Robust inventory management software does a lot of the heavy lifting for you, but it still requires human input to transform actionable data into real-world business decisions.
Yet you can’t track everything nor can you even take the proper time to become well-versed enough to be considered an expert in each metric.
Often, these numbers will help shed a light on one another and, when taken as a whole, can help give a macro overview of the business as a whole.
To make sure you make optimal decisions with the absolute key information you need to conduct proper business inventory analysis, here are seven metrics you need to follow and understand thoroughly:
A simple metric, your average inventory can give you vast insights into the rhythm and pace of your business. Calculated by combining your starting inventory with your end inventory and then dividing that number by 2, the average inventory number is a kind of temperature gauge for how inventory numbers fluctuate. You should be able to discern trends such as seasonality or even downward or upward trends in demand. For example, if you notice a steadily rising average inventory you may look for other metrics to confirm whether or not this is because of increasing sales or decreasing sales.
To help illuminate the above number, you need to know the turnover rate. This is the number that tells you how many times your inventory has sold over a given period of time.
Write-offs is a category of inventory that, for one reason or another, is no longer monetizable. In other words, it cannot be sold and thus its value (or potential value) is written off. This number can be particularly critical when inventory has a limited shelf life or optimal selling window beyond which material losses accrue exponentially.
Gross Margin ROI
Gross margin return on investment tells you how much your inventory has made compared to what it has cost you. To calculate this metric, calculate your gross margin then divide this by your average inventory cost.
This number tells you how much of your inventory a vendor has received versus how much of it they have sold. Ideally, this would be a one to one ratio but that’s not often the case. This metric helps give you some estimation of the product on shelves currently as well as how long it tends to stay there thus impacting everything from materials procurement to production to logistics and beyond.
Days Inventory Outstanding
Days of outstanding inventory, DOI, is a measure of how long it takes your firm to create or purchase a piece of inventory and then monetize that with a sale. It is calculated by dividing the average inventory cost by the cost of goods sold and then multiplying that number by 365.
The backorder number can help give your company insights into everything from inventory management to logistics or even production.