 Inventory loss - 

The loss of goods is a prime contributor to inventory differences, ultimately accounting for about one
percent of all sales. This loss (or shrinkage) is a direct result of shoplifting, employee theft, or even supplier fraud.

 Misplaced inventory - In a nutshell, misplaced inventory takes place when an item or product has been uploaded to the
database and then put in the wrong physical location. This also occurs when customers pick up a product and then place
it somewhere else.

 Human error - Possible human errors could include everything from inaccurate physical counts to picking and
placement mistakes made by employees. While this wide-spreading cause of inventory variance is inevitable and tough
to eradicate, excellent staff training is a great way to prevent this issue.

 Poor management of returns - When a customer returns items, there's a risk that those products will be incorrectly
coded and then delivered back into storage with mismatched data. This highlights another opportunity for companies to
place airtight methods and processes in place for returns, alongside effective training for all staff members.

Inventory variance can be calculated by using a variance formula that works by either monetary
value or percentage. Following these steps can help businesses get one step closer to reducing stock
errors, ensuring inventory accuracy, and minimizing profit loss.

Formulas-
Dollar Amount Value Variance = Cost of Goods Sold (COGS) in Dollars - Usage in Dollars
Percentage Variance = (Variance in Percentage / Usage in Dollars) X 100

Step 1- Find the COGS.

To determine the cost of goods sold, simply multiply the number of units (or products) sold during a
pre-determined period of time by the cost per unit.

COGS = number of units sold x cost per unit.

For example, take the month of December for a bicycle shop. If 20 bikes were sold at a cost of $250
each, then the formula would be-

20 (bikes sold) X $250 (the cost) = $5000(COGS)

Step 2- Determine the inventory usage value.

Find and calculate this usage by discovering how much stock was utilized over a set time period.

Inventory Usage = Starting Inventory + Received Product Inventory - Ending Inventory

Going back to the previous example of the bicycle shop, this formula seeks to calculate the inventory
usage of bikes in the shop over those 31 days. The starting inventory is what actually in-store is
before December 1 and the ending inventory is what is left on the 31st after the shop closes. To
ensure this formula is used correctly, the bike shop must further factor in the number of bikes ordered
in December which is the received product inventory.

Hypothetically, if the number of bikes at the beginning inventory was 30, the ending inventory was 8,
and the company ordered 5 new bicycles that month the formula works as such-

30 + 5 - 8 = 27 (inventory usage)

With each bike costing $250, the monetary value of the inventory usage is-

27 bikes X $250 (cost) = $6,750 (usage in dollars)

Step 3- Calculate inventory variance using the formula.

Using the figures calculated by the previous formulas, the final step is to plug in the appropriate
numbers to determine the variance.
This can be calculated for December as follows-

$5000 (COGS) - $6750 (Usage in $) = $1750 (variance in $)

When expressed as a percentage this would be -25%.

While Excel is a great way to input and calculate these formulas, variance reports should be produced
as frequently as possible to ensure inventory accuracy. To do this, businesses should look towards
investing in inventory management software, which can produce variance reports instantly with no
manual calculations involved.

1. Wholesaler - This is a useful product sourcing method for businesses that are not looking to
assemble the products themselves and allows companies to easily scale up or down depending on
demand. However, the expectation of the wholesale supplier method is to buy in bulk, meaning a
larger upfront cost. Additionally, because it is widely used by retailers across various industries, the
products purchased are likely to be similar to those of competitors.

2. Manufacturer - Recommended for eCommerce retailers and online stores, this is beneficial as it
doesn't involve the middlemen and means direct contact between the business and the manufacturers.
Although this is often more affordable than wholesale options, they do still require a minimum order
quantity, making this difficult for small businesses.

3. Drop shipping - Companies using this method will never even have to come into contact with the
products. By listing the items that the business intends to purchase from the supplier, then having the
supplier deliver this directly to the customer when it is ordered, the businesses themselves will no
longer have to worry about packaging, shipping, or storage.

4. Existing Marketplaces - Depending on the desired products, it's possible to purchase inventory
from other sellers, then mark up these prices to make a profit. While this is uncommon as it can
increase the final price of products, it does provide businesses with market research insight regarding
the popularity of certain items and price points.

5. Trade Shows - The purpose of these events is to bring together retailers and suppliers. Trade
shows, as well as exhibitions and conferences, are a place to see new and upcoming products.
However, their relevance would depend on the industry of your business and its location.

6. Product Sourcing Companies - This involves hiring a third party to find the best products at the
best price on your behalf. However, businesses taking this route would also need to factor in hiring
costs and check the legitimacy of these companies before moving forward.

7. Sourcing Platform - With the rising popularity of online stores, it should be no surprise that there
are online platforms entirely dedicated to marketplace B2B retail product sourcing. Online
marketplaces bring together suppliers and retailers and can be useful for making comparisons
between products and prices. However, it is important to keep in mind that these platforms are also
easily accessible to competitors.

8. Directories - Similar to sourcing platforms, directories are lists of potential suppliers. However,
unlike an online marketplace, it doesn't provide the research information regarding these vendors,
leaving businesses to do their own research and contact the suppliers directly.
  Product sourcing is a continuous process - Even when things are going well, the need for product sourcing during
this time is as high as ever. It is important to keep in mind that even as products are being sold quickly, the restocking
of these items should be seamless. To customers, it should appear that the supply of products is endless in order to meet
the demand. An easy mistake to make would be waiting until the sales percentage has decreased before beginning the
product sourcing process again.

 Conduct market research - The Importance of market research cannot be overstated. Take into account the customer
demand for the product, the target audience, and the durability of the product is it an item that lasts a long time or
something that customers are likely to purchase regularly? When conducting market research, also keep in mind the
desired price and work within that budget as much as possible.

 Utilize a proven model - Use a well-known and commonly used method when product sourcing. Look into existing
sourcing methods used for a specific type of product and consider adopting these techniques as they've already been
tried and tested.

 Choose local manufacturers - Although this does not apply for every case, as a rule of thumb, the closer to the
manufacturer, the better. When sourcing products from overseas, the profit margins tend to be smaller. It is important to
think about what method will suit the business needs best - a small bundle or a bulk buy from manufacturers. Keep in
mind that buying bulk quantities comes at a reduced cost, as it is cheaper for manufacturers to produce and sell large
quantities of the product. However, it could result in increased holding and labor costs.

 Inventory turnover - This measures how many times inventory items are replaced within a given timeframe. A higher
turnover rate means that the company's merchandise is spending less time in the warehouse and store shelves. This, in
turn, means their carrying Xcosts are low.

 Item fill rate - This their orders successfully. However, a fill rate of over 100% means the business could be back-
ordering merchandise due to stockouts.

Inventory on-hand report

Knowing how much merchandise a business has in stock and how much is allocated to outgoing orders goes a long way towards
keeping the supply chain efficient.

An inventory on-hand report, or stock control report, allows inventory managers to measure the disparity between available stock
and allocated stock, preventing stock outs and reducing carrying costs.

This report will show information such as-

 Overall inventory levels

 Levels of products and product categories that need to be reordered
 Barcodes/SKUs of on-hand stock

Inventory valuation report

Inventory valuation reports show the total and individual asset values of on-hand merchandise. These reports also break down the
cost of acquiring, carrying, and transporting inventory, as well as the potential profits from their sale.

Inventory valuation reports typically contain the following metrics-

 Total inventory value - The sum of the cost of items held multiplied by their quantity.
 Total retail value - The sum of the price of items held multiplied by their quantity.
 Potential profit value - The difference between total retail and total inventory value
 1. List inventory items in a column
List down all merchandise at the SKU level (i.e. all variations for an item) in a column. Note
that the more SKUs the company carries, the longer this process will take.

2. Create a separate column for each items description

Next, create another column and list down the descriptions of each item. Again, go down to
the SKU level and be sure to note the details of each item to clearly differentiate them from
one another.

3. Create a column for price

Assign a price to each item in another column. This allows the spreadsheet program to
calculate the total value of your inventory based on price and quantity.

4. Place remaining stock in a column

Add the number of units for each inventory item in a separate column. Update this column to
reflect new purchase orders and sales orders.

5. Choose a time period

Finally, decide how often the inventory report needs to be updated. Companies with high
sales volumes will have to update this report more frequently due to the high level of
inventory activity.

 Weekly and monthly - Frequent reporting will help sales and marketing teams create plans for promotions to drive
sales of slow products and generate interest in new merchandise.

 Seasonal - Seasonal reports allow businesses to compare year-over-year inventory data during busy selling seasons,
such as the holiday season.

 Based on the nature of business - Reports can also be based on the specific industry a company engages in. Retail
businesses, for example, need frequent inventory updates to maintain sufficient inventory levels at all times and ensure
customer satisfaction.

Whatever your frequency of reporting may be, what's clear is that spreadsheet-based reports are limited in their ability to provide
real-time information.

In order to enhance the efficiency and accuracy of their inventory reporting, businesses should consider investing in inventory
management software. These programs automatically capture inventory data from POS systems and produce accurate reports
based on real-time inventory conditions whenever you need them.

1. Re-evaluate Your Marketing Efforts

For operations managers, marketing is often low on their list of priorities. But marketing strategy
can be used to sharpen your product mix and SKU count. For example, the 4Ps of Marketing,
which stand for product, price, place, and promotion, can help managers understand what their
customers need, how much they're willing to pay for it, and where they're willing to make
purchases.

In any case, assessing your marketing strategy will help you develop your value proposition - the
core of what customers get from an enterprise and its solutions.

2. Go Over Your Product Catalog

With the marketing strategy and value proposition sorted out, the next step is to go over the
product catalog and see which SKUs align with the marketing plan. This will be easier to do if
the product, price, and place of the marketing mix have been determined.

Think of this step as spring cleaning. Organize your SKUs into three categories-

 Keep
 Remove
 Set aside
Knowing which products to set aside can be tricky, especially if the value proposition isn't clear. But be ready to revisit them as
soon as your marketing efforts gain more traction.

Let's look at a pet store as an example.

 We can use the 4Ps framework to decide whether to focus more on basic and affordable pet items or specialized, high-
end products.
 Is there a need to sell items in an online shop? Or do the majority of customers prefer to visit a physical store?

3. Analyze Customer Behaviors

Established businesses that use some kind of recordkeeping system, whether its supply chain management software or inventory
spreadsheets, will have a history of sales orders for each customer.

Go over this data and sort customers by total order value in the last 12 months. This should reveal whether the demand for
products (or category of products) is evenly spread out across all customers or the bulk of sales are dominated by a small group
of customers.

For example, a home furnishings store that uses this method may learn that the majority of their sales come from property
developers and investors that want high-end furniture. The store can then prioritize SKUs for premium raw materials.

For smaller businesses, something as simple as quick interviews and customer satisfaction surveys will reveal plenty of
information regarding the items consumers prefer from the enterprise.

4. Predict product switching and cannibalization

Another benefit of having historical customer sales data on hand is being able to look at instances of product switching and
cannibalization.

 Product switching is when customers switch between brands for parity products - think fast-moving consumer goods
(FCMG)
 Sales cannibalization occurs when existing products lose sales when new products are introduced

By looking at sales records, it's possible to detect seasonal product switching and cannibalization. For example, a clothing store
may see a surge in customers buying holiday-themed apparel during November and December. An electronics store will know to
reduce stocks of certain smartphones when new models come out during October.

5. Balance high carrying costs and low SKU counts

Finding that middle ground between high carrying costs (which includes the cost of warehouse storage space, rent, and utilities)
and low inventory counts can be the single most challenging thing supply chain managers have to deal with. But there are a few
tricks to find this balance.

For B2B companies, long-term contracts ensure that any inventory the business keeps is already locked up and spoken for. Strong
agreements with vendors also allow businesses to reduce their prices and freight costs through economies of scale.

For retail companies, their managers will have to learn to liquidate slow-moving and outdated stock sooner than later. Don't be
tempted to hold on to these SKUs in the hopes of selling them at full value as they have most likely become obsolete.

1. Self-storage
Many small businesses often opt for self-storage options and use existing spaces to store their
stock.

Pros

 Self-storage is cost-effective, as it utilizes a small storage facility or a converted garage to store products.
 The inventory is always on hand and easy to access.
 Works well for small businesses, or businesses that don't move a lot of inventory.

Cons

 Self-storage can be frustrating and may lack a clear organizational strategy.

 It can cause miscalculations or damaged inventory.
 It cannot expand to match business growth.

2. Warehouse storage
Warehouse storage is the most traditional of all inventory storage methods. A central warehouse handles all inventory, receives
shipments, and sends products to store locations or customers.
Pros

 Warehouse inventory is organized and managed by trained warehouse staff.

 It's cost-effective when moving large amounts of inventory.
 At a warehouse, inventory management systems can easily be implemented to minimize inventory errors.

Cons

 Warehouse staff are needed to handle shipping and receiving.

 It may not be in the best location to quickly fulfill orders.
 The space may be too large or too small for the business demands.

3. Outsourcing inventory storage to third-party providers

Outsourcing inventory storage can be a great way to manage stock volumes and relieve the stress of hands-on inventory storage.
These third-party providers will handle receiving, packing, and shipping, freeing up time and resources for businesses to focus on
growing their operations.

Pros

 Handles all inventory storage and shipments to maximize efficiency and shipment speed.
 Uses a network of storage centers to optimize delivery times.
 Added inventory security at the warehouse.

Cons

 With third-party providers, the business isn't managing their own inventory.
 If something goes wrong, it may take longer to find a solution.
 Third-party providers are more costly than handling inventory storage in-house.

 Central Storage - Using a central storage location is an easy way to access and track inventory all in one place. From
the central storage location, inventory can be shipped to all locations when needed.

 Point-of-Use Storage - A point-of-use storage system delivers inventory directly to store locations or point-of-use
locations. If the business orders inventory on an as-needed basis, storing inventory at the point-of-use will lower
operational costs, and reduce inventory error.

 Block-Stacking Storage - Block-stacking is an inventory storage method where products are stacked on the floor or on
pallets. Using this method will keep costs low, but it's only efficient if inventory is moving quickly. Block-stacking can
be a very successful method when the same type of inventory is placed in the same stack to stay organized.

 Rack Storage - Rack storage allows for more organization and ease of access. Last-in-first-out inventory management
systems can use racks that are filled from one end and emptied from the other. First-in-first-out systems have wider
racks that can be accessed from various points.

 Shelf Storage - Using shelf storage with bins is a great way to store small items or items of several sizes. Placing
inventory in bins allows for clear organization, and bins can be stationary or mobile to suit inventory storage needs.
Some shelf and bin storage processes even have automated systems to retrieve bins.

 Dry Storage - Grocery stores, restaurants, and food businesses use dry storage to store shelf-stable items such as pasta,
bread, canned foods, and rice. Food requires cool temperatures, proper ventilation, and additional cleaning measures.
The ideal temperatures for dry storage techniques range from 50 to 70 degrees, and humidity levels should not exceed
60%.

 Cold Storage - Another type of inventory storage used by food businesses is cold storage. This includes using
refrigerators and freezers to preserve food quality and prevent food spoilage.
1. Use a robust inventory management system to track inventory - This software will show all
inventory at a glance, provide accurate inventory reports, and even analyze trends for inventory
forecasts. With a click of a button, reorder points can be set, and new stock can be ordered.

2. Determine reorder points for each inventory item, and set automatic notifications for low
stock - Avoid over or underordering by setting these thresholds, and ensure great inventory
management. For example, items that sell quickly should be restocked more frequently, and have
higher reordering points.

3. Perform inventory checks on a daily or weekly basis - Inventory checks are essential to monitor
product volumes, reduce loss, and prevent spoilage. Depending on the type of inventory, check
volumes daily or weekly and perform inventory reconciliation.

4. Think about upgrading the inventory storage system - If the current solution isn't able to keep
up with consumer demands, or inhibiting business growth, its time to upgrade the inventory storage
method. This will make it easier for staff to access stock information, and improve management and
tracking processes.

When deciding what type of inventory storage method to use, think about the current and future
needs of the business, and decide if self-storage, warehouse storage, or third-party options match the
business goals. The chosen method should allow room for growth as the business scales its
operations.

While it may seem tedious for business leaders to learn yet another mathematical formula, turnover
ratios only require a handful of information and can be completed in three simple steps.
For businesses utilizing inventory management software, this information, as well as other inventory
tracking metrics, may already be available in their systems.

Step 1-
The first step to calculating the ideal inventory ratio for a company is finding the cost of goods sold
(COGS). The COGS is an important figure to calculate as it refers to the total costs incurred by the
company to produce the goods being sold.

To calculate the COGS, it’s important to take a look at income statements and find three key pieces
of information- the starting inventory, the net inventory purchases, and the ending inventory.

Starting Inventory + Net Inventory Purchases - Ending Inventory = COGS

If Company ABC runs a clothing store where the most popular product is a blue t-shirt, they can
determine the inventory turnover ratio for this product to see if they are storing the appropriate level
of stock to meet consumer demands.

The income statement states that they had a starting inventory of $300,000 and a net purchase of
$640,000 worth of blue t-shirts over the year, but only had $120,000 worth of inventory by the end of
the year. These figures can then be plugged into the formula to determine the COGS.

$300,000 + $640,000 - $120,000 = $820,000

Step 2-
The next step involves figuring out the average inventory (AI) on hand. The formula for this figure
can be expressed as the following-
(Starting Inventory + Ending Inventory) / 2 = AI

Since the starting and ending inventory figures have already been established, the AI is-

($300,000 + $120,000) / 2 = $210,000

Step 3-
Now that the heavy lifting is out of the way, the inventory turnover ratio can be easily calculated. As
a formula, this ratio is expressed as-

COGS / AI = Inventory Turnover Ratio

since we have already completed both formulas, we can simply plug in the figures to determine our
inventory turnover ratio.

$820,000 / $210,000 = 3.90