Key metrics to prioritize inventory replenishment [Video]
With so much data available, it can be difficult to figure out where to start when prioritizing what you need to order based on customer demand. Keep in mind that not all of your inventory and not all of your replenishment needs are going to be the same.
Take a look at a couple of different metrics:
Forecast lost profit
How much will you miss out on if you don’t order these items? That can help to put things in perspective. If you’re going to miss out on $100, $200, maybe that’s just low priority. It’s not worth your time to go through replenishing those items. If you’re going to miss out on much larger amounts, then that is worth your time and that’s a much higher priority. That can also help if you’re strapped for cash or you’re thinking about cashflow needs, you can really figure out, “What do we need most urgently and what can we wait on?”
Forecast lost profit is calculated as stockouts during the lead time * (price – cost price)
Stockouts are the days when a product is out of stock.
The forecast is the projected customer demand shows as sales in units for the “days of stock” period. The forecast is calculated using the sales velocity and the sales trends in recent months (are sales increasing or decreasing?). Sales velocity is the rate of sales excluding out of stock days. Seasonal products emphasize the sales trends from the prior year rather than the most recent months.
Replenishment retail value
What does the retail value, the revenue that you’re going to bring in when you replenish the items that you need? Even better yet, look at your replenishment profit. How much are you really going to make once you take out your expenses based on the number of items that you’re ordering?
Replenishment retail is the replenishment * price.
The retail value of products to cover the “days of stock” period. Retail price is the price the customer will pay.
Replenishment profit is the replenishment * (price – cost).
The expected profit of products needed to cover the “days of stock” period.
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