance because they have a positive perception of it.  Prevents Exploitation From Competitors Poor inventory management systems and improper inventory KPIs will lead to customers opting for competitors who may offer various incentives such as cheaper rates or free shipping. Measuring inventory KPIs will help businesses keep pace with their competitors to avoid losing out on customers to them.  Conclusion Inventory management is the very heart of an eCommerce store's success. Inventory management is a critical task for eCommerce merchants. It’s a good practice to track and control inventory orders, analyse the process and keep up with the usage and storage of readily available stocks. Without proper solutions for inventory management, no eCommerce technology is sufficient. For any eCommerce website, it is a challenge to manage multiple product lines or various product categories of different brands. Using inventory KPIs to maintain safety stocks to prevent stockout situations, find the right balance of inventory to maintain optimum inventory levels, put together the correct kitting offers, analyse past purchases to predict future patterns in stocking levels and be smart with the storage of various SKUs in the warehouses will help deliver the optimum performance at an organisational level. If you need assistance with finding the right inventory management KPIs for your business and inventory management as a whole, InventoryLogIQ can definitely help. InventoryLogIQ is unlocking next-level inventory planning for modern brands by Unlocking operational agilityAvoiding stock-outs & maximising salesPreventing inventory bloat Inventory Management KPIs: FAQs What are some of the best inventory management KPIs for your business?Some important inventory KPIs are listed below:- Inventory Turnover or Days on Hand- Average Days to Sell Inventory (DSI)- Average Inventory- Holding Costs- Stock-Out- Service Level- Lead Time- Rate of Return How can inventory KPI accuracy be measured?Inventory accuracy can be calculated by counting the products available in your inventory, dividing it by the official recorded inventory count and multiplying it by 100. What are the 5 SMART criteria that KPIs should abide by?SMART is an acronym for Specific, Measurable, Assignable, Relevant, and Time-bound. All of these factors help to improve your business performance. How can inventory KPIs be monitored?KPIs can be tracked and measured using a variety of online tools such as Google Analytics.

October 28, 2022
Inventory Optimization 101: Definition, Importance, Challenges & 10 Best Practices to Optimize Inventory in Supply Chain in 2023

Inventory Optimization 101: Definition, Importance, Challenges & 10 Best Practices to Optimize Inventory in Supply Chain in 2023

Inventory plays a vital role in generating revenue for eCommerce businesses. Because it is such a valuable resource, it is in the best interest of retailers to have practices in place to make the best use of it to avoid wastage and higher costs involved in storage. This is where inventory optimization comes into play, to be able to streamline inventory management to get the most out of it. In this blog, we will be discussing the meaning of inventory optimization, its importance, challenges, and 10 strategies to implement it. What is Inventory Optimization? Inventory optimization refers to a series of best practices that allow an organization to use the least amount of capital while maintaining an optimum level of inventory that has a high turnover rate. It forms a part of inventory management that depends on the supply and demand scenario that is faced by the organization. Inventory optimization in supply chain management helps control stock quantities by employing real-time data-gathering tools and processes to keep track of your stock. It facilitates investment management set against your business goals and supply targets and also empowers better demand forecasting. [contactus_gynoveda] Key Elements of Inventory Optimization in Supply Chain Management Inventory Optimization in supply chain management involves the following elements: Forecast Demand Forecasting accurate inventory demand is crucial for your sales cycle as incorrect predictions can affect the supply and sales numbers. Therefore, you need to consider the following numbers for proper analysis of the upcoming demand. Supply and demand numbers in the previous periodAccounting sales dataFeedback and suggestions from your sales personnel A correct demand forecast can do wonders for your inventory optimization. It can save you from stockouts and prevent you from missing your sales targets. Suggested Read: What is Inventory Accuracy? Analyze Inventory Levels Overstocking can freeze unnecessary amounts of your capital and understocking can lead to missed sales targets and a dip in revenue. That’s why analyzing inventory levels is a critical part of inventory optimization. This analysis further helps you draft an inventory policy for your organization. You can categorize products based on their consumption and demand. As a result, you can replenish the fast-moving products more frequently and in larger quantities and refill the slow-moving inventory less regularly. In addition, you can avoid a stockout due to sudden demand surges by frequently analyzing inventory levels. Check on Inventory Storage Optimized stock storage is a necessity for smoother operations. A robust inventory management system helps you be ready to consistently meet customer demand and nurture business growth. You should often check the inventory levels to calculate the reorder point and order quantities. This monitoring enables you to convert the numbers into actual orders. Briefly, it helps you ascertain when to replenish the stock to avoid missing the demand-supply gap. Why is Optimizing Inventory Important in eCommerce? Inventory Optimization holds a high value and can be a game-changer for players in the eCommerce industry. This line of business is highly dynamic, volatile, and prone to sudden changes in demand, thus profoundly influencing the supply of products. Here are a few factors as to why inventory optimization in supply chain management is critical for eCommerce businesses: Mitigates Recurring Costs Overstocking leads to frozen capital that does not bring immediate profits and may even result in the occurrence of losses. Conversely, understocking leads to lost sales. In the eCommerce industry, volatility adds to financial losses. You can reduce your supplier lead time when you have accurate information about your stock levels. Effective inventory optimization can highlight the recurring flow of expenses relating to purchases, transport, logistics, and many more, thus helping you curb them and avoid any probable losses. Provides Access to Faster Delivery Inventory optimization in the supply chain assists businesses to monitor their warehouse and SKU performance. As a result, you have relevant knowledge about the inventory presence across locations which helps you allocate merchandise where it is needed. For instance, if the demand for product A is more in Delhi, you can allocate its bulk quantities to be stored in a warehouse close by. This promotes timely and faster delivery and adds to the customer experience. Additionally, because inventory placement is organized, it takes less time to locate inventory, package it and send it out for delivery. An advanced WMS such as the one offered by InventoryLogIQ can automate these processes to make life easier for you. Suggested Read: Factors to Consider While Allocating Inventory in eCommerce Stabilizes Inventory Levels Inventory optimization gives you complete visibility of the existing stock levels and their locations from the moment they arrive at your warehouse till they are dispatched and delivered to the end customer. Such insight also informs website users when a product is in stock, out of stock, or taken off the inventory list. This tool empowers you to track your website orders more efficiently and can result in fewer lost sales and greater customer satisfaction. Enhances Customer Satisfaction Every customer expects an accurate and timely flow of information from eCommerce companies. If their desired item is out of stock, notify them as to when it will be replenished. Inventory optimization helps you gather this data regularly and make it available to the customer. It provides critical insights into customer behavior, and preferences and, thus, enhances their experience with your brand. Automated inventory management also keeps a tab on the flow of merchandise flow and when replenishment is required. This information can be synced to the online website, thus enabling customers to receive transparent information and enabling them to make the right purchase decision. Prevents the Occurrence of Overstocking & Understocking Inventory optimization helps in forecasting future demand based on historical data to assist in avoiding overstocking and understocking situations so that just the right amount of inventory can be stored to be able to fulfill orders, mitigating the wastage of time, inventory, money, and other resources. Both overstocking and understocking are counterproductive to your capital inflow and can adversely affect your business results. Challenges of Inventory Optimization in Supply Chain Procedures Supply Chain Disruptions Many factors such as global health crises, natural calamities, or even disruptions within the organization such as the wrong product being packed at the warehouse, the product incurring damage while in transit or the failure of a machine during can manufacturing, can cause an interruption in the supply chain. It increases the pressure on businesses to enable effective inventory optimization to keep it secure from unforeseen adversities. Reacting to Unstable Consumer Demand Your business must be ready for volatile customer expectations and sudden demand surges for some products. Sometimes, requests for a particular item escalate overnight and only a few players in the market can supply. This is a big challenge for inventory optimization because inventory forecasting sometimes cannot predict sudden surges and falls in customer demand for various products. This is why it is imperative for firms to keep some buffer stock aside to have a safety net for similar situations. Maintaining Frequency of Order Fulfillment Challenges in operational functions and supply chain management can constantly disrupt your inventory optimization procedures. While you may try to fulfill customers’ expectations, your stock level depends on the sales targets, the need for a stock refill, and pushing out existing inventory at the earliest. Each process needs to be optimized so the chances of it causing a disruption to the overall supply chain are minimized. 10 Best Strategies to Optimize Your Inventory in 2023 Utilize Supply Chain KPIs You can only improve what you can monitor. Deciding and implementing KPIs for your supply chain can keep track of your logistical performance and highlight deviations for you to work on. There are multiple KPIs so you need to determine which ones would be the best to track the performance metrics of your supply chain, based on the goals you want to achieve. Some common supply chain KPIs are inventory turnover rate, fill rate, inventory days of supply, and much more. Use ABC Analysis ABC analysis utilizes the Pareto principle, which opines that 80% of the results are determined by 20% of the causes. Therefore, it is effective to categorize your inventory into A, B, and C classes depending on their consumption value within a fixed period.  The three categories are as follows: A: Products with the highest consumption value or salesB: Products with medium consumption value or salesC: Products with the lowest consumption value or sales Each of these categories is based on SKU profitability and enables different restocking strategies for other products. For instance, if you sell washing machines worth Rs 25,000 each and a cover worth Rs 250 for each piece, you will stock them differently as per their values. Organize Slow and Obsolete Stocks (SLOB) Slow inventory is the gradually-moving stock that doesn’t get sold frequently. Obsolete inventory is the merchandise that has reached the end of its product life cycle. These products may not have been dispatched from the storage unit in a long time, which can be anywhere from a year to much longer, depending on their perishability. This dead inventory is a grave situation that indicates poor inventory management. These two versions of the stockpile in your warehouse demand your attention for inventory optimization in supply chain management. First, your records must highlight the inventory that hasn’t moved in a while or moves rather slowly. These stockpiles must be attended to by either discarding them or selling them off at discounted rates. Dealing with SLOB has some advantages: It creates more space for the faster-moving itemsIt reduces your cost overheadIt increases working capitalIt brings in surprise revenue from sudden sales at discounted rates to customers or vendors Accept Shortages of Low-Demand Products It is impossible to serve every customer that comes to your door successfully because to do that, you will need to keep 100% stock for all products, which will be financially and logistically unviable. The only solution is to accept that being short on some low-demand or slow-moving products is good for the long-term profitability of the business because they often cost more in terms of storage and logistical fees than what they are worth. It is a small price to pay to ensure that you are always stocked with high-demand products. Shorten Lead Time Lead time is the waiting period between order placement and receipt from your supplier. For example, if you ordered a batch of products from your supplier today and it arrives five days later, your lead time will be five days. Lead time calculation helps in business forecasting and affects the strength of your supply chain. When the lead time is higher, your supply chain is not as strong as it should be and your inventory cannot be optimized properly. Therefore, shorten it as much as possible to reduce carrying costs, streamline your logistical functions, improve productivity and replenishment speed, avoid stockouts and optimize inventory. You can reduce lead time by: Signing a contract with your suppliersIncreasing your reorder speed by ordering more frequentlyShare your sales information with the suppliers to alert them of an incoming orderEmploy inventory management software for better optimization Use Proper Forecasts Knowing how much to stock up on a particular product is as important as knowing when to do so. Predicting inventory levels can help you decide how to push sales through flash discount schemes or when to acquire more space to store your existing and incoming stock. Besides, you need good forecasting tools to understand the nuances of safety stock and reordering. Safety stock is the buffer you keep in hand in case of sudden demand surges or any other emergency. To calculate the safety stock you need to consider the following numbers: Maximum daily usageMaximum lead timeAverage daily usageAverage lead time Safety Stock = [Maximum Daily Usage x Maximum Lead Time] – [Average Daily Usage x Average Lead Time] Your reorder point must ensure proper utilization of existing inventory levels without allowing overstocking or understocking. Here is how you can calculate it. Reorder Point = Lead Time Demand + Safety Stock Reduce Uncertainty in Demand and Supply Keep a closer tab on your incoming and outgoing inventory by employing diverse automation and skilled manpower. Conduct regular audits and streamline warehouse receiving and dispatch processes. In fact, integrating your SKUs with inventory management software can enable inventory optimization through timely and accurate tracking and updates. It gives you access to the following features: Real-time visibility of your stock levelGenerates alerts for restockingGives suggestions on bundling options for a similar variety of productsChurns out analytical reports for business intelligence Centralize Your Inventory Keeping your inventory according to demand figures is a good strategy that optimizes operations and saves expenses. Also, strategically distributing your stock at one centralized location like an inventory hub, warehouse, retail store or any other type of storage facility is financially viable as well. In this case, only the storage facility is centralized, not the sales operations. You may have multiple stores across the county to sell your products but an  SKU at one location to replenish your shelves. It helps streamline all your crucial supply chain functions under one roof. It enhances inventory visibility and reduces storage and logistical overheads. As a result, it is suited for businesses that don’t operate in too vast and distant geographical locations. Automate Replenishment of Inventory Automation can help you integrate all your storage units and warehouses and monitor their inventory levels, sales channels, fulfillment centers, and delivery locations. It enhances your visibility and productivity with a constant flow of accurate data. There is a software solution to suit the needs of every business. Robust inventory management software regulates the inventory flow from your warehouses and alerts you when a product needs replenishment or is about to become obsolete. They also give you analytical reports of inventory to observe the logistical performance. Limit the Number of Available Products Having a highly diversified product range does not guarantee success. However, if you keep a limited number of product offerings, you can better optimize your inventory and deliver enhanced value and a productive experience to your customers. Apple is one of the best examples of properly utilizing a limited number of products. Their limited product range has been enough to lure queues of customers and generate massive amounts of sales. Conclusion: How Can InventoryLogIQ Help With Inventory Optimization? Inventory Optimization in supply chain management is crucial in influencing your business outcomes. Two supportive factors can alter the game for your business: cutting-edge technology and a team of experts. InventoryLogIQ is an inventory optimization & smart placement program from WareIQ to help brands accelerate sales, lower operation expenditure, and offer Prime-like speed. We have been sharing Inventory Optimization Plan with our key customers like BlissClub, TCNS Clothing, Piramal Group, Future group, Wingreens etc. with the objective to improve Inventory Turnover Ratio and improve regional utilization. Plus, you get the support of our team of industry experts who have revolutionized the way the supply chain operates. Inventory Optimization FAQs Why is inventory optimization important?Inventory optimization allows for a significant reduction in overall expenditure while increasing profit margins due to smarter use of inventory and storage. How can inventory be monitored?Inventory monitoring can typically be done through 2 methods:Cycle Count: This refers to counting a limited sample of your inventory to compare with digital records and make sure it is accurate.Physical Count: This is a more time-consuming process that involves the counting of every unit of inventory by hand to make sure that there are no discrepancies between the physical count and the inventory records. What is multi-stage inventory optimization?A multi-stage inventory optimization process recommends the optimum inventory levels at every stage of the supply chain by optimizing inventory levels in different locations. How can InventoryLogIQ help with inventory optimization?Our highly advanced inventory planning and optimisation platform, InventoryLogIQ conducts and automates various inventory optimization processes such as providing real-time updates to inventory levels across fulfillment centers and selling channels, intelligent inventory placement that suggests the best storage facility for each unit of inventory, forecasting demand levels based on historical & real time data, providing automatic replenishment triggers and much more.

October 28, 2022
Inventory Allocation 101: Definition, Pros, and Cons & Factors to Consider While Allocating Inventory in eCommerce [2023]

Inventory Allocation 101: Definition, Pros, and Cons & Factors to Consider While Allocating Inventory in eCommerce [2023]

Inventory is the key asset of any eCommerce company to be able to transform an order into a delivery. One of the main ways to ensure that this process is carried out efficiently is proper inventory allocation. This enables companies to place the appropriate amount of inventory at every step of the supply chain process, to mitigate shortages and unforeseen circumstances. We will be discussing what inventory allocation is, inventory allocation methods, reasons for companies to employ an inventory allocation strategy, and factors to consider when making that decision.  What is Inventory Allocation? The process of strategically optimising and tracking the levels of inventory that an eCommerce company maintains across its entire distribution network (including multiple sales channels and fulfillment centers is called inventory allocation. Let us look at a typical, growing eCommerce company that sells its products across multiple online channels, including Flipkart, Amazon, Shopify (etc.), and needs to allocate its inventory to each channel based on the volume of orders received. To achieve the shortest possible delivery time, the eCommerce firm will use multiple fulfillment centers and warehouses to fulfill orders. Given this scenario, the firm must utilise various inventory allocation methods to fulfill orders based on the optimal mix of products, customer orders, and warehouse locations. An optimised inventory allocation exercise ensures that the correct inventory levels are maintained at each fulfillment location, so customers’ orders are delivered at the earliest possible time. Sudden increases in demand such as during a flash sale, are also built into the calculations. 2 Types of Inventory Allocation Methods Let us look at the two most prominent inventory allocation methods that are used: Manual Inventory Allocation As the name suggests, if an eCommerce firm uses physical spreadsheets, and inventory ledgers and analyses data manually for inventory allocation, it is referred to as manual inventory allocation. Unfortunately, not only is this method time-consuming but it is also prone to miscalculations, errors and other inefficiencies. A primary concern is that when a business grows, the problems multiply rapidly and manual inventory allocation can often compound those problems by creating more mistakes which can have disastrous consequences.‍ Tech-Enabled Inventory Allocation Most modern inventory allocation methods are enabled by eCommerce firms investing in the latest technologies that seamlessly manage and track their inventory and its movement across their entire distribution network. By using electronically-captured data and the deep insights they offer, this method of inventory allocation is done in real-time and maintains high levels of inventory accuracy and efficiency while being easy enough to use. Businesses primarily employ inventory management software that consists of all the above features which help businesses automate their inventory allocation procedures.  Advantages and Disadvantages of Inventory Allocation Advantages of Inventory Allocation Avoids Overstocking The perils of overstocking are many, often with disastrous results which can be especially pronounced for eCommerce startups or small firms. To begin with, overstocking causes overutilization of warehouse space clogs up invaluable cash flow, and increases carrying costs. Additional problems include high insurance premiums, rent, and labour. Problems of expiry dates, damage, and pilferage/theft also start cropping up for inventory that stays on the shelves for long periods of time without being shipped out. Inventory allocation helps prevent overstocking by making businesses aware of the optimum amounts of inventory they require. Helps in Order Fulfillment Conversely, very low stock levels cause their share of problems. Firms would run short of inventory and be unable to capitalise on customer demand. Even worse would be the issues of sudden stock-outs, especially when you may have already confirmed customer orders. All this would drive your customers to your most feared result, i.e. you would lose them to competitors who provide more efficient service.  About 3/4th of today’s online customers would be unlikely to return unless their orders are fulfilled within 2-days. Efficient inventory allocation would eliminate such problems by helping firms ascertain the exact amount of inventory they would need. Assists in Understanding Buyer Behaviour A huge benefit of efficient inventory allocation is that it helps to understand the buying behaviour of your customers. By tracking data, clustering them into ACV-cohorts, and analysing stock movement across important parameters, firms can learn much about their customers' buying habits and preferences. Ultimately, this enables management to make better business decisions. Disadvantages of Inventory allocation Lack of Proper Usage Poor inventory allocation methods that are not tailored specifically to your business can set you up for failure. Therefore, the goal is to make the correct and informed decisions to be able to efficiently manage and allocate inventory, not just to simply adopt an inventory allocation process to be up to speed with the rest of the industry. Struggles to Adapt Oftentimes, companies are led by pure profitability and only maintain high-profit and high-demand items. If customers decide to change their preferences suddenly, you could be left with dead stock. You would be precariously placed since you would not have left enough warehouse space or invested in SKUs for other customers (that offer less profitability). Why Should eCommerce Companies Have an Inventory Allocation Strategy? We live in an age of information and as you would have heard, knowledge is power. Awareness about your inventory requirements, broken down by locations, nature of products and other factors, the type of SKUs, customer clusters, and their preferences, and a deep understanding of buyer behaviour gives you this knowledge. With it, you can improve your decision-making through timely and informed decisions while also forming the bedrock of optimising your supply chain.  Modern eCommerce firms are prone to fluctuating inventory levels which is an underlying result of selling across multiple channels and different locations. Using modern inventory management software and technology enables eCommerce management teams to stay ahead of the curve and maintain close working relationships with their 3PL partners and fulfillment teams. After all, an effective inventory allocation strategy will reduce operating costs, maximise inventory ROI and successfully satisfy customer demand. Let’s look at the 4 key reasons to have an inventory allocation strategy: Prevents Overstocking Firms often adopt the easy way, i.e. to stock more inventory than they expect, just in case they fall short. However, that is often counterproductive to company profitability and cost-efficiency. On the contrary, overstocking drives up inventory carrying costs, requires larger warehousing facilities, requires more labour and higher insurance, and creates problems of pilferage and dead-stock – the list is endless.  Optimising your stock levels by following a robust inventory allocation strategy based on comprehensive data analysis, demand trends, and SKU movement is the way to go to prevent overstocking. Avoids Overselling A robust order pipeline is an aim for all eCommerce companies. However, it requires significant study and projections based on analyzing the correct parameters. Overselling leads to backorders and results in a poor customer experience, delayed shipping, price fluctuations, etc. The correct inventory allocation strategy to prevent overselling is for it to stem from your demand analysis. Therefore, it becomes imperative to maintain data about seasonality, promotions or sudden changes in the ecosystem (e.g. a competitor going bust and their orders suddenly shifting over to you). This prepares firms to stock the correct inventory levels (with requisite safety buffers) based on past trends and future growth projections. Optimises Management of Multiple Channels Modern retailers have adopted an omnichannel strategy to satisfy changing customer preferences and demands. However, along with its advantages, it also needs an efficient omnichannel inventory allocation strategy to tackle stock level oversight, order returns, reorders, and stock forecasting problems.   Using inventory management systems that track the demand and supply of stock across an omnichannel network is of great help. Popular eCommerce platforms offer direct, API integrations with your MIS to help you track inventory movement from a centralised dashboard, across multiple platforms, which makes the entire inventory allocation process faster and more efficient. Assists in Scaling Business Operations Extending the point above, it will become impossible to scale if eCommerce firms don’t implement modern tech stacks and processes that enable better decision-making to run the business. However, this can be daunting, given its costs, knowledge requirements, and time constraints. Therefore, eCommerce firms can partner with 3PLs (third-party logistics companies) to take care of the rising need for order fulfillment and inventory management. A 3PL brings significant capabilities across an extensive network of fulfillment locations, logistics capabilities, and technology – these are must-have features as a firm begins its journey of growing its customer base and expanding its services. 4 Factors to Consider While Allocating Inventory in eCommerce in 2023 You may sell hundreds of SKUs via an omnichannel sales network or use multiple warehouses for order fulfillment. You could be a niche brand selling to a limited number of customers or an eCommerce startup just getting started with limited monthly orders. You may even be a behemoth fulfilling thousands of daily transactions across the globe. Establishing a solid inventory allocation policy is the cornerstone of achieving supply-chain efficiency and successfully servicing your customers, regardless of your status. Let’s look at the key factors to consider during inventory allocation: Demand for Inventory Perhaps, the most important tool for an eCommerce business, especially a growing one, is the demand forecasting function. It creates a ripple effect throughout the organisation whereby you can make well-informed decisions around production, promotion, labour, and much more. While it is true that you will unlikely ever achieve 100% accuracy with demand prediction, if you set up the correct procedures and use advanced tools and technology that are available, you should have an accurate enough handle on your sales patterns. Adopting a data-driven methodology will enable firms to make sound inventory allocation decisions and accurately predict the amount of inventory required to be stored across their warehouse locations and how much must be allocated to different sales channels, depending on demand. Strong demand-forecasting techniques also consider promotion-led demand, flash sales, seasonality and other temporary peaks and valleys in demand that will directly impact inventory allocation. Availability of Inventory Evolving customer preferences have meant that delivery times are an increasingly important element for a business to differentiate itself from the competition. Studies show that customers rarely return to an online platform if their order fulfillment experience isn’t satisfactory.  A crucial part of this is achieved by ensuring that the correct mix of inventory and supply is maintained at shipping destinations closest to the customers’ addresses.  Modern inventory tracking software is a useful tool that ensures accuracy and visibility. These highly sophisticated systems allow you to aggregate demand patterns across channels and locations, thereby allowing you to aggregate the appropriate inventory levels that must be maintained at every warehouse location. In turn, this helps in setting reorder levels, organizing transportation, hiring labour (both full-time and part-time), and negotiating rates with suppliers, to name a few.  Additional benefits include not having to urgently fulfill orders from warehouses further away from the delivery address due to a stock-out at the nearest one. eCommerce firms typically use automated stock-tracking systems that let them seamlessly connect to vendors, suppliers, and other supply-chain stakeholders via a centralised cloud-based system. Therefore, all critical data points like SKUs, channel throughput, inventory availability at fulfillment centers and customer details are available holistically and easily.  Availability of Warehouse Space Another important factor to keep in mind while planning your inventory allocation is the available warehouse space, the cost of renting it, and operating costs.  eCommerce firms partner with 3PL firms so that they have access to their vast network and resources of warehouses, on-site teams, transport fleets, and modern operating systems. Based on your requirement, storage fees will vary from a fixed fee per pallet, square meters allocated, according to SKU, the transaction (etc.) The simplicity of Order Fulfillment As mentioned earlier, an efficient inventory allocation process shortens order delivery times; simplifies logistics and saves costs.  To ensure the shortest possible delivery times, you must minimize the shipping zones a parcel needs to travel to reduce last-mile delivery costs and the time taken to deliver it. This is achieved by maintaining sufficient stock levels at all warehouse locations across the entire network of warehouse/fulfillment centers that you operate. For example, suppose you anticipate an uptick in sweaters and warm clothes in northern India just before the onset of winter in November, you should allocate additional inventory there so that they can be delivered faster and with minimal distances travelled. How Can InventoryLogIQ Help With Inventory Allocation? InventoryLogIQ can assist clients with inventory allocation by deploying their significant capabilities in the field. Let’s look at some leading ones: Automating Inventory Allocation ‍With its modern automated technology, InventoryLogIQ provides its users with a centralised dashboard that gives clients a bird’s-eye view of the entire operation, across all platforms. This provides a detailed and accurate view of inventory movement, including tracking at the SKU level, cluster viewing broken down by sales channels, unit type, storage locations (etc.). This is a critical tool in managing your inventory allocation.  Streamlining Inventory Management Today’s eCommerce firms adopt a multi-channel sales approach – this naturally includes multiple fulfillment centers, on-site teams, and various vehicular fleets. This could get tricky and result in disastrous consequences if not handled properly. Challenges like stock fluctuation, intra-network movement, re-order levels, etc., are naturally amplified due to this multi-channel sales network. The levels of automation that today’s 3PLs such as WareIQ can bring, thereby reducing human error and ensuring real-time visibility and communication, have become a strong tool for clients. Forecasting Sales Patterns 3PLs use highly sophisticated data-analytics systems that can record and mine massive amounts of data every second. This comprehensive data analysis generates deep levels of insight that enable management teams to make more informed and effective business decisions. Detailed reports that provide in-depth information at both the macro and micro levels of client operations and metrics that outline the best practices of sales-based inventory allocation help clients immensely. Channel throughput and efficiency, stock turnover, fast/slow-moving products, etc., are some key data points in determining sales patterns. Advantages of an Elaborate Fulfillment Network Today’s eCommerce firms mostly use an omnichannel sales strategy. With its elaborate and extensive network of fulfillment centers, InventoryLogIQ allows clients to leverage the strength and resources of this network in fulfilling their orders. Reduced shipping costs, faster delivery times, and inventory splitting are some of the associated benefits. Conclusion Today’s eCommerce companies operate in a fast-paced, highly competitive,and complex eco-system that spans international borders. They deploy an omnichannel sales and distribution network and several fulfillment centers and employ huge teams to manage their inventory. Therefore, firms must use a data-led and technology-enabled inventory allocation system that considers all the numerous variables that affect it to come up with a winning one. InventoryLogIQ provides commercially certified solutions, professional services, barcode scanning, and technology such as an advanced IMS (inventory management software) to assist businesses in better understanding and controlling their assets, inventory management in the supply chain, and industrial processes. These solutions are quickly implementable and cost-effective, saving you time, money, and effort. We offer extensive knowledge and capabilities in all eCommerce-related requirements, from inventory allocation to order distribution.  Inventory Allocation: FAQs What is the goal of inventory allocation?The main objective of inventory allocation is to ensure that the optimum amount of inventory is available to fulfill orders across every channel. This is done by determining the demand and the amount of inventory needed to fulfill it. Why is it important for businesses to allocate inventory?It is important for businesses to allocate inventory so that they can avoid stock-out or overstock situations and they can efficiently manage storage space and operating costs. What factors can affect inventory allocation?The factors that can effect inventory allocation include:- Inventory demand- Inventory availability- Warehouse space How can InventoryLogIQ help with inventory allocation?InventoryLogIQ has a custom IMS that can group and organize your inventory in efficient ways, across fulfillment center locations and sales channels to avoid stockout & overstocking situations. We also assist in demand forecasting to determine how much inventory is needed for each sales channel.

October 28, 2022