The rise of omnichannel selling has put pressure on the supply-chain, which is just one of the retail trends pushing inventory management practices to be more efficient than ever.
So, what are small businesses doing to protect their supply chain? They’re looking deeper into inventory management software functionality—simply buying inventory management software is not enough. According to our data, 86 percent of potential inventory management software buyers say that ‘reporting and analysis’ is the key application requirement for an inventory management solution. Without using inventory management analytics, you lack the insight to adapt to changing market conditions and customer behavior.
In this article I’ll go through four key metrics that inventory management analytics features can help measure and analyze:
Metric #1: Demand forecasting
Wouldn’t you love to know how best to meet customer demand in the future? Demand forecasting helps you predict how much stock you’ll need to carry in the future, based on past trends and sales. Cloud-based inventory solutions with demand forecasting features can help you analyze such trends in order to avoid underestimating how much stock you’ll need, and therefore losing potential sales.
There are many methods that inventory management analytics software use to analyze inventory data to inform demand planning, such as the time series analysis model, which analyzes historical data to identify seasonal variations and trends in order to inform future inventory decisions.
How can maintaining a high level of demand forecasting accuracy protect the supply-chain?
- Having accurate product availability prevents spending more on safety stock.
- Reduction in need for clearance sales.
- Forecasting can result in enhanced efficiency in warehouse operations such as improved employee scheduling and fewer surprises in production goals.
- Analyzing forecasting results can help businesses adjust their strategies in order to match their competitors.
It’s important to remember that demand forecasting is not a definitively accurate measure when measured alone. However, using demand forecasting features can act as a critical tool in helping you achieve business goals such as reduced waste and elevated sales volumes.
OUR RECOMMENDATION: To achieve demand forecasting accuracy, use it where you deem necessary; you need not measure every metric attached to your business. If your warehouse is experiencing a slump in productivity, it might be worth measuring efficiency over time, but if you’ve historically not seen any seasonal fluctuations in demand, then this is an area where your forecasting efforts may be wasted.
Further recommendation: Check out inventory management solutions with demand forecasting features.
Metric #2: Cost of carrying inventory
Most businesses will have inventory in stock that has not yet been sold or shipped, and the cost of carrying this inventory is one of the most important that inventory management analytics features can help manage.
Not only can monitoring and measuring your carrying costs show you how much profit you could be losing out on, it can also help you identify areas of the business where adjustments should be made, such as production levels. There are several costs associated with carrying inventory, such as the following:
Holding costs: Related to the space and storage of inventory, including rent, taxes, utility bills.
Handling costs: Associated with the labor used to move, pack, and organize inventory.
Capital costs: These include all costs (and losses) related to the investment in inventory, such as lost opportunities to use working capital.
How can measuring the costs of carrying inventory protect the supply-chain?
While carrying costs are somewhat unavoidable, measuring them via inventory management analytics will help you future proof business decisions, show how cost-effective your operations are, and help you stay competitive through reducing costs. With such a large proportion of total inventory values going towards carrying costs, businesses that don’t measure them are potentially jeopardizing their entire supply-chain.
Inventory management tools can help businesses determine when their reorder point should be, which can help avoid overstocking and paying more in holding, handling, and capital costs.
OUR RECOMMENDATION: Given that carrying costs are one of the largest costs to small businesses, measuring and analyzing these costs is essential in protecting the efficacy of the supply-chain. Businesses that fail to analyze carrying costs risk operational shortcomings by failing to pinpoint where in the supply-chain the business is taking losses. Invest in inventory management software to ascertain where you can reduce excess inventory.
Further recommendation: Check out inventory management solutions with billing and invoicing features to help balance the numbers.
Metric #3: Inventory turnover
Inventory turnover is one of the key metrics in measuring the health of your business: in general, a higher inventory turnover speaks of a healthy business, and a lower turnover indicates inefficiencies in inventory management.
Healthy turnover rates differ by industry, but here’s the bottom line: your level of inventory turnover impacts on your level of profit. Not only does measuring and analyzing this metric give you a better idea of market demand, it’ll also help determine what areas you need to work on to improve your turnover rate.
Why is measuring inventory turnover important to inventory management?
Measuring inventory turnover can highlight where inventory planning activities could be improved, and where profitability could be increased. It also presents an opportunity to measure important business trends. For example, maybe a high-value product that was popular last year has received far less demand this year, and therefore a significant amount of capital is tied up in unsold and obsolete merchandise.
OUR RECOMMENDATION: Regularly review your stock in order to determine which products are selling well, and those which are becoming or are already stagnant stock. This will decrease the opportunities for your capital to be tied up in unsellable stock, and will also reduce handling and holding costs.
Further recommendation: Check out inventory management solutions with inventory tracking features.
Metric #4: Cash to cash cycle time
The cash to cash cycle means the time it takes between paying your suppliers for your inventory to recovering payments from your customers. In a study conducted by CFO on cash to cash cycle completion, the “worst-performing” organizations needed 80+ days, while the “best-performing” organizations needed just 30 days or less.
Your cash to cash cycle time is an important metric to measure and analyze, as it demonstrates how quickly your business is able to recoup money in order to invest again. Analyzing this metric can also indicate where there are detrimental parts within the process.
Why is measuring cash to cash cycle time important to inventory management?
For small businesses, using inventory management analytics to measure their cash to cash cycle is even more important given their more restrictive cash flow. Delayed payments from customers can mean the difference between being able to reinvest in stock and needing to source other means of buying new stock.
The health of your cash flow is also important, as it’ll determine how able you are to pay staff, fulfill orders, and reinvest on time.
OUR RECOMMENDATION: Take a good look at your invoicing processes: what works, and what doesn’t? Avoid using manual methods in your accounting processes, and look to digitalize these where possible. Think about the following when getting started with cycle to cycle time analysis:
- How your products are organized e.g. by supplier, category, or product
- How often and at what point in your sales cycle you’ll count your stock levels.
Inventory management analytics: Dig deeper and protect your supply-chain
Owning an inventory management solution is no longer enough: inventory management analytics are what will ensure that your inventory practices can protect the entire supply-chain, help you identify strengths and weaknesses, and ultimately set goals for your operations.
- Visit our extensive inventory management software catalog
- Check out GetApp’s Category Leader ranking of the top 25 inventory management solutions in the cloud
- Read: 5 ways warehouse management software implementation costs deliver ROI
- Read: Gartner’s hierarchy of supply chain metrics.