Inventory Aging and How to Avoid Its Negative Consequences
Inventory age often suggests whether an item might prevail with a seasonal promotion, a substantial discount, or being sold in a product bundle. Average inventory estimates the amount (or value) of a companies inventory over a specific time period. Knowing your stock’s age provides valuable insights into your customers’ demand. And you can use these insights to build more accurate inventory plans based on what customers actually want (or don’t want).
In most cases, you can consider inventory dead if it’s been on your shelf for more than 1 year. If it’s that old and the inventory turn metric shows it’s slow moving, it may be time to invoke some of the actions I just mentioned. A business focusing on CPGs will analyze aging inventory much more differently than a business specializing in clothing. Aging inventory can impact a business’s ability to adjust and perfect its SKU selection within its storefront. When considering the effectiveness of a product lineup, aged inventory by SKU can also show which products are more popular and which don’t seem as attractive to the market.
Smart sensors can monitor storage equipment health, predicting maintenance needs to reduce downtime. Automated systems can optimize picking routes to improve overall warehouse efficiency. Efficient warehouse management is integral to minimizing storage costs (like long-term storage fees) and preventing aging inventory.
The table of data shows the history of purchases we made from our vendor for this part. For example, on March 5, 2021, we received 25,000 gaskets and on February 11, 2021, we received 25,080 gaskets. The remainder of the table shows our purchase history for this part number back to 2018.
- Efficient warehouse management is integral to minimizing storage costs (like long-term storage fees) and preventing aging inventory.
- For example, Odoo and IBM allow you to generate an inventory aging report.
- Simply put, storing excess inventory is bad for business; not only does a product surplus signal ineffective inventory management, but it’s bound to have a negative impact on your revenue, as well.
- If we have 116,000 in stock and our most recent purchase was 25,000, then we know we have 25,000 gaskets that have been in our storage for 66 days.
Meanwhile, brands that run stock age reports likely will identify this quality problem. And they can switch suppliers before overstocking damaged goods or redesign a higher-quality version of the product. That way, they’re not stuck accumulating carrying costs that’ll wreck margins and lower their gross profits. You can start off by sweetening the deal for your sales team — give them a bonus for each piece sold or another attractive incentive.
Optimize your inventory control strategy
It might include details such as the style or item number, warehouse, quantity, pending transactions, and available to sell. Investors can use the average age of inventory to evaluate a company’s operations. The average age of inventory gives insight into how fast a company is turning over its inventory.
Key Takeaways of the Inventory Aging Report
Inventory values can fluctuate from month to month, so an average gives you a better idea of what it cost. With an aged inventory report, your purchasing department won’t accidentally place another order for that item number. With optimized reorder points and inventories, your warehouse has more space that can be utilized for new items. This sort of communication and transparency can do wonders for your supplier relationships. The average age of inventory tells the analyst how fast inventory is turning over at one company compared to another. The faster a company can sell inventory for a profit, the more profitable it is.
The system updates balances 24/7, so it’s impossible to overlook the slow-moving items. Investing in advanced inventory management tools that provide real-time insights into aging inventory is a proactive step toward a better inventory control strategy. These tools can automate the generation of aging inventory reports, making it easier for businesses to stay ahead of potential issues. You can generate an inventory aging report manually using spreadsheets, but this process can be time-consuming and error-prone. Consequently, many retailers use inventory management software that can automatically generate inventory aging reports in real time.
This process can also help inform other departments about upcoming work that will be needed to correct aging inventory challenges. For example, if a certain SKU isn’t moving quickly, the marketing department might want to be consulted to determine what kind of promotions will be needed to address the challenge. Additionally, aging inventory might inform ecommerce business owners about existing agreements within the supply chain to pivot a strategy before it leads to a larger cash flow problem. An accurate aged inventory report can be a crucial financial health check for your business.
Utilizing the knowledge and information you have from aged inventory reporting is the key to making data-driven sales decisions. With the correct data, you can prevent making arbitrary reductions in prices. Or order more inventory without knowing how much you currently have on hand. This is particularly useful for small enterprises just beginning their eCommerce journeys. Hasty inventory transactions can have significant long-term adverse effects on any business.
Lastly, to find the average age of your inventory, divide the number of days in one year, 365, by the inventory turnover ratio. The number you receive reflects how many days your inventory takes to be sold or replaced. Demand trends help you know how well a product is doing by showing your customer base’s fluctuations in consumer demand and buying patterns. Maybe there was a time when an item sold well for six months after its release, but then it hardly moved any units at all during the second half of that year. Inventory age often suggests whether or not an item might succeed with some promotion–seasonal sales, discounts on those items, or bundling them together. Excess inventory is the accumulation of products that have been overproduced but are still being stored.
The Role of Invoicing and Analytics for 3PL Cash Flow Management
Holding inventory audits regularly ensures that your stock records accurately reflect what is in your warehouse. This increases inventory accuracy and clarifies which stock items aren’t moving. aged inventory reports provide an insight into your purchasing behaviours. The average age of Company A’s inventory is calculated by dividing the average cost of inventory by the COGS and then multiplying the product by 365 days.
Helps anticipate potential cash flow issues
If you absolutely cannot sell https://1investing.in/ there is always the option to donate items to schools, charities or community groups. Not only does this offer potential tax benefits but it also provides an opportunity to raise your profile and perhaps to even attract new customers through a public relations event. Conversely, Company B also owns inventory valued at $100,000, but the cost of inventory sold is $1 million, which reduces the average age of inventory to 36.5 days. For instance, once you integrate your system with Inventoro, you can see the age of your inventory right away. With accurate lead times and timely data-based reports, you can seamlessly optimize your inventory in the long run and get rid of your aging inventory for good. In a manual inventory system, you have to record all the movements of stocks on a piece of paper.
The inventory department needs to review the inventory aging report to determine which items aren’t moving. After these items have been identified, you need to investigate further to see why the products haven’t sold. It could be that you’re ordering too much inventory, so you have excess on the shelf. If so, reduce your order for those products, and communicate to sales to make sure you order products that move quickly so you can meet customer demand. Calculating average inventory age is an important part of inventory management, as this knowledge helps you shine a light on inventory inefficiencies and/or lost profits. To work out inventory age for your own product listings, you’ll need to know your average inventory cost, cost of goods sold (COGS), as well as your inventory turnover ratio (ITR).
For example, suppose you offer a 5-year warranty on your product but by the time you produced this product for your customer, the gasket used was 2 years old. With a shelf life of 3-5 years for the rubber, the product may fail for your customer within 1-3 years because of the gasket’s age. If your gaskets are made of natural rubber and have been sitting on the shelf for two years, your goal should be to use them up before they become three years old.
When you regularly run an aging inventory report, you can identify which products turnover slowly and which aren’t selling. The more aging inventory you have in your warehouse, the less space you will have to store your new inventory. You will need to buy new storage or to reallocate your current inventory to be able to store more inventory. Therefore, the facility costs will increase, which will lead to an increase in your overall production costs. We have seen how to calculate inventory age for each item carried and how it can enhance your knowledge of the true state of inventory.
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