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Data & Analytics Blog

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The Role of Data Analytics in Inventory Management

Posted by LPA Software Solutions on Aug 10, 2020 10:48:00 AM

It’s difficult to understate the importance of good inventory management. After all, management costs can range up to 40 percent of the cost of inventory itself.

That number alone makes it clear why you should invest in inventory management. Controlling those costs could save your business thousands of dollars.

That’s where data analytics and inventory management software become key to business operations. What can these solutions do for you, and how can they help you improve inventory management? This guide has all the answers.

Identify Popular Products and Avoid Customer Disappointment

One thing an inventory management app will show you is which products are your most popular items. These are the products you move the fastest.

If you don’t watch stock levels carefully, you may run into problems. You may not be able to keep stock of these products on the shelves, which can lead to shortages and lost sales. Your customers may be quite disappointed, and you could lose them to your competition.

The data from your management app will show you which products you need to reorder most often. You can then use the data to determine how often you need to reorder, and even how much stock you need to keep on hand.

Using data analytics, you can identify trends in sales of these products. This allows you to adjust your stock levels for anticipated high-sales periods. You can also plan for lulls.

It also allows you to define a “safe” level of stock. The best inventory management software may even help you by automating the reordering process. Whenever stock hits a certain level, the system will place an order for you.

In turn, you can avoid stock shortages and keep your customers happy.

Inventory Management of Slow-Moving Stock

At the opposite end of the spectrum, you have stock that rarely turns over. These products aren’t very popular, selling slowly.

Data analytics can help you identify these products as well so you can better manage them. These products may have a much lower “safety” level of stock. You may not need to reorder very often, and you may want to keep much less stock on hand as well.

The data in the app can also help you identify which of these slower sellers may not be worth stocking. If keeping the stock on hand is costing you more than you make from sales, you might decide not to carry the product.

Data from the inventory management app can also help you avoid overstock situations. Overstock costs you, since you need to pay for the extra space to store the product before it sells.

More Accurate Forecasting with Data Analytics

Another advantage of using an inventory management system is the ability to forecast demand. This plays into your ability to keep the right amount of stock on hand. In essence, it lets you avoid both shortages and overstocking.

Forecasting draws on historical data, so you can see when people tend to buy more or less of a product. This can help you predict the stock levels you’ll need for a particular season or when you run a promotion.

It can also help you identify which locations will need more of a particular product and when.

Analyzing Inventory Management Performance

Inventory management software data also gives insight into how well you manage inventory on the whole.

You'll want to look at metrics like total inventory, days of inventory, and sales to inventory ratio. They can help you determine how effective your management is.

Days of inventory, for example, shows you how much cash you’re using for stored capacity. You can then compare it to lead times and product demand. If your days of inventory outstrips lead times and product demand, you could reduce inventory and free up some cash.

Sales to inventory ratios can provide insight into how fast inventory is flowing to customers. Total inventory is useful as you analyze asset utilization in the business.

Another particularly useful metric is gross margin return on inventory, or GMROI. This metric helps you analyze the profitability of any inventory item. In turn, you can determine if the inventory investment is a good one for the business.

Correcting Overstock Situations

The insights offered by data analytics can also help you liquidate any excess stock you have. You may be able to determine where you have excess stock. Then you can look at how to liquidate it without taking a hit to your profit.

You can take a look at which stores or channels are most likely to move the product. You may even be able to determine when you’ll be most likely to move the product. Data about past promotions may even help you determine a price point that will help the stock move.

In turn, you can free up your space and your cash.

Using Algorithms to Determine Product Mix

Finally, data analytics can also be used to determine optimal product mixes. A comparison of sales data may show some items move well when paired together.

Product mix may also vary by location. Some stores may sell more of some items. There may be some products that certain stores don’t carry at all, because the product sits on the shelf.

AI can use datasets from inventory to help you decide what to send to each location, as well as the right amount.

Power Your Business with Data

From this quick review, it should be clear that data analytics can only improve inventory management. Whether you want to automate reordering or reduce inventory levels, data analytics can provide the insight you need.

What else can data analytics do for your business? You might be surprised to discover how the right software can streamline all business operations.

Ready to get started? Get in touch with an expert team. They can guide you through setting up the software. In turn, they'll help you prepare your business to compete in an even tougher business environment.

Topics: Planning Analytics, Data Science & AI