Before you start tracking any inventory metrics, it’s important to identify the specific goals for your inventory analysis. Here, the general intent is to improve the overall efficiency of your inventory. To better manage your inventory, taking an operations management course can help you identify areas that need improvement. Using inventory metrics you can easily gauge the performance of your stock. When you measure metrics and KPIs, you’re likely to gain insights on how to improve your business. Most importantly, you should carefully track your inventory for better decision-making. But what metrics should you measure? Below is a look at some of the metrics you should track.
Inventory turnover is an essential metric in inventory analysis which normally tests the effectiveness of the stock. It usually measures the number of times the inventory is sold and replaced over a given time.
A higher inventory turnover showcases high efficiency for your business. This means that your production strategy is on point and you can implement it for the long term. In contrast, a lower turnover translates to low efficiency and a poor production strategy. You should, therefore, consider reassessing the inventory analysis for better results.
Gross Margin Return On Investment (GMROI)
GMROI is the gross profit returns on the investment you made in your stock. Measuring this metric helps you to gauge your business’s performance and establish whether you’re on the right track. if for instance, one product is underperforming, you can discontinue it and increase the production of items with higher sales.
Remember, the total investment cost factors are not only the purchasing costs of the inventory but also the carrying costs and the inventory costs incurred.
Carrying Costs Of Inventory
Carrying costs or holdings are the total costs associated with inventory storage. They include costs like warehousing costs, inventory costs, and the financial costs of the stock. When it comes to warehousing costs, you need to consider elements such as tax, rent, utilities, and salaries. Inventory costs, on the other hand, include opportunity costs, obsolescence, perishability, and even insurance costs. Businesses should maintain an average of 25% to 30% carrying costs.
To calculate carrying cost, you should know the total inventory value and the Average annual inventory costs so you can work out the carrying costs.
Sell Through Rate
Sell through rate is the percentage of the goods sold against the goods available for sale in a set period. The sell-through rate makes it easy to compare the sell-through of the same product from month to month. It also compares well to the sell-through of different products.
A low sell-through rate means you overstocked or overpriced the goods. Therefore, the manufacturer can offer a discount to solve this problem. On the other hand, a high sell-through rate means that you understocked or underpriced the goods.
To ensure you make optimal business decisions you need to understand and follow the four metrics discussed above. With this information, you can easily carry out proper inventory analysis for your business. Oftentimes, these numbers can help give you an overall overview of your business and its progress.