- Inventory analysis helps you determine the right amount of stock to keep on hand to fill demand while avoiding spending too much on inventory storage.
- Inventory is an asset on a balance sheet and represents the product a company plans to sell to its customers eventually.
- In addition to finished goods, inventory includes the raw materials needed to produce those goods and work-in-progress goods.
The goals of inventory analysis include lowering costs, reducing theft, managing cash flow and ensuring you always have the goods available that customers want to buy.
Here are more details on some primary goals of inventory analysis:
- Increases Profit – Keeping the right amount of inventory on hand to grow sales while reducing expenses will increase profits.
- Decrease Storage and Related Expenses – Avoid keeping more inventory on hand than you need, which will lower storage and related costs.
- Reduce Capital Costs – You retain more cash and capital for other investments when you avoid buying too much inventory.
- Improve Cashflow – Having the goods customers want to purchase increases cash flow.
- Find Area to Improve – Closely watching inventory helps you identify products that are selling exceptionally well or poorly. Understanding this dynamic can free up shelf space and improve supplier relationships
- Minimize Stockouts and Backorders – When you don’t have a product to deliver to a customer who wants to buy it, that creates an unhappy customer who may have to wait for it on backorder or even buy it from a competitor.
- Stop Project Delays – When using inventory to build products for a special project, an inventory analysis tracks the stock needed. Use this information to make sure there’s enough lead time to reorder that inventory, so you don’t run out of materials and delay a project.
- Diminish Wasted Inventory – If you buy and store too much product, it can turn into a loss when it becomes obsolete, degraded or otherwise loses its value. Perform an inventory analysis to prevent that from happening.
- The ABC analysis serves as an economic analysis procedure.
- Part of the analysis is the evaluation and categorizing of customers, tasks, goods, etc. into classes A (high priority), B (medium priority) and C (low priority).
- In particular, in product management, the ABC analysis finds frequent use.
- The ABC analysis is based on the Pareto principle (80/20 rule), named after the creator Vilfredo Pareto, which states that 80% of the happening or the results are due to 20% of the total time of the process.
- Simply put, the focus should be on what is most important.
- In a logistics context, this means that 20% of all items in the warehouse account for 80% of goods movements, and therefore it is important to focus on these items or to focus particularly on the warehouse movements of these items.
- In many companies, most of the work is heaped on a few products and goods.
- Most inventory costs on a few expensive items and much of the revenue on a few sales.
- Therefore, resources, efforts and personnel should be directed to managing the most important and expensive items.
- They are responsible for a large percentage of the bottom line (Pareto principle).
- XYZ analysis is a way to classify inventory items according to the variability of their demand or derived/forecasted consumption.
- XYZ analysis can be used to plan material requirements and inventory levels so that waste, production delays, or excessive inventory levels can be avoided.
- XYZ analysis evaluates the ability to plan consumption and demand.
- X-goods – very low fluctuations: X-items are characterized by consistent sales over time. Future demand can be reliably forecasted.
- Y-goods – some fluctuations: Although demand for Y-items is not constant, the variability of demand can be predicted to some degree.
- This is usually because fluctuations in demand are caused by known factors, such as seasonality, product life cycles, competitor actions, or economic factors. It is more difficult to accurately forecast demand.
- Z-goods – the greatest variation: demand for Z-items can fluctuate widely or occur sporadically. There is no trend or predictable causal factors, making reliable demand forecasting impossible.
Methods to Calculate ABC-XYZ Inventory Analysis:
- The variability of demand for an inventory item can be expressed as the coefficient of variation. To categorize your products into X, Y and Z you therefore need to:
- Identify the items you want to include in the analysis.
- Calculate the coefficient of variation for each item e.g. (standard deviation/mean) * 100.
- Sort the items by increasing the coefficient of variation and accumulate the figures.
- Set the boundaries for each category.
- Adding another level of insights to your inventory classification process allows you to make more informed ordering and stocking decisions
- For example, it makes sense to treat AX items that are valuable and have a constant demand differently from AZ items with erratic demand,
- If demand is steady and easy to predict (X items), your safety stock levels can be much lower than products where demand is much more volatile (Z items).
- This ABC-XYZ Analysis gives a detailed view of what products we can keep always available in the inventory (i.e., Stock) which is in high demand and what products we can have in less quantity as it is slow-selling products or there is not much demand for that and what product we can get rid of as there is no use for it.
- Looker made it easy for us to classify products based on their demands and we can also give forecast with the prediction from this method.