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Key Inventory Formulas

The key inventory management formulas retailers need to know include inventory turnover, sell through rate, days of inventory outstanding, safety stock, reorder point, and economic order quantity. These formulas help analyze inventory efficiency, sales performance, typical stock turnaround time, backup stock needs, replenishment triggers, and optimal order sizes. Retailers also benefit from inventory management software that automates tracking, forecasting, purchasing, and other tasks to help seamlessly manage multi-channel stock levels and replenishment in real-time.

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Ijay Alabot
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19 views

Key Inventory Formulas

The key inventory management formulas retailers need to know include inventory turnover, sell through rate, days of inventory outstanding, safety stock, reorder point, and economic order quantity. These formulas help analyze inventory efficiency, sales performance, typical stock turnaround time, backup stock needs, replenishment triggers, and optimal order sizes. Retailers also benefit from inventory management software that automates tracking, forecasting, purchasing, and other tasks to help seamlessly manage multi-channel stock levels and replenishment in real-time.

Uploaded by

Ijay Alabot
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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KEY INVENTORY

FORMULAS
Key inventory management formulas
It’s not just common terminology you need to know when it comes to inventory
management. There are some specific formulas to take note of too.
We’ll be going into greater depth with how and when to use these formulas later on
in this guide. But here’s a quick run through to use as a reference point:

1) Inventory turnover
The inventory turnover ratio measures how many times your inventory is sold over a
given time period. It’s, therefore, a critical analysis metric showing how effectively
inventory is being managed overall.
The formula takes cost of goods sold (COGS) over a specific period, and divides it by
average inventory over the same period.
Generally speaking, higher inventory turnover rates indicate better performance and
efficiency. This is because the company would be getting through its inventory stocks
more often – minimizing carrying costs per unit.
This gives an insight into the overall
efficiency of a company and its inventory
management processes.

The higher the inventory turnover rate, the


more efficient a business is at getting
through its inventory.
Find COST OF GOODS
• Formula
• The cost of goods sold formula is calculated by adding purchases for the period to
the beginning inventory and subtracting the ending inventory for the period.

• Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory

• The beginning inventory for the current period is calculated as per the leftover
inventory from the previous year. Any additional inventory which has been
purchased or produced is added to the beginning inventory. To arrive at the Cost
of Goods Sold, products that were not sold are subtracted from the sum of
beginning inventory and additional purchases.
COGS = BI + Purchases - EI
• Given :
• Year 2021 BI = 9611 boxes
• Year 2021 Purchases = 34,699 boxes
• Year 2021 EI = 2,883 boxes
•
• = (9,611 + 34,699) – 2,883
• = 44,310 – 2,883
• = 41,427 COST OF GOODS SOLD FOR FY 2021
INVENTORY TURNOVER RATIO

FORMULA • IT = 41,427/9,611+2,883
= Cost of Goods Sold / (BI + EI) • 2
2 • = 41,427/6,247
• Given:
• = 6.6
• = 1 : 6.6
• COGS = 41,427 boxes
• BI = 9,611
• Meaning the entire invty. were
• EI = 2,883 sold almost 7x/year.
•
• 2) Sell through rate
• Sell through rate takes the amount of inventory a retailer receives,
and compares it against what is actually sold over a given period. It’s
usually expressed as a percentage:
This helps analyse if your investment in
a particular product is working out well.
Low sell through rates indicate you
either overbought or priced too high,
while high sell through rates indicate
you may have under bought or priced
too low.

It’s a great way to make decisions on


future purchase quantities for a
product or from a particular supplier.
Sell thru rate
• Formula: No of sales/stock on hand x 100 • SELLTHRURATE
• Given: = Sales FY 2021/Stock on Hand x 100
• Price/Item = Ph 20.00 = Ph 828,540.00/2,883 boxesx100
• FY 2021 = 41,427 = 287.33 x 100
• FY 2021 EI = 2,883 = 28,738 %
• A) Find Peso Sales
• = Price/item x No. of Goods sold for FY
2021
• = Ph 20.00 x 41,427
• = Ph. 828,540.00

• =
3) Days of inventory outstanding (DIO)
Days of inventory outstanding (DIO) measures the typical number of
days it takes for inventory to turn into sales.
It’s hard to draw insights from just one calculation. But you should
look into typical industry standards, and also keep track of whether
you are trending up or down as time goes on
Days of inventory outstanding (DIO)
• FORMULA = Aver. Invty Cost/COGS X 365 • DIO
• Find • = Php 2,427.95/Ph 2,269.97 x 365
• A) Aver. Invty Cost/day • = 390 days

• 2021 Total Invty (BI+Purchases)


• PROVE:
• 365 days
• DIO = Total Invty – Stocks Sold
• = (9,611 + 34,699) x Php 20.00
• = 44,310 – 41,427
• 365 days
• = 2,883 EI or stock on Hand
• = 44,310 /365 • No. of stocks sold/day
• = 121.40 bxs /day x Php 20.00 • = 41,427/365 = 113.49
• = Php 2,427.00 • No. of days stocks supply.
• COGS/day • EI = 2,883 / Daily sales
• = Php 828,540/365 • = 2,883/113.49
• = Php 2,269.97 AIC/day • 25 days
• = 365 days + 25 days = 390 days stocks
4) Safety stock
• Safety stock is the backup stock
needed to meet unexpected supply
problems and/or sudden changes in
demand.

• Bear in mind that you want to have


enough safety stock to meet
demand. But not so much that
increased carrying costs puts a strain
on cash flow.
SAFETY STOCKS

• SS = maximum sales volume x lead time


• Given :
• max sales volume/day = 115 bxs
• max lead time = 15 days
•
• Compute for SS
• = 115 x 15 days
• = 1,725 bxs
• 6) Economic order quantity (EOQ)
• EOQ is a formula that helps
calculate exactly how much
inventory to order. It takes into
account a company’s typical
demand, ordering costs and
carrying costs to provide the most
economical figure possible:

• This is obviously quite a


complicated formula to use. But we
cover this in greater depth in
Chapter 4: Purchasing Inventory.
• 5) Reorder point
• The reorder point helps determine
when to order new inventory. It is a
specific point in time that acts as a
trigger to re-order as soon as stock
has diminished to that certain level.
• It’s important to consider the lead
time for new stock to be delivered
when setting reorder points. Enough
stock should be leftover to keep up
with demand before the newly
purchased inventory becomes
available for sale.
Reorder point
• FORMULA = Aver. Lead Time x Max. Daily Sales Volume + Safety
Stocks

• Given = 15 days lead time


• Daily Sales volume = 115 boxes
• Safety Stock = 1,725 bxs

• = 15 x 115 + 1,725
NOTE THAT 3,450 BXS IS GOOD FOR 30 DAYS SUPPLY WHICH
• = 3,450 bxs. COULD BE REGARDED AS FLOOR STOCKS LEVEL.
Inventory management software
• An inventory management software or system does all the heavy lifting for a retail business when it comes to
its inventory. It tracks inventory additions and subtractions automatically, without relying on manual, paper
or spreadsheet processes.
• Systems like this are becoming more and more popular among growing businesses as they tackle the
challenges of modern multichannel and omnichannel retail.

• Choosing an inventory management system that’s right for your business can be a tricky process. But here
are a few pillar features of good software:

• Real-time tracking. Syncs a live inventory figure across all sales channels and warehouses.
• Forecasting. Uses past sales data to project estimated inventory requirements into the future.
• Purchasing. Helps manage all suppliers and purchase orders for quick and easy stock replenishment.
• Rules & automations. Allows creation of inventory rules, e.g. to dictate how much stock shows on each sales
channel.
• Cloud-based. Accessed from anywhere with data never being overwritten by team members making
changes.
• Many systems will also help manage and automate a plethora of other operational tasks – like sales &
wholesale orders, picking & packing, shipping, and returns.

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