If you are using Databases to keep record of inventory then data without analysis means nothing. When managing stock it is important to do Inventory analysis. Managing inventory levels is vital for most businesses, and it is especially important for retail companies or those selling physical goods
To run the businesses operations smooth it is important to analyze the inventory. It provides in depth knowledge of the availability of business products in relation to the demand for specific products.
Having a sound stock control is something all businesses must endeavor to obtain, because it puts them in a position where they can maximize their items in connection to customer requests. It is basic for businesses to hone standard stock examination so as to pick up legitimate stock control.
One of the critical roles of inventory analysis in any business setting is that it helps to make decision making easier, most notably in regards to protecting vital assets. Furthermore, the combination of products classification and inventory analysis can help improve an organization’s inventory control.
More importantly, a proper inventory analysis enables businesses to achieve a good Return on Investment (ROI).
So, how does a business carry out its inventory analysis?
Well, this is where top inventory techniques such as FSN Analysis, VED Analysis, and SDE Analysis come into play.
This analysis deals with the availability of an item in the market. It depicts whether a particular material is scarce or readily available. SDE Analysis is highly beneficial in a market environment where certain items are not readily available. In such situations, it offers the right guide in choosing inventory policies in relation to material availability. The inventory is classified in the following way
- Scarce (S): This generally refers to materials that are in short supply (i.e. scarce). Materials that usually fall into this category include; imported materials, raw materials, and spare parts.
- Difficult (D): This signifies materials that are not easily found in the market or would have to be gotten from a far place. It also refers to materials with limited suppliers.
- Easy (E): This generally refers to materials that can easily be found in the market
VED analysis in inventory management deals with the classification of materials based on their importance to other materials.
- Vital (V): These are essential materials whose non-availability while putting a halt to business operation. These materials need to be in stock at all times else, production will be affected.
- Essential (E): This refers to materials that you require a certain amount of. You just require a minimum amount of them to keep production active.
- Desirable (D): This refers to materials that do not really affect production. Production can run with or without these materials
FSN analysis in inventory management deals with the classification of items based on usage, consumption rate, and quantity.
- Fast Moving (F): This refers to materials that have a high usage frequency
- Slow Moving (S): This refers to materials that have a slow usage frequency
- Non-Moving (N): This refers to materials that are only utilized for a specific duration
While the inventory turnover ratio is one of the best indicators of a company’s level of efficiency at turning over its inventory and generating sales from that inventory, the days sales of inventory ratio goes a step further by putting that figure into a daily context and providing a more accurate picture of the company’s inventory management and overall efficiency.
Inventory days formula is equivalent to the average number of days each item or SKU (stock keeping unit) is in the warehouse. Inventory days is an important inventory metric that measures how long a product is in storage before being sold. If the percentage is high, there may not be enough demand for it, the product might be too expensive or it’s time to rethink how it’s being promoted.
To calculate inventory days, you can use the formula:
Inventory days = 365 / Inventory turnover
Now we will need inventory Turnover here. So how to Calculate Inventory Turnover;
Inventory turnover = Cost of products sold/Inventory.
The inventory days formula can be redone as the numerator inversely multiplied by the denominator.
Inventory days = 365 x Average inventory
Days Sales Of Inventory
The days sales of inventory (DSI) or Days Inventory Outstanding (DIO) or Days in Inventory (DII) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.
It indicates the liquidity of inventory.
How to Calculate DSI?
DSI Can be obtaining by dividing average inventory or closing inventory by cost of goods sold and then multiply by 365 days.
DSI = Average Inventory / COST X 365 Days
DSI=days sales of inventory
COGS=cost of goods sold
You can get average inventory by
Average Inventory = Closing Inventory
Average Inventory = (Opening + Closing)/2
In both above cases Cost of Goods Sold (COGS) remains the same.
If DSI is higher then company is not doing good, if lower then thumbs up.