Inventory is a crucial asset for any company that sells physical products, and how it is managed has a significant impact on business profitability. In order to successfully complete orders, businesses need an inventory management system that offers them a clear picture of how many items are available at each location in real-time. Not having reliable inventory records can result in poor order fill rates, delivery holdups, inflated inventory expenses, and more. 

Thanks to inventory cycle counts, businesses can easily achieve and maintain accurate inventory lists, enhance their operations, and save time and money. That’s why it is so important to conduct inventory counts on a regular basis. 

In this post, we’re providing an answer to the question “What is cycle count in inventory?”,  the benefits of conducting regular inventory cycle counts, and how inventory management software can help you streamline the process.

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What is Cycle Count in Inventory

An inventory cycle count is a method of counting inventory that involves rotating through predetermined, specified portions of stock on a regular basis. The schedule specifies the precise time each inventory item will be counted. You can arrange daily or weekly inventory counts of specific categories of items so you don’t have to count your entire inventory all at once.

Difference Between Cycle Counting and Physical Counting

Physical inventory counts every item of inventory at once, typically annually or semi-annually. Cycle counting, on the other hand, is the process of counting smaller, pre-selected portions of inventory multiple times throughout the year, sometimes even daily.

Performing physical inventory is a good option for businesses with little inventory. Schedule and conduct an annual physical inventory count if you can simply count your stock without closing and inconveniencing your customers. Many businesses conduct cycle counting in addition to an annual physical count in order to get a solid understanding of their inventory. 

Why is Inventory Cycle Count Important?

Cycle counting has become a popular inventory management technique for businesses across various industries because it doesn’t need businesses to stop all daily operations and do a thorough physical inventory count at once. Among the most significant advantages are:

• Reduced required safety stock
• Less obsolete inventory and fewer inventory write-offs
• Reduced overhead expenses and employee overtime expenses

• Increased order fulfillment rates
• Time savings
• More accurate inventory assessments
• Reduced errors
• Improved customer service
• Improved sales
• More time between physical counts
• Increased productivity and improved business operation
• Timely detection of thefts

Types of Inventory Cycle Counting

There are numerous types of inventory cycle counting techniques that can be tailored to meet various business requirements. Among the strategies used the most frequently are:

Random sample cycle count

This method is a great choice if your products are similar. With random sample cycle counting, you can select a random sample of the products to count throughout each cycle count. The benefit is less downtime for your warehouse or retail location since random cycle counts can take place during regular business hours. There are two methods for counting random samples:

• Constant population counting. With this method, the same number of products is counted every time. Because the products are selected at random, there is always a risk that some of them might not be counted at all while others might be counted repeatedly.
• Diminished population counting. Products that have already been counted are not included in subsequent cycle counts until all inventory has been counted. The procedure then starts over.

Control group cycle count

With this method, a small number of inventory items are audited repeatedly over a short period of time. The control group method works well when a business is new to cycle counting. By regularly counting a small group of representative objects, managers can find and fix flaws in the counting method. The procedure can be used on other product groups once it has been refined and no faults are reported.

ABC analysis

One of the easiest and most widely used cycle count techniques is the ABC analysis cycle count. It’s based on the 80/20 Pareto rule, which states that 20% of your items account for 80% of your results. The top 20% of the most valuable items should make up the A group, followed by the middle 30% of products with medium value, and the bottom 50% of the least valued item. The highest priority items, those marked with an A, are counted most often, whereas the items in category C are the least important and are counted least frequently.

How to Do Cycle Counting

Now that you have learned about the different types of inventory cycle counts, let’s look at how to conduct your inventory cycle counts effectively.

1. Go through your inventory records

Starting with an accurate database is important. Review all data entries for inventory transactions and make sure to correct any discrepancies.

2. Start counting

Review the inventory amounts, locations, and descriptions from your inventory records and compare them to what is actually present in your stockroom, warehouse, or sales floor.

3. Investigate and reconcile any differences

Identify the inventory discrepancies discovered during cycle counts and resolve them with your inventory management employees and in your system. 

4. Alter your procedures if necessary

If the same problems are occurring frequently, you could need to fix the holes in your strategy or even establish an entirely new inventory counting procedure.

5. Adjust your inventory records

After cycle counts are finished,  be sure to include a stage in your process to update your inventory management system to match your physical inventory. 

6. Repeat the cycle counting process

The cycle counting process should be repeated on a regular basis. You can opt to do it daily, weekly, monthly, or quarterly depending on your business. The more often you perform inventory cycle counts, the more accurate they will be. 

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Best Practices for Cycle Count Inventory

The following best practices will help you launch, manage, and improve your inventory cycle count process:

Plan beforehand. It’s crucial to plan out your product counts at the very beginning so that you can make sure that every item is inventoried at least once every three months.

Close out everything before the beginning of the count. Make sure that any open receiving, WIP transaction, and shipping for the products that have been chosen for the cycle count are closed before beginning one.

Start the inventory cycle counts early in a shift, either before your operations have cycled up for the day or late in the shift when things have settled down. This will cause less disturbance and movement, which makes the counts easier.

Double-check your counts and deal with issues that cause discrepancies. In order to get accurate results, make sure that at least two people count the same item separately. Compare the findings, and if you notice any discrepancies, look into what might be causing them.

Track your progress over time. It’s critical to monitor your inventory cycle counts over time and look for patterns so that you can identify the systems that are not functioning and make the necessary adjustments.

Document your cycle count process. Make a clear, concise document that explains how your inventory cycle counting works. The document should be simple enough so that every new employee can understand it, but also detailed enough for existing staff members to understand the procedures for handling issues.

Use inventory management software. Even though you can use spreadsheets to count and track your inventory, inventory management software that uses barcodes or QR codes is a much better option because it can streamline the procedure and significantly improve the level of accuracy of your counts. Rather than manually updating your inventory at regularly scheduled times, inventory management solutions like ApparelMagic record purchases and outbound orders and all associated costs in real-time. More accurate metrics mean fewer mistakes that can unbalance your inventory levels.

The Bottom Line

Cycle counting makes inventory management and inventory reconciliation easier because you can concentrate on smaller product portions, spend less time counting, avoid closing your store’s doors and miss out on sales.

ApparelMagic can help you improve inventory tracking and increase inventory accuracy. Accurate inventory tracking from the time you receive a product to the moment you deliver it, means lower inventory costs, decreased risk of error, higher customer satisfaction rates, and more efficient overall operations. 

Determining prices can be a challenge for any company, from analyzing the market trends and considering labor costs to thinking of every single penny that goes to transport and storage. But when you’re buying products or materials in bulk, the situation can get even more complicated.

Calculating a wholesale price is a delicate task. A product needs to be priced high enough from the supplier or wholesaler’s standpoint to maximize earnings. On the other hand, in order to increase their earnings, your clients (retailers) want to have access to affordable goods in order to maximize their own profits.

So, how do we strike the perfect balance? In this post, we’re talking about how to calculate wholesale price so that both you and your customers are satisfied.

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What is a Wholesale Price?

Wholesale pricing involves setting a price for products at the wholesale stage of selling. When a manufacturing company wants to sell to bulk retailers or wholesalers, it usually charges the wholesale price. A bulk distributor may also set the wholesale price when selling to smaller retailers.

Since commodities are typically sold in large quantities at the wholesale stage, the wholesale price is set as low as possible in order to allow other participants in the supply chain to make a profit. This is why, when calculating wholesale price, you should be able to make a profit from the sale of the items in addition to recovering the costs of manufacturing and storing them. In order to achieve this, you should take into account several elements, such as the product’s average market pricing, the type of demand, what your competitors are doing, etc. 

Because of everything said above, calculating wholesale prices can be quite a challenging task. 

Wholesale price vs retail price

So, what is the difference between wholesale vs retail pricing? Retail pricing is essentially the item’s final price, i.e. the price that the final consumer pays when making a purchase.

Just like a wholesaler sets the wholesale price, a retailer sets the retail price. In some cases, wholesalers may suggest a retail price. This is called manufacturer-indicated retail price (MSRP) or recommended retail price (RRP). However, the final pricing is ultimately in the retailers’ hands.

Compared to wholesale prices, retail prices often feature a greater markup and profit margin. This is due to the fact that they will have to factor in extra selling expenses such as rent, employee salaries, and advertising in the final pricing.

While wholesale prices can change depending on the quantity purchased (bulk distributors may offer a discount for larger orders), retail prices are typically constant regardless of the number of items purchased. However, if sales aren’t moving as quickly as they’d like, a retail store may also provide a discount to boost sales.

How to Calculate Wholesale Price

Let’s look at how to calculate wholesale prices for your products. 

1. Research your market and competition

Before you set any product prices, determine your market segment and your place in it. For instance, are you a designer brand, a sports brand, or a contemporary one? This will help you establish how your target market views you, which eventually has an impact on your pricing.

Look into every wholesale product that competes with your products. A thorough understanding of the competition is necessary to fully comprehend the unique value of your products. Talk to your clients and end consumers, look for complementary goods, and learn how and when people buy your products. If done properly, this research will allow you to clearly understand why your clients choose to work with you.

2. Calculate your COGM

COGM (cost of goods manufactured) is the total cost of creating or purchasing a product and includes the cost of the raw materials, labor, as well as any other expenses required to put the product on the market, such as handling and shipping. The following formula can be used to calculate a product’s COGM:

COGM = Total Cost of Materials + Total Cost of Labor + Additional Costs and Overhead 

3. Set your wholesale price

When determining your wholesale price, start by doubling your cost of goods. By doing this, you can make certain that your wholesale profit margin—the gross profit a store makes when an item is sold—is at least 50%. Retail clothing brands often aim for a 30% to 50% wholesale profit margin.

Strategies for Calculating Wholesale Price

Which approach to wholesale pricing you choose will depend on your business, your goals, as well as the information that your market research reveals. That being said, here are some strategies for wholesale pricing you can use:

Cost-plus pricing 

With this pricing model, a product’s price is determined by taking into account all of its costs plus a profit margin.

A benefit of this pricing strategy is that it guarantees a profit on every item a wholesaler is selling. However, it might not be the best choice for goods that could expire quickly or whose production costs are prone to frequent fluctuations.

Surge pricing

Surge pricing is the practice of raising a product or service’s price in response to rising demand. In other words, low demand results in low prices for the product, whereas high demand causes the price of the product to rise exponentially.

This pricing approach is useful if there are peak hours, days, weeks, or seasons when demand for a wholesaler’s goods is highest. However, it should be noted that if prices rise too dramatically, this surge pricing could also result in strong customer backlash.

Value-based pricing

Value-based pricing is a demand-based pricing strategy that works by determining the customer’s willingness to pay for a certain product. According to a study, consumers are willing to spend more on goods they believe are worth the cost. However, setting high prices has the drawback of perhaps creating a limited market for your goods.

Competitor-based pricing

As the name implies, this pricing strategy uses competitor pricing as a benchmark. To draw in more wholesale customers, you can either set prices at a level that is equal to those of your competitors or lower.

If you can efficiently manage your costs while selling at a lower price, you have a chance of achieving brisk sales and solid profits. However, for smaller wholesalers or those who are just starting out, this strategy could be challenging to implement and maintain.

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Common Challenges When Calculating Wholesale Prices

As mentioned before, there is a lot that goes into determining a wholesale price. Here are some of the most common challenges that wholesalers face when calculating wholesale prices.

• Competition. Competition among wholesalers can be quite fierce in certain industries. This means that you will either need to set your product’s price at the current market rate or go below it. However, you should keep in mind that by doing this, you might start a price war and drive costs even lower.
• Discounts. Although discounts can be very effective sales tools, you need to be very careful when applying them. If you offer small discounts, your clients might not be tempted to buy. On the other hand, if you provide discounts that are too steep, you run the risk of losing all of your profit. 
• Seasonality. Seasonality refers to fluctuations in sales caused by external factors that occur on a predictable schedule around the same time every year. This means charging different prices for your products depending on whether it is low season or high season, which can be quite challenging. 
• Brand identity and brand recognition. The value of your products and how your customers perceive your company are both largely determined by pricing. However, it might be difficult to strike the ideal balance between a price that accurately reflects the worth of your goods and a price that customers are prepared to pay.

Bottom Line

Pricing is consistently cited by business owners as one of the difficulties faced by successful wholesale companies.  

In this article, we’ve explained what wholesale pricing is and offered a few tips on how to calculate wholesale price. It’s up to you which of the suggested methods you choose but whichever route you go down, the key takeaway remains the same: the success of your company depends critically on choosing the appropriate wholesale price.

Fortunately, if you have the necessary tools and a thorough understanding of how wholesale pricing operates, you are in a stronger position to set wholesale prices that benefit your business. 

Enhancing supply chain efficiency can lead to a variety of operational benefits, from helping companies save money to enabling better inventory management, faster processing times, and shorter delivery times.

Obviously, supply chain efficiency is crucial, but what can you do to improve it? In this post, we are answering the question “What is supply chain efficiency?”, explaining how you can measure it, and sharing tips on how to enhance supply chain efficiency. 

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What is Supply Chain Efficiency

The effectiveness of a company’s supply chain refers to how well it uses its resources (including human, financial, physical, or technological) to produce and deliver products, as well as how effectively it gets its goods to the right location at the right time and at the lowest cost possible. Supply chain efficiency is important because it gives you a competitive advantage, increases profit margins, promotes customer satisfaction, and fosters growth.

Difference between supply chain efficiency and supply chain effectiveness

A well-functioning supply chain should be both efficient and effective. While efficiency is about how well a company uses its resources to ensure the fast and seamless operation of systems, effectiveness is the extent to which a certain process produces the desired results expected from it.

According to experts, supply chain effectiveness is an external benchmark that measures how well the company is satisfying customer expectations, whereas supply chain efficiency is an internal benchmark. Although the terms “supply chain efficiency” and “supply chain effectiveness” are often used interchangeably, a company can have an effective supply chain that is still not efficient and vice versa. 

For instance, an efficient supply chain can result in faster processes and delivery of the finished product to customers in a timely manner, but the product’s quality may or may not meet their expectations. Similarly to this, an effective supply chain is one that produces high-quality goods or services that satisfy customer demands. However, if that good or service wasn’t provided on schedule, the supply chain might not be efficient.

How to Measure Supply Chain Efficiency

Although each company will have distinct priorities, there are several supply chain performance metrics that can be used to measure efficiency.

• Inventory turnover. How often a company sells its inventory in a specific time period. Inventory turnover is calculated as the cost of goods sold divided by the total or average inventory. 
• Supply chain cycle time. The time it would take to complete a customer order if inventory levels were zero at the moment the order was placed. The entire supply chain will be more efficient and the company will be better positioned to react to changes in the market if the cycle is shorter.
• Customer order cycle time. The period of time (number of days) needed to fulfill a delivery once a customer has made an order.
• Days Inventory Outstanding is a measure of how long a company typically keeps its inventory before selling it. It is determined by multiplying the average inventory by the cost of the products sold for the time period. The quicker a company converts its stock into sales, the lower its DIO.
• Days Sales Outstanding measures the length of time it takes to receive payment from clients. To calculate it, divide the average accounts receivable by the total value of sales made on credit. The result is then multiplied by the number of days in the time period that’s being measured. 
• Fill rate is the percentage of orders that can be fulfilled at a given moment with the available inventory without lost sales or backorders.
• Perfect order measurement is the percentage of orders with no errors. The supply chain operates more effectively if there are fewer errors. 
• Cash conversion cycle is the length of time it takes to convert cash into inventory and then into sales.

5 Ways to Improve Supply Chain Efficiency

Although creating an effective supply chain is labor-intensive, the rewards are substantial. Here are a few supply chain management best practices.

1. Improve your supply chain visibility

Visibility allows for better tracking of your products as they move through the supply chain, from manufacturing to inventory and warehousing to packing and delivering to customers. The greater your supply chain visibility, the better you’ll be able to understand your stock levels and delivery efficiency. In addition, supply chain visibility makes it simpler to identify any potential bottlenecks and inefficiencies.

One way to improve your supply chain visibility is by using technology. Technology solutions like inventory management software provide businesses with information on each step in the supply chain enabling them to solve issues immediately. 

2. Foster strong relationships with suppliers

And any inefficiencies that might develop on the supplier side can have an impact on your supply chain efficiency as a whole. One strategy to improve your supply chain is eliminating any underperforming suppliers while establishing strong relationships with dependable suppliers that are better suited to meeting your business objectives. 

Inventory management software can play a crucial role in fostering strong supplier relationships by enhancing the information flow between you and your suppliers. In addition to guaranteeing that your supplier database is accurate, the ideal solution should enable you to update suppliers on their purchase orders, invoices, and payments. By providing suppliers with the information they require, you can reduce the number of inquiries you get from them, saving everyone involved time and improving supply chain efficiency.

3. Automate your supply chain processes

By automating important procedures, businesses can free up employees from manual duties and enable them to concentrate on things that create value. Automation can also be quite helpful in reducing the likelihood of error.

Although automating time-consuming tasks such as order processing and automated shipping, won’t replace the need for human effort, it will help you increase productivity and streamline operations. Warehouse automation reduces the effort, time and mistakes that are very common in logistics. Some companies even use logistics automation in their own warehouse, as well as tracking devices on each item in order to better track their inventory, improve inventory forecasting, and avoid issues such as out-of-stocks and excess inventory. 

We already mentioned how the use of inventory management software can help improve supply chain visibility and help you build strong supplier relationships. By automating your inventory management, you can also make sure that the right products are delivered at the right time, which makes it simpler to determine when additional products need to be ordered. Automation can also help your company identify chances to minimize obsolete stock, reduce human error, lower warehousing and storage costs, and shorten lead times for products in transit, which can make it simpler to coordinate the delivery of commodities with production requirements.

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4. Invest in employee training and development 

Regardless of how many of your internal processes you decide to automate, your supply chain will still rely more on people than on technology. For this reason, you need to make sure that all of your personnel are properly trained in the operation of your supply chain.

Make sure to provide training on your supply chain processes and systems for all your employees. Employees with inadequate training could feel overburdened and prone to mistakes, whereas well-trained staff will contribute to more streamlined supply chain operations. 

5. Audit your supply chain efficiency frequently

It is not enough to achieve supply chain efficiency once. Inefficiencies can appear as the internal procedures or business environment evolve over time.

Once you have made the necessary improvements, maintaining an efficient supply chain is the only way to ensure that everything works smoothly. Be sure to regularly assess the effectiveness of your supply chain and look for any opportunities to further increase its efficiency. 

The Bottom Line

In today’s global economy, having an efficient supply chain is essential. Your supply chain is a crucial component of your company’s operations and when it’s properly set up, it can greatly benefit both your company and your clients.

Following the tips and best practices listed in this article is a great place to start for increasing the efficiency of your supply chain. As a result, you’ll be able to improve cost savings, increase inventory visibility, build better relationships with your suppliers, and boost customer satisfaction. 

To calculate the worth of the company’s inventory assets, any company that keeps inventory must have an effective inventory accounting procedure in place. Because inventory movement has an impact on your business’s cash flow, cost of products sold, and even profit, it is crucial to account for it correctly. Businesses use a number of standard inventory accounting methods to value their goods, keep track of the inventory turnover ratio and ensure accurate record-keeping.

In this post, we’re providing an answer to the question “What is inventory accounting?”, and share strategies for managing inventory, as well as different inventory accounting methods you can use. 

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What is Inventory Accounting?

Inventory is a term that refers to the items that your company has purchased with the goal of reselling them to customers. Since it has a value, inventory is recorded as a company asset on your balance sheet. But if it becomes outdated, damaged, or the market price for that kind of goods declines, it might quickly lose its worth. 

Inventory accounting can help you determine the cost of inventory and its value. This is crucial when determining selling prices, obtaining insurance, creating a budget, calculating taxes, or selling your business. You can also use it to determine where in your company you are making the most money. Proper management and accounting of inventory can make a huge difference to your profitability and the overall business.

How Inventory Accounting Works

In the States, public enterprises must adhere to GAAP (Generally Accepted Accounting Principles), a set of rules established by the Financial Accounting Standards Board (FASB).

GAAP requires companies to accurately record inventory following a strict set of guidelines. It forbids companies from both overstating or understating the value of their inventory because doing so could result in an inflated valuation for the business. Inventory counts as a business asset, so overstating its worth may give the appearance that a company has more assets than it actually does.

Fashion retailers, manufacturers, and wholesalers all need to use inventory accounting as an essential business strategy. Since the price of identical products might fluctuate over time, many of these enterprises struggle to assign a value to inventory that is currently in stock as opposed to inventory that has already been sold.

Companies are required to choose an accounting inventory method in their first year of operation, and while changing the method later on is possible, doing so can be very difficult. For this reason, business owners should carefully compare inventory accounting policies to decide which is best for them not only now but also in the future as their business (and the inventory amount) expands.

Benefits of Inventory Accounting

Inventory accounting improves the financial picture of a company, and this is probably its most significant benefit. Here are some ways in which inventory analysis, proper inventory management and accounting can help you earn as well as save money:

• Avoid cash flow issues. If your stock levels are properly tracked and managed, you’ll never have too much money locked up in surplus inventory. You’ll be able to spend that money on other expenses or expanding your business.
• Maximize sales. Be aware of when you are running out on a certain inventory item in order to prevent ever having to turn away customers. 
• Reduce expenses. Lower storage (and write-off) expenses by ordering fewer of your slow-moving items of inventory. 
• Better decision-making. Inventory accounting helps in the preparation of financial and revenue estimates, thus enabling the business owner to make wise decisions when it comes to inventory purchases.
• Get better deals. Knowing which are your best-selling products can enable you to place larger orders at a lower cost per unit.
• Determine where you make a profit. By accurately tracking stock costs, you’ll be able to determine the true margin that products earn you. 
• Do more effective marketing. You can better prepare for promotions by recognizing seasonal sales trends.

Inventory Accounting Methods

There are three main inventory accounting methods that companies use: LIFO (Last In, First Out), FIFO (First In, First Out), and WAC (Weighted Average Cost).

1. LIFO

The last in, first out method is based on the idea that the items of inventory you’ve added most recently would be the ones to sell off first. This approach works well for retail businesses that specialize in non-perishable types of inventory or those with a low risk of obsolete inventory. 

It can also result in a rise in COGS (cost of products sold) and a decrease in net profit if more recently purchased items of inventory are more expensive. 

2. FIFO

First in, first out is an accounting inventory method that assumes that goods that were purchased first will likewise be sold first. Therefore, the oldest available on-hand inventory will be used to fulfill orders. It is a practical method to employ while managing the merchandise in your warehouse but it’s also good for valuing unsold stock.

The FIFO approach offers a lot of advantages. Businesses that offer perishable commodities (such as food and drinks) generally run a lower risk of having their products spoil or go past the best-before date. They can contribute to improved supply chain management to guarantee that their customers get the freshest stock possible. 

3. WAC

The weighted average method differs entirely from the first two methods. It is applicable to companies who decide not to keep track of the cost per inventory unit for each unique purchase and delivery. Instead, the value of inventory is calculated using the average cost of products during the relevant time period.

You can determine the weighted average cost by simply dividing the total cost of items in inventory for sale by the number of items in the inventory. 

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Which Accounting Inventory Method Should You Choose?

There is no simple response to this question. Your company’s financial objectives and the state of the market will both influence how you value your inventory. Select an accounting inventory method that fits your company’s requirements to optimize revenue potential and efficiently manage inventory records for tax calculation purposes.

Here are a few situations that can help you decide which inventory accounting method is ideal for your company.

Saving taxes

Your inventory valuation method can be useful if you’re looking for solutions to reduce your tax liability.

Assuming there’s inflation, a LIFO method will result in cost savings. When using the FIFO approach, you can observe that the tax due is highest because the profit is likewise the largest. Because of the decreased profit margin under LIFO, the liability is lower. However, you should bear in mind that we’re assuming price increases over the year. The outcome of this scenario might change if there is depression.

Attracting investors 

A business with a large profit margin can attract many potential investors and retain its current stockholders. So FIFO valuation will be advantageous in an inflationary market if you’re looking for fresh funding opportunities or if you want to delight your shareholders with good earnings. Similarly to this, when prices are declining, LIFO value will be a preferable option.

Applying for a loan 

If you intend to apply for a loan, you’ll need to keep your inventory as collateral. In such circumstances, it is desirable for the stock’s worth to be high because a higher valuation will give the lender more assurance. A FIFO method will provide you with a better value for closing inventory if prices are rising year-round. On the other hand, if prices are falling, a LIFO approach will provide a larger value.

The method that provides you with the highest inventory value will be ideal for your business because financial institutions consider the value of the closing inventory in your balance sheet as one of the criteria before approving a business loan.

The Bottom Line

In general, inventory accounting determines the exact worth of assets at various phases of their creation and production. It helps to ensure that the value of all assets, which is reflected in the value of the company, is accurately represented. Businesses can boost their profit margins and improve financial health by carefully evaluating the values determined by inventory accounting.

Hopefully, this article has provided a clear answer to the question “what is inventory accounting?” and has given you deeper insight into the best inventory accounting practices.

Despite this, retail businesses may still find inventory accounting to be a complicated task. That is why it’s smart to rely on inventory management software. Running your business on a single cloud inventory management solution such as ApparelMagic, increases accuracy and efficiency while reducing headaches across the board (not just for inventory accounting). This ultimately allows you to concentrate on expanding and improving your business. 

In the world of fashion retail, inventory reporting is a source of valuable information and priceless insights. But despite this fact, many apparel businesses either fail to keep track of their inventory or do so manually, which often results in inaccurate inventory data. Even though it might not seem like a big deal, inaccurate reporting actually has the power to make or break your company’s ability to stand out from the crowd and make a profit.

In this post, we’ll take a look at what inventory reporting is, why it is important, as well as how inventory reporting software can help you create reports to improve your fashion business.

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What is Inventory Reporting? 

An inventory report is a written or electronic document that lists the stock that a company currently has on hand. It can contain figures indicating top-selling items, total inventory, and other product-related data to aid in tracking, categorizing, and managing inventory. Physical or digital inventory data can help to prevent stockouts and overstocking.

A solid inventory report gives a breakdown of the items in stock so the company can determine what they can sell and what they need to reorder. 

Why is Inventory Reporting Important?

With proper inventory management reporting, fashion businesses can reap a number of benefits. Here are some of the most important ones:

Transparent inventory tracking. Inventory reports track your inventory, which is the largest and most important element of any product-based company. Thanks to this transparent inventory tracking, fashion retail stores can make sure they have enough products in stock and guarantee timely deliveries. In addition, consistent and transparent inventory tracking results in better inventory management and reveals patterns and trends in sales that can be used to improve inventory forecasting.

Organized categorization of the inventory. Organized categorization of inventory can help fashion companies by segmenting products based on their value, carrying costs, demand, and other factors. These categories enable brands to identify which SKUs are the most successful and which ones can be removed from their catalog. 

Improved inventory planning. Inventory reports are essentially a measurement of how much capital you have invested in your various products and commodities because they are focused on your current inventory levels. Because of this, using inventory data from these reports is a great help when planning your inventory. Inventory reporting metrics provide detailed information that companies require to improve their demand forecasting, reorder points, budgeting, and other processes.

6 Types of Inventory Reports to Create

Inventory reports summarize the status and performance of your inventory, providing useful information about how many inventory items are available, whether any items have low stock levels, which items sell the quickest, which product categories perform best, and other relevant information. The following are the 6 types of reports you can create:

1. Inventory performance 

Reports on inventory performance provide data about your best and worst-selling products, as well as year-over-year growth. This can help you understand the number of units you need to reorder.

Additionally, keeping an eye on year-over-year growth tells if your financial performance is getting better, getting worse, or staying the same, which can help you to adjust or improve your supply chain as needed.

2. Inventory value

A value report displays the total value of all of your products housed in separate warehouses and compares the volume of inventory at each storage location. In addition, it shows how well a product performs based on how much it costs, how long it has been sitting, and the inventory turnover rate for that product by the warehouse.

Inventory analytics are crucial for tracking your purchases so that you can effectively manage cash flow that is connected to inventory value. 

3. Inventory profitability 

SKU profitability, listing profitability, and trending profitability are the three components of inventory profitability tracking. Reports on SKU profitability show the actual profit each SKU produces. Listing profitability, on the other hand, examines your SKU’s performance information in terms of unit and gross margins, as well as inferred shares per sales channel. Last but not least, trending reports display your profitability over a specified time frame.

The information from inventory profitability reports can help fashion companies to reduce inventory costs, get rid of dead stock, and increase earnings by focusing on promoting high-selling products. 

4. Low stock

This type of inventory report lets you know which products are getting low. If you constantly experience stockouts, customers will stop coming to your fashion store and start buying elsewhere. This makes it easier for you to monitor items with low stock levels, place prompt reorders, and ensure that there is always enough to meet customer demand.

5. Inventory forecasting 

Inventory forecasting reports determine the amount of inventory required to fill upcoming orders based on how much merchandise you anticipate to sell over a predetermined period of time. To create the most precise forecasts possible, these projections take into account your historical sales data, planned promotions, and known external variables.

Thanks to data-driven forecasting, you will always have the exact amount of stock you require. This keeps your extra merchandise from lying around and costing you money.

6. Sales report 

A comprehensive sales report will help you streamline your accounting procedures and increase your cash visibility. With the support of a sales report, fashion brands can explore a comprehensive accounting summary for each sales channel, including discounts and income as well as taxes and refunds. 

In addition to breaking down sales into product categories and date ranges, a strong sales report can also help you identify trends and top customers, and enhance your forecasting efforts. 

How to Write an Inventory Report 

You can make a simple inventory report in Google Sheets or Excel to track and analyze your inventory data, but this does not support automated updates and simply shows the inventory situation at a given point in time. 

For this reason, it is recommended that you use inventory management software that automatically updates you on stock levels, sales, etc. Instead of having to sift through inventory, a reliable inventory management reporting software can tell you which stock items are in short supply, or in high demand.

Using the steps below, you can create simple inventory management reports that need manual updating. 

Create an inventory item column

The first column should contain a list of inventory items. This should be done at the SKU level and can be noted as the SKU name. For example, if you have a black blazer in five sizes, you would list each size for a total of five entries. The more SKUs you have, the more challenging this task will be. 

Create a descriptions column

In the next column, write a description of each item. In addition to colors and sizes, try to add further context or information here to support what makes the product unique for the purposes of inventory monitoring and reporting. 

Price each item

Enter the price of each item so that you can quickly determine the overall worth of your inventory and the value of each item based on inventory quantities and prices. You might need to keep track of the manufacturing and purchase costs separately from the selling price.

Create a remaining stock column

Next, include a column to track the number of items you have in stock. Every time a new sales order or purchase order is received, this column should be updated to ensure that each number is accurate.

Choose a time frame

How often you choose to update your report will depend on your individual business needs. In general, you will need to update it more frequently as your sales volumes increase since this means that your numbers will change quickly. 

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How Often Should a Business Produce an Inventory Report?

Again, the answer to this question depends on your specific business goals and needs. In any case, developing the habit of running inventory reports is important for all retailers, regardless of industry and size. Typical time periods for running inventory reports include:

• Weekly and monthly. You can easily pull weekly and monthly reports from your inventory management software and POS system. These reports allow you to regularly check the condition of your inventory, set inventory criteria to match demand, and even let marketing teams know how a certain promotion went.
• Before and after busy selling seasons. For fashion retailers, real-time sales figures provide a huge advantage. However, in order to increase sales, it is essential to understand your period-over-period growth. For instance, you can run inventory reports to compare Valentine’s Day 2022 to Valentine’s Day 2021.
• Depending on your business operations. Reports can also be based on the particular sector of business activity. For instance, fashion retail businesses require regular inventory updates to maintain adequate inventory levels at all times and guarantee customer satisfaction, especially if they have high volumes of hourly or daily orders. 

The Bottom Line

Inventory reporting may seem like a tedious task, but it is an essential step in learning how your fashion business operates and identifying areas that may be improved. 

In order to increase the effectiveness and accuracy of their inventory reporting, businesses in the fashion industry should consider investing in inventory management software. These systems automatically pull inventory data from POS systems to provide an overview of inventory location, performance, valuation, shrinkage, and more.

Inventory reporting software generates precise reports and offers valuable insights into your stock levels enabling you to easily determine what products you need to order, what promotions to run, and how to keep your customers happy and your fashion business profitable. 

In retail, safety stock management is essential since demand changes and new trends appear fairly frequently. Running out of stock can be a costly issue. In North America alone, stockouts result in $144.9 billion worth of lost sales.

By anticipating customers’ needs and expectations, companies can quickly refill their shelves, place advance orders for products, or have an emergency supply of inventory on hand. Knowing how to calculate safety stock will help you manage your inventory more effectively, cut expenses, and increase productivity and income.

In this post, we provide an answer to the question “What is safety stock?”, why it is important, discuss how to calculate safety stock, and more. 

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What is Safety Stock?

Any business could run out of products, which is why you must take measures to ensure that your company remains operational regardless of what happens. 

Your company should ideally never have to worry about running out of inventory, but this is not always the case. There are many situations that might lead to a stockout, including a surge in customer demand, issues in supply chain management, supplier inability to deliver what and when you require, equipment malfunction, or simply bad weather impeding deliveries.

Safety stock is extra inventory that is ordered and kept on hand in case demand exceeds expectations. It reduces the risks and effects of stockouts, enabling your supply chain to continue operating normally even after cycle stock is exhausted.

The Importance of Keeping Safety Stock

There are several reasons why companies should always have safety stock on hand. Here are some of the most important ones: 

Prevent stockouts. Safety stock can help businesses lower the possibility of running out of a particular product and keep operations going while the company finds, buys, and distributes this inventory. 

Offset demand uncertainty. Demand fluctuations are one of the most important reasons for keeping a safety stock. Seasonal effects, abrupt changes in consumer preferences, panic buying, or a competitor’s departure are just a few of the many factors that might affect demand spikes. Safety stock allows companies to restock while still satisfying the increased demand.

Reduce the consequences of supply issues. Unexpected disruptions in supply like a lack of raw materials, operational shutdowns, production problems, and political or legislative measures, can have a significant effect on your stock levels. These delays affect the entire supply chain, influencing things like delivery timelines and store disruptions. Safety stock helps to lessen the effects of supplier issues and keeps the supply chain going until the issue is resolved or the company has secured a new supplier. 

Make up for inaccurate forecasts. Demand forecasting is typically reliable, but unexpected changes can cause it to be inaccurate. Maintaining safety stock ensures consistency and enables decision-makers to make more precise estimates and forecasts. 

Boost efficiency. Safety stock ensures more efficient operations even when there are supply problems, including on-time deliveries, more effective warehouse staff, and reliable, consistent inventory levels for forecasting and reporting needs.

Enhance customer satisfaction. Customers who know that a business will always have the products they need in stock are more likely to return and spread the word about the business. This pays off greatly in the long run and helps your company grow. 

Common Safety Stock Risks and Challenges

Safety stock is a valuable tool when it comes to preventing stockouts, but it can also have some disadvantages that inventory managers need to take into consideration when developing their safety stock strategy.

Safety stock is static

Classic safety stock is referred to as static, which means that it doesn’t increase as the business expands. As a result, the number of units designated as safety stock may not be sufficient when the company grows. Inventory managers should periodically analyze safety stock levels and bottlenecks and make any required adjustments.

Excess safety stock

Although carrying safety stock is important to prevent sales losses due to stockouts, there is no getting around the fact that it requires an additional monetary investment. Having too much safety stock can result in a lack of space for current cycle stock or new items. Additionally, it is a sizable corporate expense because holding fees frequently account for about 20% of the overall cost of the inventory.

Setting safety stock to zero

This is a common strategy that supply chain managers use to reduce the expenses associated with keeping too much inventory on hand. This is particularly common when a sudden increase in demand levels out and returns to normal. While setting safety stock to zero resolves the problem of having too much inventory, the risk of not having a buffer to manage future changes in demand or supplier delays is re-ignited, which can be even more expensive. 

Overuse of safety stock

While safety stock is a good defense against stockouts, it is not a solution for all your inventory problems. To balance the dangers and expenses of stockouts with those of having too much stock on hand, supply chain managers must determine the ideal quantity of safety stock for each product.

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Calculating Safety Stock

Follow the following steps for calculating safety stock:

1. Calculate Lead Time

Lead time is the period of time that passes between the start and end of a production process or the time it takes to restock your inventory. Simply said, you need to consider how long it takes to make a buy request, have it authorized, email suppliers, receive deliveries from suppliers, examine products, put them on shelves, or update online inventory levels.

To calculate the average lead time, you must include lead time variables. This means that lead times won’t always be consistent. To keep track of this, make a table with the following categories:

• Expected lead time of a specific product
• The actual time it took to replenish the order for a specific product
• The difference (variance) between the expected and actual times. 

Positive figures in your variance category indicate that there were more days than anticipated. If the category contains negative values, the delivery came earlier than predicted. Using these figures and their respective definitions, you can determine the standard deviation for your lead times. 

To do this, add up all the variances, then divide the sum of variances by your portion numbers, i.e., the lead times of the most recent shipments (for example, if you have seven past shipments in your portion, you will divide the sum by seven). The average estimated time should then be added to this result.

2. Calculate Demand

In order to calculate the market demand average, you need to start with a specific time period. The best time frame is determined by how quickly you can place a product order again. This can be a week or two, a month, or even longer.

Take the total sales volume for your time period and divide it by the number of buying days to determine the demand average. For instance, in a one-week timeframe, there would be 7 buying days. 

3. Establish Your Desired Service Level

The service level factor involves balancing inventory costs against the cost of stock out to determine the appropriate service level for a certain product. Higher service levels mean that more safety stock is needed.

To determine safety stock, you can use the normal distribution chart to choose a set of numbers that correspond to the percentage of your targeted service level.

4. Calculate Your Needed Safety Stock

Once you’ve determined your average lead time, average demand time, and desired service levels, you can finish the calculation and determine your safety stock using the previously mentioned safety stock formula:

Z × σLT × D avg = Safety Stock

Where:

Z is the desired service level

σLT is the standard deviation of lead time

D avg is the average demand. 

The Bottom Line

Keeping safety stock has a number of benefits, one of the most important ones being the ability to continue running your business even when there are problems in the supply. However, it is crucial to avoid keeping too much safety stock on hand because doing so might do more harm than good for your company.

Formulas can assist in finding the ideal balance, but determining and achieving the ideal safety stock level necessitates a thorough knowledge of the entire supply chain. Inventory management software like ApparelMagic removes the need for manual processes, enabling businesses to reduce disruptions, maximize sales, achieve an optimal safety stock level, and boost profits.

The speed and effectiveness with which your company can complete customer orders have a direct impact on your profitability. If customers are unhappy with the way their orders are processed and fulfilled, they can decide that you don’t offer good customer service and go to your competition. In other words, since it’s a crucial element that could have an impact on your bottom line, your delivery process needs to be your top priority.

In this post, we’re providing an answer to the question, “What does order fulfillment mean?”, discuss the order fulfillment process steps, and offer tips on how to improve your order fulfillment process. 

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What Does Order Fulfillment Mean?

Order fulfillment includes the task of putting together an order and sending it to the customer, as well as the activities that help with these tasks, such as product inventory management, supply chain management, quality assurance, order processing, and customer service. The main objective is to deliver the customer’s order as quickly, affordably, and efficiently as possible.

How Order Fulfillment Works: Order Fulfillment Process Steps

The order fulfillment process takes place in one or more fulfillment centers and is comprised of the following steps:

1. Receiving Inventory

Incoming goods need to be counted, inspected, and inventoried regardless of where they are coming from or in what forms, in order to make sure the number is right and the quality is acceptable. Bar codes or SKUs are used for receiving, storing, and retrieving the delivered goods from storage.

2. Inventory Storage

After being received and inventoried, goods are either distributed right away or placed in short- or long-term storage. Instead of holding things for future sales, it is preferable to store items for only long enough to aid in the orderly distribution of commodities for current sales.

3. Order Processing

Order processing is a key component of order fulfillment, and effective order-processing workflows can help maintain customer satisfaction. The workflow includes product picking, transporting the product to the packing team, performing damage inspection, choosing packing materials, and finally, packing and moving the product to the shipping center. 

4. Shipping

At this stage, it is necessary for you to choose a third-party fulfillment carrier that will handle order shipping. Your shipping carrier will choose the optimum delivery method based on the order’s dimensions, actual package weight, and other requirements (as supplied by the shipping center). The shipping center then updates the order status so that sellers are informed when orders are shipped. 

5. Returns Processing

Returns processing entails conducting quality assurance inspections and sorting returned goods accordingly. The returned items are then restocked, shipped back to the retailer or manufacturer for credit or refund, or sent to a recycling facility.

Why Is Order Fulfillment Important

Order fulfillment is one of the most important aspects of any sale. If you succeed at the fulfillment stage, all of the hard work you put into finding the proper clients and converting them will have been worthwhile. On the other hand, all of your efforts will be in vain if the order you deliver is inaccurate, late, or damaged. 

In addition, order fulfillment has an impact on a number of other areas of your company, including inventory management. To make sure your fulfillment process runs well when demand spikes, you must order extra products and keep them on hand. You might also need to hire more employees and rent a bigger fulfillment warehouse to store your goods. Therefore, if your order fulfillment process is defective, all of these other operations will suffer. 

When using the proper order fulfillment process, you can:

• Always have the appropriate number of products on hand
• Reduce your shipping costs
• Prevent underselling or overselling
• Offer better customer service 
• Reach out to new customers
• Lower your operating expenses
• Spend more time working on expanding your company.

9 Tips to Improve Your Order Fulfillment Process

As mentioned before, your order fulfillment strategy is the backbone of your business and can make or break your company’s profitability. Here are 9 tips on improving your current order fulfillment process.

Choose a good order fulfillment software

Choose a system that allows for end-to-end tracking of orders, inventories, and any other business-related activities. ApparelMagic is PLM and inventory management software that has integrated warehouse management and fulfillment tools that enable you to improve on-time deliveries and customer experience. ApparelMagic offers speed and transparency throughout the allocation and pick-and-pack process, as well as invoicing and delivery in one secure, cloud-based system that is always accessible.

Optimize your inventory management

You can’t work on order fulfillment If you don’t have the products you need to ship. For both order fulfillment and supply chain management, you must have reliable, real-time data on item availability. Good inventory management software is really important for this task as it guarantees inventory accuracy. This means you will have no issues with understocking or excess inventory, and you will always have adequate supplies on hand. 

Select the locations of your distribution centers wisely

If you have the option of housing goods in different places, the closer a facility is to your customers the better. If, on the other hand, you want to handle order fulfillment from only one location, having that location centrally positioned is your best option. 

Choose the right order picking strategy

It’s critical to make the most of your human resources if you want to keep prices down and efficiency high in your order fulfillment operation. Typical order-picking techniques include zone and batch order picking (in which several orders are picked simultaneously), discrete order picking (in which each order is selected separately), and other techniques meant to cut down on travel time and speed up picking.

Choose the right shipping company

Even though it can appear straightforward, there are several factors to take into account when selecting a shipping carrier. You must first be certain that the company you select can successfully ship to your clientele. Are the majority of your consumers in urban areas or remote, hard-to-reach areas? Can the company you choose rapidly ship little, delicate things or extremely huge shipments without breaking them or losing them? You might need to conduct some research to compare shipment costs and consult with other business owners to find out which shipping method and commercial carriers they use for their products.

Practice demand planning

Your entire order fulfillment process should be able to handle an increase in demand levels. You can predict and get ready for potential fluctuations in demand by reviewing prior volumes and noticing significant increases (for example, around holidays that have an impact on your sales).

Set clear expectations

When setting customer expectations, it’s always best to underpromise and over-deliver. When an order is received, it’s best to establish clear expectations and then put in the effort to fulfill them. If anything seems to be taking longer than expected, let your customer base know as soon as possible so they know what to expect and don’t end up disappointed. 

Prepare for customer returns 

Even while you strive to provide each and every one of your customers with a flawless experience, mistakes, flaws, and shipping delays will occasionally occur. No matter who was at fault—you, your customer, or a supplier—it is best to be ready to make things right with as little fuss as possible.

Measure and review key metrics

It’s difficult to improve your order fulfillment process if you don’t know where adjustments are required. Choose the most important metrics, monitor them over time, and check them regularly. Some of the KPIs you can’t afford to ignore are on-time shipping, order cycle time, perfect order percentage, order picking accuracy, order fill rate percentage, etc. 

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How Do You Choose an Order Fulfillment Strategy?

Businesses can choose from a variety of order fulfillment models and strategies. You might favor either internal or external fulfillment, depending on the capabilities and resources available in your organization. 

If you have the resources on hand, conducting fulfillment in-house gives you complete control over shipping accuracy, delivery schedule, operations, human error, and shipping costs. With internal fulfillment, you are responsible for hiring the workers, maintaining the company warehouse, and guaranteeing that each item is shipped flawlessly. Many of these difficulties disappear when you are outsourcing order fulfillment.

On the other hand, order fulfillment may be better off being totally outsourced to a third-party fulfillment company if fulfillment and logistical resources and abilities are limited. This makes it possible for your team to concentrate on creating and marketing the product, which frequently results in increased predictability. 

Your path to the ideal solution should be guided by a thorough financial analysis, but you should also consider the products you’re selling, prospective shipping choices, and fulfillment costs to make the best choice for your company.

The Bottom Line

Although improving your entire fulfillment process might seem like a difficult task, it is one of the best methods to gain a competitive edge and increase your company’s profits. 

Hopefully, the order fulfillment process steps described in this article will help provide an answer to the question “What does order fulfillment mean?”, and the improvement tips will give you an idea of where to start when it comes to improving the process for your own organization. 

There isn’t one fulfillment method that works for all companies. Whether you decide to adopt a hybrid model of fulfillment or outsource to a third-party fulfillment partner, the important thing is to identify the optimal method that satisfies the requirements of both your business and your customers. Your fulfillment procedures should be made more efficient in order to maintain client satisfaction and business profitability.

Inventory forecasting is crucial, particularly in light of the extreme variability in consumer preferences and supply networks. In order to achieve precise inventory forecasting, you need to gain insights from data analysis, industry trends, and market expertise. As Thomas Schleicher, a well-known authority in the field of measurement science, said, “Good forecasting is a blend of both art and science.” 

In this post, we’re covering the fundamentals of inventory forecasting, along with formulas, inventory forecasting methods, and more. 

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What Is Inventory Forecasting 

Inventory forecasting is the process of determining the required levels of inventory for a future time period by evaluating sales history, historic data, seasonal trends, and upcoming events. Thanks to accurate forecasting, businesses are able to fulfill orders with sufficient inventory while at the same time preventing spending money on surplus inventory.

Why is Inventory Forecasting Important 

Inventory forecasting is a crucial component of inventory management. If done correctly, it might bring a wide range of benefits for your company. Here are some of the most important ones:

Reduced stockouts and overstocks

Inaccurate inventory forecasting can sometimes result in stockouts. Although there is a demand from consumers, you don’t have enough inventory to meet it. Keeping excess stock, on the other hand, could not only increase the inventory carrying costs but also have long-term material waste effects. An excess of unsold goods may end up as solid waste in the case of spoiled or expired food products, items with a short shelf life, such as cosmetics or electronics, and out-of-style items that can’t sell, such as clothing or luxury goods. 

By ordering the right amount of the goods, you can take advantage of bulk ordering without tying up money in unneeded inventory while at the same time saving on storage space. 

Less manual labor

Accurate inventory forecasting reduces labor and warehousing expenses because you are better equipped to handle changes in demand. Inventory forecasting systems make it simple to anticipate future inventory requirements and lower inventory carrying costs by automating reordering, projecting labor requirements, and accounting for variations in order volume. For warehouse management and all employees, this saves time and manpower.

Increased customer and supplier satisfaction

Having products on hand increases the likelihood of repeat business and keeps customers satisfied. Understanding supplier procedures and schedules, on the other hand, also helps you reduce stock-outs and maintain positive relationships with them. 

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Forecasting Inventory Methods

Although intuition and past experience may have some bearing, formulas and data are the foundation of the most effective inventory forecasting. There are four different inventory forecasting methods you can use: 

• Qualitative forecasting: When faced with a shortage of historical data, some businesses turn to their customers. Focus groups and market research are two common sophisticated data collection techniques used in qualitative forecasting.
• Quantitative forecasting: Using historical data, this method is thought to be more accurate than qualitative forecasting. The forecast is typically more accurate the more data an organization has. Time-series forecasting, which builds a model to anticipate future trends using temporal quantitative data, is an example of quantitative forecasting.
• Trend forecasting: Using growth data and historical sales, this technique extrapolates potential patterns while excluding seasonal impacts and inconsistencies. This forecasting method benefits from more detailed sales information that demonstrates how individual customers and customer types are likely to make purchases in the future. Using this data, analysts can develop new strategies for promotion and sales.
• Graphical forecasting: It is possible to graph the data for trend forecasting in order to display peaks and valleys in sales. The graphical approach is preferred by certain forecasters because it’s visual and offers lots of insights. This allows them to identify patterns and add slanted trend lines to graphs to analyze directions that could otherwise go unnoticed.

How to Choose the Right Inventory Forecasting Method

So, how do you decide which of these forecasting inventory methods is the best for your business?

First, think about the data you already have and the data you can obtain. The process will vary depending on the company. Established businesses should employ the quantitative method, inventory analysis, and historical data as a starting point. Newer businesses, on the other hand, might want to begin by gathering qualitative market data.

The most accurate forecasting relies on multiple data sources and forecasting inventory methods. Forecasters can get started with quantitative data, then add qualitative data, and finish with inputs specific to the industry. 

What’s important is to ensure that the model takes into account the constantly shifting and frequently unanticipated trends and changes in the market that can instantly change customer demand (fashion trends or styles). Forecasters should also create several models based on historical data and various possible scenarios for tackling more difficult problems, such as a worldwide pandemic like Covid-19. 

Inventory Forecasting Formulas 

Understanding inventory forecasting formulas is crucial if you want to develop more complex forecasting models. They can also aid in measuring operational efficiency and pointing up potential improvement areas. Here are a few formulas you can use:

1. Safety stock

Safety stock is your reserve inventory to ensure that you have enough products on hand to fulfill customer orders. Use the following formula to calculate it:

(Maximum daily use X Maximum lead time] – (Average daily use X Average lead time) = Safety stock

2. Average inventory

This formula measures the amount of inventory you have available at any given time. Keeping it consistent over time can help you prevent stock-outs while maintaining enough inventory to meet customer demand. 

(Starting inventory + ending inventory) / 2 = Average inventory

3. Inventory turnover

The inventory turnover ratio helps you see how many days it will take to sell the inventory you have on hand. A higher ratio points to strong sales.

By using the inventory turnover ratio, you can determine how many days it will take to sell your current inventory. A higher inventory turnover ratio indicates stronger sales. 

Cost of goods sold (COGS) / Average inventory = Inventory Turnover Ratio 

4. Economic order quantity (EOQ)

Economic order quantity is the ideal order quantity during regular times. Here’s how to calculate it:

EOQ = √2DS/H

Where D is the demand rate, S is setup costs, and H is holding costs

5. Reorder point formula

To determine the reorder point, you need to know your average daily unit sales, average lead time, and amount of safety stock. To determine your reorder point for a particular item, multiply the average unit sales by the average lead time, then add the amount of safety stock quantity.

6. Lead time

How soon after placing an order does a consumer receive the product? This formula assesses the effectiveness of your company and provides insight into customer satisfaction.

Order process time + Production lead time + Delivery lead time = Lead time

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Inventory Forecasting Best Practices

Like anything else in business, following best practices in inventory forecasting will yield better results. Here are a few steps you can take to improve the effectiveness of your inventory forecasting.

View stock levels in real time. In order to accurately forecast future demand, you need accurate and timely data. Real-time inventory tracking enables you to maintain track of current stock levels at any given time and determine whether or not your estimations were accurate or far off. If your forecasts were incorrect, be sure to determine the cause. Knowing why this occurred will enable you to use lessons from the past and modify your forecast as you go.

Know the optimal forecast period for your company. Should you make forecasts for a month, a quarter, or a year? Without using this time frame as the foundation for all of your planning, you run the risk of falling short of meeting the proper stock levels at the right times.

Get the right personnel. The ability of experienced employees to analyze data and generate accurate forecasts is a key component of inventory forecasting. You need personnel that can understand, apply, and, most importantly, analyze data in order to make the best judgments possible for your company.

Take notes you will use for future planning. This will provide context and ensure that you don’t overlook the cause of a shift in product demand. List any future flash sales, well-known holidays, and other occasions that might force your sales or production cycle to either slow down or ramp up. This way, you can review your notes from the prior year or years to make plans for the subsequent year.

Use the right software. Inventory forecasting can be challenging without specialized inventory management software. Thanks to inventory software like ApparelMagic, you’ll be able to manage your stock without using laborious and ineffective manual processes. There are many available options on the market, so take your time to choose the best solution for your industry and business. 

The Bottom Line

When it comes to inventory forecasting, there is no magic wand or universal approach that works for everyone. Even if you use the best inventory forecasting tools available, inventory forecast is still just an estimate based on knowledge and experience. However, by regularly monitoring inventory turnover, stock counts, and other trends in your customers’ orders, you’ll be able to plan more precisely in the long and short-term.

Inventory management software can be a crucial part of your business’ success by ensuring you have the correct amount of stock on hand to meet consumer demand, without needlessly tying up money in excess inventory. 

Regardless of what type of products you sell, inventory shrinkage is probably a worry for you. This is due to the fact that your company’s productivity and profitability can significantly suffer if inventory is damaged, lost, or stolen.

Inventory shrinkage can lead to warehouse shortages, increased inventory costs, longer delivery times, poorer customer experience, decreased customer satisfaction, decreased customer loyalty, increased operational costs, problems with cash flow, and ultimately loss of profits. 

As money is at stake, it is of course in your company’s best interest to identify and prevent shrinkage.

In this post, we provide an answer to the question, “What is inventory shrinkage?”, go through the main factors that cause inventory shrinkage, show you how to calculate it, and provide 6 tips for reducing it.

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What is Shrinkage in Inventory?

Inventory shrinkage occurs when the real, physical inventory level is lower than what is listed on a company’s inventory list. To put it another way, the business inventory listed on your company’s ledger is either missing or is very damaged and can’t be sold.

Inventory shrinkage could be slowly eating away at your profits by negatively affecting your cycle stock, i.e. the amount of inventory available to meet the increase in demand during a given time period.

When businesses discover that the retail inventory records kept by accounting and the physical counting do not match, they often notice inventory decline at year-end inventory counts. Using inventory software can help you maintain track of your inventory all year long and prevent such unpleasant surprises, although annual physical inventory audits are always necessary.

Reasons Behind Inventory Shrinkage

Inventory shrinkage can be attributed to a number of factors. However, employee theft, administrative mistakes, vendor fraud, and shoplifting are the usually main causes:

• According to the 2021 National Retail Security Survey, shoplifting incidents are at an all-time high, and each one costs retail organizations about $461 in lost revenue. When it comes to employee theft, although less common, it nevertheless costs an average of more than $1,550 per dishonest employee. Internal theft, sadly, can be difficult to detect and stop. Employees can easily steal merchandise under the radar because they have access to more remote parts of the store and are familiar with the sales and inventory management procedures.
• Human error, including mistakes by cashiers and salespeople, errors when receiving/sending stock deliveries, errors during inventory audits and data entry, etc. are also common reasons for shrinkage in inventory. With 56% of shops using it, POS analytics is still the most widely used loss prevention strategy.
• Errors and fraud by vendors may be one of the least common shrinkage sources, accounting for only 4.8% of inventory shrinkage cases, but they can still happen. 
• Damaged items are unavoidable in the retail industry, regardless of whether they are damaged during shipping or by customers while they are shopping. When you find damage, be sure to swiftly change your stock count and get rid of the affected item. If you don’t, your counts will be incorrect and the missing unit will appear to be a shrinkage problem.

How to Calculate Inventory Shrinkage 

In order to find out how much shrinkage your company experiences, you’ll need to calculate your inventory shrinkage rate. This rate, which is expressed as a percentage, shows how much retail inventory your company lost as a result of damage, theft, mistakes, etc. Low shrinkage rates mean less inventory lost.

In order to calculate the shrinkage rate, you need to know the COGS (cost of goods sold), the amount of inventory you have, and how much of that inventory was lost as a result of shrinkage. 

Start by determining the cost of products sold, then deduct that amount from your inventory.  The amount that is documented can be found by deducting your COGS from it.

Documented inventory = Inventory – COGS

After determining how much inventory you ought to have, find out how much inventory you actually have. This will show you your inventory loss. Divide your inventory loss by the amount of documented inventory to calculate the inventory shrinkage rate. To get the shrinkage rate of your company’s inventory, use the formula below:

Inventory shrinkage rate = (Documented inventory – Actual inventory) / Documented inventory

To convert your inventory loss rate into a percentage, multiply it by 100.

6 Efficient Ways to Prevent Inventory Shrinkage 

​​Retailers can reduce the quantity of inventory lost to shrinkage each year by implementing a variety of measures. We examine six of the most effective ones below.

1. Invest in an inventory management solution

Keeping accurate stock records can be difficult if you’re currently using an inventory spreadsheet or pen and paper. Additionally, it is nearly hard to calculate and monitor the inventory shrinkage rate when a company is unable to swiftly assess the inventory that is on hand.

Thankfully, modern inventory systems like ApparelMagic are easy to set up and may make it simple to compare inventory records to the actual outcomes of your inventory audits. You’ll always be aware of how much stock you have on hand, where it is located, and how it’s being kept thanks to ApparelMagic. Using these figures, you may easily determine the shrinkage rate of your inventory, let your accounting staff write off stolen, damaged, or lost goods, or look into the history of any inventory that is experiencing shrinkage.

2. Consider using RFID technology

While QR codes and barcodes are sufficient to keep track of your inventory, RFID (radio-frequency identification) technology can help lower the danger of shoplifting by allowing businesses to monitor inventory as it moves throughout the store and can even set off an alarm when a customer leaves.

RFID technology can be costly which is why it is recommended for high-traffic retail companies that must maintain their profit margins.

3. Perform regular physical inventory counts

One way to reduce the risk of inventory shrinkage is to conduct a surprise physical count of inventory from time to time (say every couple of weeks). A surprise physical count (in addition to your regular cycle count) ought to take place entirely at random in order to prevent any pre-planning or manipulation. They will allow you to get a clear picture of what’s really happening in your warehouses or distribution centers without having to count every item on hand. 

Once you have performed a count of a small inventory batch, you can quickly determine the shrinkage rate of your stock. If it exceeds your permitted limit, you’ll know to add up everything else and identify the problem’s underlying cause.

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4. Count your orders as soon as they are delivered

Counting your orders as soon as they arrive is the best way to prevent supplier fraud. By doing this, you can make sure you’re getting exactly what you paid for. 

Inform your vendor as soon as possible if you notice an issue with a delivery. In addition, double-check faulty goods that are filtered from purchase orders and follow up with the supplier to make sure your buy manager isn’t involved in any dubious transactions.

5. Consider employee screening 

When hiring new employees for your store or warehouse, proper references and background checks are essential in order to identify any potential problems. It’s simple to hire someone right away after a good interview without thinking about their background, but a little investigation can go a long way.

It might be worthwhile to get in touch with the candidate’s past employers to learn how successful they have been at managing inventory. Any previous inventory management practice and experience, especially when done successfully, is an important advantage. Having dependable workers in charge of your business inventory offers priceless peace of mind and lowers the risk of damages, theft, and errors.

6. Invest in a security system

There are many hardware systems with software support on the market that can help you prevent inventory theft.  CCTV cameras, intruder detection, door auto lock systems, and door access control are some of these systems.

To prevent theft and unauthorized entry to your warehouse, you can also construct a custom system in accordance with your needs and budget.

The Bottom Line 

Inventory shrinkage occurs in the retail industry either because of theft or administrative errors.

It is a serious problem that requires a comprehensive analysis of your business procedures and identifying loopholes. Once these loopholes are identified, you will need to find a clear way to reduce inventory shrinkage. 

In this article, we provided an answer to the question, “What is shrinkage in inventory?”. We also looked at how to calculate inventory shrinkage, the problems that frequently result in shrinkage, and strategies for preventing shrinkage in the future. Be sure to use this knowledge to prevent future inventory shrinkage within your company. An effective loss prevention plan will help you eliminate, or at the very least significantly reduce, inventory shrinkage rates.