When running a business, it is important for managers to practice a periodic Inventory Analysis to have a better Inventory Control. An Inventory Analysis is defined as the process of comprehending the mix of the business products while being aware of the demand for certain products.
Some of the reasons why Inventory Analysis is so important is because it contributes a lot to an Inventory Manager’s decision on what steps need to be done to protect valuable assets. Inventory Analysis, along with the classification of your products, can help improve your policies for better Inventory Control.
The most significant benefit businesses can achieve from Inventory Analysis is a better R.O.I. or Return on Investment. For many, if not all businesses, the R.O.I. is the deciding factor of whether a company’s money rules are met and if it is still worth continuing its operations.
Other benefits of Inventory Analysis are:
- Establishing a proper warehouse layout
- Reducing lead time in acquiring sellable items
- Implementation of proper authorization
- Proper item classification for better cost management
- Proper management of dormant inventory items
- Improved utilization of the company’s capital
- Better and positive cash flow
- Future identification of possible opportunities or losses
There are many methods of Inventory Analysis an Inventory Manager can use. Here are the following most common Inventory Analysis methods:
This analysis categorizes items based on their annual consumption value, sometimes Inventory Managers can use Pareto’s Principle for classification.
Pareto’s Principle classifies the important items in a certain group that usually constitute a small portion of the total items in the group. The majority of the items, as a whole, will seem to be of minor significance.
Here is how ABC Analysis looks like:
- CLASS A: 10% of total inventories contributing towards 70% of total consumption value.
- CLASS B: 20% of total inventories, which account for about 20% of total consumption value.
- CLASS C: 70% of total inventories, which account for only 10% of total consumption value.
This analysis classifies inventory based on quantity, rate of consumption and frequency of issues and uses. Here is the basic depiction of FSN Analysis:
F stands for Fast moving, S for Slow moving and N for Nonmoving items.
- Fast Moving (F) = Items that are frequently issued/used
- Slow Moving (S) = Items that are issued/used less for certain period of time
- Non-Moving (N) = Items that are not issued/used for more than certain duration
This is an analysis whose classification is dependent on the user’s experience and perception. This analysis classifies inventory according to the relative importance of certain items to other items, like in spare parts.
In VED Analysis, the items are classified into three categories which are:
- Vital – inventory that consistently needs to be kept in stock.
- Essential – keeping a minimum stock of this inventory is enough.
- Desirable – operations can run with or without this, optional.
HML Analysis classifies inventory based on how much a product costs/its unit price. The classification is as follows:
- High Cost (H) = Item with a high unit value.
- Medium Cost (M) = Item with a medium unit value.
- Low Cost (L) = Item with a low unit value.
This analysis classifies inventory based on how freely available an item or scarce an item is, or the length of its lead time. This is how the inventory is classified:
- Scarce (S) = Items which are imported and require longer lead time.
- Difficult (D) = Items which require more than a fortnight to be available, but less than 6 months’ lead time.
- Easily available (E) = Items which are easily available
If you have time you may test out all of these methods of Inventory Analysis to determine which one you are most comfortable with. There are certain businesses that work better with one type of method than the other. Once you find out which of these methods is perfect for you and your company, a positive R.O.I. is just within reach.