3 Costly Inventory Analysis Mistakes Made by Distributors

As we all know, distributors are the sole of any business model. No matter how much inventory we produce, we need to have a good and efficient distributor to get it to the right set of customers on time. Our business revenue majorly depends on the set of distributors, who picks and delivers products to our customers on time, which actually gives us a good brand name in the market.

Inventory being the bread and butter of the distribution sector, some common mistakes done during inventory analysis and management can ruin the whole distributor business model. Inventory analysis and tracking have different aspects to consider while maintaining a company’s inventory like the no. of the inventory needed for customer demand supply cycle, inventory location, volume of safety stock and more. Improper inventory management can lead to an increase in stock storage cost, capital crunch, disruption of the supply chain, etc.

Let’s understand more on what is Inventory analysis and methods of inventory management for different business models.

What is Inventory Analysis?

Inventory analysis is the understanding of inventory trends to determine the optimum amount to keep in hand. Traditionally, this has been done by balancing the costs of ordered stocks and current inventory in hand. A regular Inventory Analysis is vital to have a better Inventory Control over our warehouse stocks and final products.

Goals of Inventory Analysis

Some primary goals of Inventory analysis are:

Decrease the storage and related expenses – Avoid keeping inventory more than you need in hand, will help to decrease the storage and some related costs.
Increase the profits – Having the right amount of inventory helps increase the sales and profits which will also reduce the expenses.
Minimize Stockouts and Backorders – When you don’t have product stock, but the customer wants to buy it. This makes the customer unhappy and dissatisfied, the customer needs to wait for the backorders or may buy them from the competitors.
Find areas to improve – Inventory helps to identify the products which are selling more or poorly. By understanding, this dynamic can free up the shelf space and improve the supplier relationship.
Diminish wasted inventory – If you buy and store lots of products, it may be a loss when it becomes obsolete, degraded, or also loses its value. To prevent this perform Inventory analysis.
Stop project delays – To build new products for the special projects you use inventory, inventory analysis will track the needed stock. Using this information, make sure that there is enough time to reorder the inventory so you don’t run out of materials and delay a project.

Benefits of Inventory Analysis

In today’s digital age, distributors use efficient inventory management software like SalesBabuCRM, which has varied online features and technology to track and manage our inventory. Also, easy to use features in the software accelerates the learning curve for the employees, which helps to automate many manual jobs in stock maintenance process.

Some of the benefits of these inventory analysis methods are :-

Improved utilization of the company’s capital and better ROI.
Automation of menial jobs.
Less human error and inventory lost.
Establishing a proper warehouse layout.
Implementation of proper authorization to avoid theft.
Proper management and rotation of dormant inventory items.
Proactive identification of possible opportunities or losses.

Methods of Inventory Analysis

There are many inventory analysis methods being followed by different companies based on their business model and inventory requirements. Let’s discuss a few of them here to understand how the inventory analysis works.

ABC Analysis

This Analysis is also known as Always Better Control process. It is a stock management process where inventory items are classified into three categories namely: A, B, and C. Here is how ABC Analysis looks like:

A: 10% of total inventories contributing towards 70% of total consumption value or the most expensive inventory in the stock, hence these are dealt with utmost care.
B: 20% of total stock count, which is about 20% of the total consumption value. As the cost of these inventories is less than A, hence control level is also moderate for this category.
C: 70% of total inventories, which account for only 10% of the total consumption value. These inventories require lesser investments so the control level is minimum.

This ABC analysis is very useful to categories the stock and inturn saves a lot of maintenance cost on the inventory.

JIT Analysis

In Just in Time method of inventory control, warehouses will only have the exact amount of inventory which is needed during the production process. With minimum or no excess inventory in hand, the company saves a lot of cost on storage and stock insurance. This model seems to be a little risky as the new inventory is ordered when old is close to replenishment and may lead to out of stock situation due to any delay in stock delivery. This method needs very efficient and on time planning to receive stock at appropriate time.

VED Analysis

VED is also known as Vital Essential and Desirable inventory analysis. This analysis classifies inventory according to the relative importance of certain items in the production cycle like in spare parts, raw material and others.

This analysis, classify items into three categories which are:

Vital – inventory that consistently needs to be kept in stock as these are vital for production.
Essential – keeping a minimum stock of this inventory is enough as it might slow down the production cycle.
Desirable – operations can run with or without these items and are optional or easily replaceable.

Minimum Safety Stocks

The minimum safety stock is the level of extra inventory which an organization maintains to avoid stock-out situation in cases of unseen scenarios. This is the minimum stock level which is kept in stock and used in case the new order is not received before the existing spare parts, raw materials and other existing stock is over.

FSN analysis

This method of inventory analysis and control is very useful for controlling obsolescence. This analysis classifies stocks based on quantity, the rate of consumption and frequency of issues and uses. Here is the basic depiction of FSN Analysis:

Fast Moving (F) – Items that are frequently used and reordered quickly based on customer demands.
Slow Moving (S) – Items that are used less for a certain period and are periodically reordered.
Non-Moving (N) – Items that are not used for more than a certain duration and are reordered as per the demand.

HML Analysis

This analysis is used mostly in manufacturing which will measure the inventory based on the low, medium and high cost. The accounting of inventory also depends on the Last in First out ( LIFO) or First in Last out (FILO). LIFO companies sell the inventory first which they bought last. FIFO companies will sell the inventory first which they bought first. The companies will exhaust the stock which has the earliest expiration date first.

SDE Analysis

This method of inventory analysis considers how scarce an item is and how easily you can acquire it. This method involves the components that make up the manufactured goods. A company measures the inventory based on:

Scarce – A component which takes a long time to get and which is deficient in number.
Difficult – A part which is less scarce but also takes several weeks to arrive.
Easily available – Components that are easy to acquire.

Mistakes made by Distributors during Inventory Analysis

In today’s era, every company wants to reduce its inventory cost and maximise it’s stock availability to earn the most from their investments. As discussed above, there are pros and cons of every inventory management process. However, if we understand our business requirement better and categorize our inventory, we can use a mix and match model of different inventory analysis methods and maximise our company’s ROI.

But in the rat race of trying something new, many distributors make some common mistakes which inturn could cost your business thousands or even millions of dollars.

Today let’s discuss some of the most common mistakes distributors make during inventory analysis and how we can avoid them with better awareness.

Inventory Mistake #1:Too Much Inventory

Earlier, many traditional business models use to assume that more inventory is more sales and more revenue. On the contrary, if we see closely, more inventory means more stocks to maintain, more storage cost, more wastage due to perishable and out of demand stocks, more labour cost and more window for theft and shipment losses.
In the past few years, companies have understood the requirement of efficient demand forecasting methods to maintain the right amount of inventory to accommodate demand without landing into out of stock situation. This can easily be achieved by following ABC or minimum safety stock analysis and keeping only the required or minimum amount of required inventory for the production.

As distributors, we should have a clear understanding of the fact that Inventory holding costs are one of the largest expenses for the business, and should constantly be minimized by using an efficient inventory management and analysis tool.

Inventory Mistake #2:Improper Inventory auditing

Traditionally, inventory in the warehouses were checked once a year to save on manpower and cost incurred during auditing. But in today’s era of technology and fast changing market requirement yearly audit is quite inefficient and cost incurring affair.

One year is a long time to keep an account of inventory wastage and pressing issues occurring on day to day basis like stock shrinkage or poor upkeep of perishable goods. These stock issues cost a lot of money to the organisation on a daily basis which, if not taken care of immediately may cost a huge cause of loss for business at the end of a financial year.

The first steps to avoid such auditing issues is to implement an efficient online inventory management system which not only keeps track of stocks in regular basis but also help in analysing any pressing issue which has been bothering the stock maintenance for a period of time. Metrics and analysis in an online inventory management system, helps to organise our inventory by the process of cycle counting.

These systematic and periodic checking of stock helps to better maintain our inventory and avoid any major loss for the company.

Inventory Mistake #3:Failing to Automate

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.” -Bill Gates

As rightly said, without automation, you can’t create an organised system for managing your stocks across locations and departments, and without an efficient inventory management system, it’s impossible to improve your business revenue.

Hence migrating to an automated online inventory management system is the bottom line of a successful business model.

Read More – Efficient Inventory Management System

Conclusion

Inventory management is an essential part of every business but being aware of the common mistakes that others have made is the first step in avoiding them, followed by implementing changes to inventory system by tactically ordering, tracking, and maintaining your business model. The good news is, we have efficient cloud based inventory management system like SalesBabuCRM which can provide a one stop solution for all these inventory management requirements.