It’s been a while I have not updated the blog. It has been a crazy couple of weeks with work commitments but I’m back on board. To keep in the same vein of Supply Chain Metrics, I would like to today post an article on some Inventory metrics.
Inventory management is one very important and often overlooked part of a business. Inventory can be the greatest investment a business makes and if managed astutely it can prove to be a very powerful tactic in outdoing the competition.
Consider this. The last 5 retailers delisted from the stock market by venture capitalists in Australia cited inventory management as one of the areas they can improve to make the business more profitable. One of the biggest contributors to Apple’s profitability as mentioned in my blog titled “Tim Cook - Supply Chain Guru and Acting CEO Apple Inc” is their ability to only have a few of their older products when launching their new products. This ensures reduced obsolescence, inventory holding costs including opportunity costs.
Different businesses based on the industries in which they operate need to develop different inventory metrics. This article will provide an overview of the most popular ones which managers can then use to adapt to their own businesses.
Before you get into measuring inventory performance, stratify your inventory
1. Calculate the 12 month dollar usage for all of your products (volume * cost).
2. Rank the items in descending order by the dollar usage.
3. The "A" items are the top 80% of the total annual usage dollars.
4. The "B" items make up the next 15% of total annual usage.
5 The "C" items are the remaining items are the remaining 5% with >0 usage in the past 12 months
6. Label zero-usage items can be labeled as "D".
2. Rank the items in descending order by the dollar usage.
3. The "A" items are the top 80% of the total annual usage dollars.
4. The "B" items make up the next 15% of total annual usage.
5 The "C" items are the remaining items are the remaining 5% with >0 usage in the past 12 months
6. Label zero-usage items can be labeled as "D".
By stratifying your inventory you are ensuring that you are managing each product according to it’s importance to the business. You should aim not to run out of “A” items and ensure sufficient management capacities are built into achieving this.
After stratifying your inventory ensure you know your inventory on hand relative to usage. Inventory on hand can be measured in weeks or days of stock. By understanding your inventory on hand relative to usage, you can set target availability/stockholding according to your business environment for each category and deem stockholding above the target availability as excess stock.
Inventory turnover is also a very good indicator of inventory performance. Inventory turnover can be calculated by dividing (annual COGS by average Inventory level). This commonly used metric is an indication of the number of times inventory is sold and replaced over a period. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.
This is it for today folks. Please start looking at stratifying your inventory before starting any other kinds of measurement. Good luck and please keep me posted regarding your progress.
Yey you're back! I think the advises you gave out in this post are extremely important for any business (small and large) that wants to succeed! It's literally impossible to keep track of traffic in your store without it and to know what's selling and what's benched for too long.
ReplyDeletei agree with you that we must keep a track of our inventory so as to ensure the effective working of the supply chain of the products, i do this by keeping track of how much of any product is needed in the next 6 months and then make plans according to that.
ReplyDeleteSupply Chain Management Courses
There are lots of metrics for inventory management. I think the key is not to focus too much on one particular metric. Instead, trying to balance performance of all metrics is also good.
ReplyDeleteHi
ReplyDeleteI read this post 2 times. It is very useful.
Pls try to keep posting.
Let me show other source that may be good for community.
Source: Account management KPIs
Best regards
Jonathan.