Business is easy when items in your e-commerce store sell like hotcakes. Products fly off the shelf, nothing is going to waste in your warehouses, and you can reinvest the profits right back into your business.
However, what happens when some of your inventory languishes in storage? Merchandise is hard to move, warehouse fees pile up, and profit margins shrink instead of growing.
Prevent wasting time and money on these items. Let’s examine what inventory aging is, how you can monitor it, and consequences of ignoring it.
Aging inventory is any item that sits in your warehouse and doesn’t sell either quickly or at the full retail price. The age analysis always starts with the receiving date, meaning when an item is added to inventory.
Assuming you manage your stock using a first in, first out (FIFO) strategy, the items received longest ago will the first ones to fulfill customer orders. In order to compute the age of a product, go through your historical stock backwards, subtracting stock intakes from the current stock until you reach zero.
As an example, let’s say you received 50 units on September 1 and 50 units on October 1. As of October 15, there are 75 units in stock. That means 25 units from the September 1 receiving are still in stock and have an age of 45 days. There are 50 units in stock from the October 1 receiving and those have aged only 15 days. FIFO management of your stock means that 25 units from the September 1 order were used to fulfill customer orders before stock that was received later.
Why Use Inventory Aging?
Having the right tools to gauge and monitor aging inventory means you can respond to slower sales before it becomes a real problem. Inventory Planner is one program that let you see what your FIFO is and what is aging, all at a glance.
There are three key benefits in using inventory aging to improve the health of your sales:
- You can avoid long-term storage fees. This is beneficial when using either FBA or 3PL warehouses, who will often charge you over a certain date range if products sit around too long and take up valuable storage space. You don’t want to send your warehouse a lot of items that don’t move out in a short length of time, and that will therefore cost you additional fees.
- You have fresh products in front of your customers. Depending on what you sell – especially food items with an expiration date – items can literally go stale. They can also be metaphorically stale. If you are a fashion retailer, few customers want to buy articles of clothing from several seasons ago.
You want good turnover in your inventory. That increases your cash flow so you can invest in inventory to get the quickest ROII (return on inventory investment). It is in your best financial best interest to not have cash sitting on the shelves.
From a branding perspective, you want to have fresh items in front of customers. You want your marketing to highlight what you currently offer, and customers want to know they can come to you to purchase the hottest items.
- The inventory aging report complements the overstock report. Think about your non-productive inventory. Where are you not getting a good ROII? How long have products been stuck in storage?
The aging analysis is a snapshot of your inventory right now, and overstock looks ahead to the end of your planning period. Put them together and you can ensure you have merchandise that won’t sit on the shelf too long.
Consequences of Not Paying Attention to Inventory Aging
If you don’t keep your aging inventory in mind, it will eat into your margins, cost you more, and not produce the optimal amount of profit. Here is what happens if you ignore inventory aging:
- If items have been sitting around for a long time, you must mark them down, which cuts into your profits because you sell below retail price.
- You might completely lose out on revenue if items expire. You can’t sell it or even donate it (if it’s a food item). There is no ROII and you can’t recoup even a minimal profit.
- Long-term storage fees. Depending what your FBA and 3PL warehouse fees, that is a real cost to remember when calculating profit margins.
- There are opportunity costs of not making a better investment in your inventory. If you invest in slow-moving inventory, cash is tied up there and not doing anything for you. Better investments mean that items turn over faster, you generate more cash, and you can invest that into your business or take home as profit.
While it can be painful to think about items that aren’t selling, you simply can’t afford to ignore it. Properly calculating inventory again will give you more insight into your retail business and permit you to adjust inventory accordingly. In the long run, you will have a better handle on your business and more money in your pocket.