Inventory analysis is the technique used to determine the ideal level of inventory for a company to avoid stock outs or over stocking situations. Inventory analysis is particularly important for wholesalers of durable goods as market demands can fluctuate and vary greatly over time. Knowing your inventory, maintaining efficient processes for managing stock levels, and monitoring and acting on changes in customer demand are all essential for effective inventory management.
Managing inventory is of vital importance to wholesalers, and there are a number of common problems to navigate when optimizing inventory levels. Inventory control can easily become out of balance when warehouse locations have too much excess stock or obsolete stock on hand, resulting in a tightening of working capital. Inventory control and inventory optimization can be likened to a high wire balancing act while being blindfolded. Most companies do not have the right processes or technology in place to help them forecast into the future with confidence which can be very dangerous to a companies profitability and growth.
It is imperative to consider – and work to avoid – making the greatest and costliest mistakes in supply chain management. Below are three costly inventory analysis problems facing wholesale distributors today:
There are a few different methods used by inventory managers to analyze their stock levels. Inventory analysis methods commonly involve either considering the overall inventory turnover (the cost of goods sold divided by the average inventory), or using the average daily cost of goods sold to determine the total number of days’ stock remaining in inventory.
Different inventory analysis methods, techniques and best practices include:
For wholesale distributors of durable goods, if the cost of materials or finished goods from suppliers tends to increase over time (and what doesn’t cost more over time?) using LIFO will typically result in lower taxable income compared to the FIFO method.
Distributors should keep in mind that to maintain a relatively strong balance sheet, which helps a company qualify for loans, satisfy investor expectations, or to impress industry analysts, the FIFO method may be the better option as working capital tends to look stronger.
For those simply looking for a blended average associated to costs, then the Average Cost method is the easier route to take. Lastly, for distributors that are looking to avoid stretching cash flow or prefer to avoid rush ordering supply, inventory redistribution is ideal for off setting the procurement of larger quantities of product that run the risk of obsolesces over time. Since most suppliers require larger quantity bulk orders to drive volume price discounts, redistribution can be a far less expensive option.