Accounting is currently the best way we have available in the industry to accurately measure the financial health of your business. By tracking profits, expenses, and the merchandise value of the inventory you have on hand at any given time, it paints an excellent picture on how well your business is performing and where improvements can be made. Too much merchandise value, and you’re paying for storage for items that aren’t moving fast enough to be profitable. Too little, and you might not be able to keep up with demand. Having an inventory management plan can go a long way towards ensuring that your business is doing the best it possibly can. Read on for our definitions and tips so you can make your business go from good to great.
Inventory strategy is all about maintaining the right level of stock to meet your customer’s needs. It’s a delicate balance act. Too little inventory and your customers go without and will often seek out another provider with a more robust and resilient supply chain. Too much inventory and you’re left paying hefty storage fees for inventory that may not sell anytime soon. Inventory forecasting goes a long way towards being able to predict customer demand before it hits, making sure that you’ll be able to have everything you need on hand ahead of time.
As a rule, it’s ideal to have a relative balance, but supply and demand can be difficult to reconcile. Although you definitely have the option to skew more on the inventory side if you want to have a bit of a backlog or a bit towards the exclusivity side if you want your products to feel special and if you’d like to make a bit more profit, it’s best to keep these opposing but complementary forces in a tight dance. If you have too much product to serve too little demand, that means you have overstock inventory. That leaves you paying for the manufacture and storage of merchandise that you just can’t move quickly enough for it to be profitable. You might have to start downstocking, meaning that you box up all the items that aren’t selling well and ship them to a discount store or other alternate retailer.
Stockouts represent the opposite problem. Too much demand for too little supply leaves your warehouses empty and your customers frustrated and wondering if you’ll be able to deliver consistently. In an increasingly tough industry, it’s difficult to justify items being out of stock for more than a couple weeks that won’t leave your customers looking for their fix elsewhere. Especially in this day and age, where consequences from the Covid-19 pandemic have left the global supply chain reeling, stockouts can sneak up on you. It’s important to maintain a healthy level of safety stock to avoid any issues.
Finding out how to calculate average inventory doesn’t have to be rocket science. Although there are a number of average inventory calculator programs (both standalone and integrated into a wider order management system) that can help you out if you don’t feel comfortable doing it yourself, it’s a simple enough equation that you could even do it by hand. Simply take your current inventory, add it to your previous inventory, and divide that number by the number of inventory periods you’ve considered. Like magic, that’s your average inventory formula.
Inventory turnover is another important metric that can help you make sense of your business. A rate that’s too low is indicative of a business struggling to make sales. The formula goes as follows: Cost Of Goods Sold ÷ Average Inventory. Cost of Goods Sold (COGS) is a measure of the production cost of goods and services, including the price of raw materials, manufacturing, and factory overhead. You calculate average inventory by taking into account fluctuations throughout the year, considering both peak and off-seasons. At that point, you want to run a Days Sales of Inventory calculation by taking the inverse of your number and multiplying it by 365. This tells you exactly how many days it takes to sell out the entirety of your stock.
Reorder point calculation isn’t as difficult as it used to be before the age of technology. Your SKU manager may very well have the capacity for calculating reorder point numbers built in. If for some reason you don’t have a reorder point calculator on hand, though, here’s the time between orders formula you can use to do it by hand: Reorder Point = Demand during lead time + Safety stock.
It’s that simple. Of course, the trouble can come when figuring out how much demand there is during lead time, and how much safety stock you should have on hand. But let’s say that it takes a month to receive new products from the manufacturer. You may want to take the amount of orders processed during your highest month so far, and then double it or even slightly more. This ensures that your reorder level is sufficient even if there happens to be extra demand, or your new inventory is a bit late.
You may be wondering exactly how to make sure you’re neither caught in an overstock order or out of product for weeks to come. Not to worry. P2Pseller’s got your back. Our information and inventory tracking software enables you to calculate the amount of safety stock you should have on hand at any given time, and automatically reorder product once you hit a certain threshold without overordering. Register a free account with us today to browse the full extent of our offerings, without any commitment required on your end. We’d love nothing more than to have you on board.