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3 Inventory Metrics to Count On

3 Inventory Metrics to Count On

Dealing with inventory can be the worst part of a small business owner’s day.  It can be a time sink that is stressful and can create uncertainty to whether enough product was ordered or maybe even too many supplies are already sitting on the storage room shelves.  Poor inventory management is one of the top 8 reasons why small businesses fail, according to SBA.gov.  This statistic in itself is motivation to take action before poor inventory management negatively effects your business financially.

Dealing with inventory can also be a breeze provided the right tools are utilized and the right numbers are being tracked. Using a dedicated inventory management system will help to accurately determine which supplies are needed and what is in stock.  This will ensure that orders coming in are sent out quickly and efficiently.

“Often I would reorder or manufacture parts I already had simply because I didn’t know I had them, which was an unnecessary cost.” 

Racesource, part of the team that maintains the monster trucks Grave Digger and El Toro Loco, learned quickly the cost of inventory when they realized they weren’t tracking their inventory reliably. Racesource Vice President Paul Huffaker shared,  “Often I would reorder or manufacture parts I already had simply because I didn’t know I had them, which was an unnecessary cost.”

Before adopting Inventory Control, Racesource used to spend an hour a week just tracking parts, with the automated barcode system this is no longer necessary and the company saves 52 hours per year. In addition, Racesource has saved about $8,000 a year that used to be spent reordering unnecessary parts.

The Numbers You Can Count On

 There are 3 essential numbers that can offer a higher-level look at how inventory is being managed, allowing significant changes to be made to the current system when necessary.

 Inventory Carrying Cost: As long as inventory is sitting on the shelf, it’s costing money. Studies of inventory carrying costs have estimated that that these costs are approximately 25% per year as a percentage of average inventory for a typical company.   As a result, the profit earned from a particular sale goes down over time and must be written down. A write-down happens when stock has not sold and its market price has fallen below what it was purchased for.  The item itself isn’t worthless; it just isn’t valued at its original purchased price.  The difference between the purchase price and the current, lower, price is the write-down amount.

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A write off happens when a portion of a company’s inventory no longer has value.  This is far more financial damaging than a write down.  Many companies realize they have product missing after they match their manual inventory count to what is really in stock.  All missing product has to be written off for a total, financial loss.

 By adjusting carrying cost, having more or less inventory on hand, and by tracking inventory with dedicated inventory tracking software allows product to be accounted for accurately and in real time.

3 Inventory Metrics to Count OnInventory Turnover: The ratio of sales to inventory shows how many times inventory is sold and reordered during a specific period of time. Low turnover is, of course, not ideal, since it means that product isn’t selling.  It can also be dangerous if inventory deteriorates while waiting for a buyer. Other related costs can be incurred with deteriorated inventory.  Stock-out costs, the costs that occur when not enough inventory is on hand to complete an order, (such as emergency shipping fees) and strategic planning time, the time spent communicating with suppliers or improving ordering processes means less energy and focus devoted towards other business aspects.  Those costs can add up quickly.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.  (However, companies selling perishable items have a very high turnover).

 Inventory service cost: The cost of servicing inventory means protecting it from issues such as theft, workplace accidents, or keeping it on the right side of the law. Depending on the type of coverage, insurance will cover inventory in the event of natural disasters, theft or accidents. Taxes must be paid on the levels of inventory kept on hand, the higher the inventory, the higher the taxes. Many local authorities tax the level of inventory in the warehouse, so higher levels of inventory will lead to higher taxes paid and a higher inventory service cost.

Having a large amount of inventory requires that it be tracked. Using proper inventory management software, or applications, may be needed to ensure no inventory goes missing.

Related Article: 3 Tips to Apply to Your Inventory

Using Metrics to Drive Decisions

These three metrics, when combined, highlight how inventory is either making a company healthy or is providing a warning sign if the company may be facing an inventory-related problem in the near future.

By balancing inventory turnover against carrying costs, it can determine how long inventory is sitting around. It will also show if it is getting the most profit possible out of each sale. The ordering schedule can be tweaked to anticipate seasonal needs, and even figure out if there are particular products that should stop being offered altogether. Even better, decisions can backed up with clear data.  No more relying on gut instinct or waiting until a product’s price is deeply discounted to change course.

Inventory management doesn’t have to be a chore. In contrast, it can be the best way to collect data that improves business and increases profits. The right metrics just need to be collected and utilized.

How would using dedicated inventory management software help your business to keep track of important inventory metrics and stay ahead of any financially draining situations?