Once you have full visibility over your inventory management, you can start to see how to grow sales, margins and efficiency throughout your business. Here’s everything you need to know about using inventory reporting to analyse — and improve — your business processes.
A good inventory management (IM) system allows you to take control of your stock as you purchase, produce and sell goods. But a great one enables you to make measurable improvements to how you run your business. Read on for a detailed rundown of how reporting can benefit your:
Now you’re confident that your inventory isn’t shackling your sales, you should be able to analyse your data and dig into exactly what’s powering your company’s sales performance. Here are three areas to start with.
With accurate sales order records, you should be able to view which products are performing best and which are performing worst.
That’s a useful report, but it becomes much more powerful when you drill down into the figures. Do particular products sell better at certain times of the year, for instance — or are some more popular in specific regions?
Your IM system should enable you to interpret the performance of your salespeople and channels. Again, this information becomes really useful when paired with other data. One member of your team might be better at selling a particular product, for example. Or perhaps customers in a certain region prefer one channel to another.
Inventory reporting isn’t all internal, and you’ll want to get to know your customers just as well as you know your products, employees and sales channels.
For example, you might have customers who are a perfect fit for one of your products — but they don’t know it yet. Or you might have one customer driving the majority of sales in a region.
Optimising sales performance: example
By analysing your recent sales orders, you identify that 80% of people who buy one of your red jackets buy some red trousers shortly after. The remaining 20% might do the same, if they were that such a product exists. You add a ‘people who bought this also bought’ section to your sales page, and the 20% now know about the trousers to compliment their jacket.
Of course, knowing your best products, channels and customers is pointless if you don’t use the information to learn and optimise. Pricing strategies are just one one optimisation method: aiming to grow sales by, for instance, adding special customer pricing or applying quantity discounts to encourage bulk purchases.
If you’re confident in your IM system, you should be able to test different strategies, working out what works best before applying it across your business. Find out more about pricing strategies.
It’s worth paying attention to both the number of units you’re selling and the amount you’re making on each sale in your reporting. This is especially true once your strategies begin to get more complicated.
Happily, a comprehensive IM system will enable you to get far greater insight into your margins on every product, by showing you exactly what you have to spend to buy, assemble, manufacture and sell your goods. Let’s take a look at how.
To calculate your cost of goods sold (COGS), you need to work out what you spent on the products you sold to your customers. It sounds simple, but with costs fluctuating over time, getting an accurate figure can be tricky. And without an accurate figure, you won’t be sure of the margin you’re making — or what the value of your remaining stock is.
There are three main ways of calculating COGS: FIFO, LIFO and average landed cost.
FIFO and LIFO are two inventory valuation methods that work in similar ways, but with different results. FIFO stands for first in, first out and LIFO for last in, last out.
FIFO works on the principle that the first inventory bought or produced will also be the first sold. So if you buy 100 items for $5 each, and then a further 100 for $6 each, you’ll sell the $5 stock before you move on to the $6 stock.
If you sell 120 items, then your COGS would comprise of the 100 you bought for $5 each, plus 20 of the items you bought for $6 (120 + 500 = $620).
LIFO works on the principle that the last inventory bought or produced will be the first sold. So continuing our example, you’d sell the $6 stock before the $5.
If you sell 120 items, then according to LIFO your COGS would comprise of the 100 you bought for $6 each, plus 20 of items you bought for $5 (100 + 600 = $700).
Average landed cost is a method of calculating COGS that averages out purchases made over time. Unlike FIFO and LIFO, average landed cost isn’t weighted towards stock bought first or last. Instead, it is a neutral calculation.
To calculate average landed cost, you work out the total cost of your inventory and divide it by the total units you bought. If you buy 100 items for $5 and a further 100 for $6, then your total would be $1100, giving you an average landed cost of $5.5 (1100 / 200).
If you sold 120 items, then your COGS would be $660 (120 * $5.5).
We’ve used a simple calculation here, but to get accurate COGS you’ll need a system that takes everything into account: including the amount you’re spending to make, move, sell and purchase your goods. Find out more about valuing your stock.
Holding the right amount of inventory is a crucial factor in the success of any product-based business. Keep too much on hand, and you’ll soon find holding costs eating into your margin — not to mention running the risk of your stock becoming unusable before you can sell it.
On the other hand, keeping your levels too lean means increasing the likelihood of stockouts. And you can’t sell what you don’t have.
A perpetual IM system should be capable of reporting on the value of stock on hand at any given time, as well as comparing it to previous periods. It should also tell you your purchases value: that is, how much money you currently have invested in your stock.
To really understand the level of stock you need to hold though, you’ll want to use two KPIs: inventory turnover and days to sell.
Inventory turnover is the number of times you have sold and replaced your inventory in a given period of time. It’s a great way of analysing how efficient you are at selling your stock, as well as whether you are over or understocked. Low turnover is often a sign that you’re either overstocking or selling stock inefficiently. High turnover, meanwhile, can signal that you need to hold more stock.
To calculate inventory turnover, you’ll need two figures: your cost of goods sold and your average inventory. To work out your average inventory (AI), minus your total stock on hand from the end of the period you want to analyse from the total at the beginning and divide the figure by two.
(Beginning SOH – ending SOH) / 2 = average inventory
Dividing your COGS by your AI gives you your stock turns figure.
COGS / average inventory = inventory turnover
To calculate days to sell, you simply divide your inventory turnover by the number of days covered in your AI calculation. For example, if you used a year as the period for your AI, you’d divide it by 365.
The resulting figure will tell you the number of days it will take, on average, to sell all your stock. Essentially, it shows how long your inventory will remain in your warehouse.
Dedicated IM software will automatically enable reporting on your days to sell, stock turns, COGS and more. It’ll also offer advanced functionality to give you more confidence to hold the right level of stock — for example, reorder reports that automatically alert you when you need to buy more. Find out more about inventory management software.