How to measure stock on hand, over stock, under stock and dead stock quickly and simply
Many businesses are adjusting demand forecasting due to ongoing supply chain disruption. Companies are experiencing continued delays in shipping and higher transportation costs for products sourced internationally. Customer behaviour is also shifting and some products have increased in demand while others less so. For companies that manage lots of products, it's important to evaluate how the impact of the disruptions should be applied to its measurement of inventory. By measuring stock on hand, over stock, under stock and dead stock and collating all these metrics on a dashboard will help you be in control of your inventory in real time.
In traditional stock management, ratios such as inventory turnover and gross margin return on inventory investment (GMROII) were used to measure inventory performance. Both of these metrics require a series of calculations.
Although understanding stock management is critical to success, inventory and operation managers no longer have to rely on complicated calculations. Sounds too good to be true? It’s not. Below we have listed some key metrics relating to inventory management and we discuss how to measure them in the simplest, most accurate way possible.
Stock on hand
This first metric may not come as a surprise to anyone who has dealt with stock management before. In order to understand and manage inventory in an effective manner, you must first understand what you have on hand.
Instead of using a spreadsheet with many different calculations, you can quickly and easily see in data analytics software how much stock you have on hand for a particular product. You can sort from highest to lowest, drill down on a particular product to find in-depth information and more.
Overstock of a product occurs when a product is kept in storage in quantities much larger than what is needed. Overstock can be determined by looking at historical sales trends, and comparing these to current stock on hand. This concept is closely related to that of inventory turns, or inventory turnover, but is represented as a more actionable form of data.
In the image below, you can see how inventory management software helps you quickly identify overstock by exploring a metric called ‘stock in months’. If your historical data tells you that you typically sell little of a given product, but you see you have 60 months (or 5 years!) worth of a product in stock, this would typically mean you have overstock.
You can use this information to ensure you do not continue to purchase more of this product or it can alert you to run sales/marketing campaigns to move this product before it becomes dead.
Understanding when you have too much stock is essential but so is understanding when you have too little. If you know a specific product has an especially long lead time from your supplier, you may want to make sure you have enough stock to fulfil customer orders.
If you know it takes up to two months to source a product, and you see you have two months of stock left, it may be time to order more frequently. Likewise, items that are selling fast and there is a low supply of may need to be ordered. In terms of inventory turnover, understock represents an excessively high inventory turnover ratio.
To identify such products in Phocas data analytics, beyond looking at the ‘months in stock’ column, you can with a single click sort your products from low to high to identify where you have little stock compared to demand.
You may have read our recent blog on dead stock. Dead stock is stock that is no longer being sold and presents a loss to your business.
Perhaps you have overstock of a product but you are not selling any of those units anymore? The stock is effectively sitting in your warehouse and gathering dust - it is effectively dead. It may be time to quickly run a promotion to move the stock or send it to a branch in a different region where there is a market for it to avoid future losses.
We explained earlier how Phocas enables you to quickly see how much stock on hand you have of a product. You can then see how much of the product you have sold over the past 12 months. See the first two columns below.
In addition, Phocas reveals how much your dead stock could be costing you.
In the image below, the column on the very right highlights that you hold over $695,000 worth of stock for products that led to no sales over the past 12 months. This is an alarming statistic as wouldn't you rather have access to that capital to purchase more popular products, use for campaigns or to invest with?
The importance of good inventory management
It is important to understand the above concepts in order to run an efficient business and retain customers beyond the disruption. Appropriate stock levels enable your sales team to ensure your valued customers get their products on time and allow you to do more with your capital.
If overstock is not returned or sold at a discount, it may contribute to a dead stock graveyard over time. The business is then not only unable to sell the stock it purchased, but storage space that could have been used for profitable products is also taken up.
In addition, overstock or dead stock that is of a high value represents company assets that are not accessible and are not producing a profit. This may prevent the company from investing in opportunities for business growth, or may put the business in a difficult position when prices are pressed down through competition.
To learn more about effective inventory management, download the eBook ‘Data-driven inventory optimization’ by clicking here.
Craig is an expert in data analytics helping customers determine specific data requirements so they can enhance performance, productivity and confidence.
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