Understanding Inventory Analytics and Segmentation

Josh Zhang
May 3, 2021

Managing inventory is crucial for any retailer, e-commerce brand, distributor, or manufacturer. In this article, we visit why it's crucial to have an effective inventory dashboard and inventory segmentation.

On this page:

  1. Benefits of Inventory Dashboards
  2. Common Inventory Management Methods
  3. How Explo Can Help

Why Establish Inventory Dashboards

Think you don't need an inventory dashboard, or that your business is operating fine without one? Let's take a step back and walk through some of the benefits of an inventory dashboard.

  • More control over your business: Inventory dashboards make comparing inventory, tracking how your inventory ages, and tracking inventory balance easier than ever. With proper statistics and visual cues, participants make decisions 64% faster with an overview map than these without, according to a study performed by American Management Association.
  • Better inventory balance, happier customers: Think about the last time your order didn't get delivered on the time it promised, how it derailed your schedule, and how you felt afterward. Even with a short delay, the butterfly effect of not being able to fulfill orders can be costly for both your business and your customers. With a more informed inventory balance, oftentimes you would be able to have a faster response time, better fulfill your orders, and give customers a better impression on both your product and service.
  • More accurate & realistic goals: Without a thorough understanding of your inventory, it's almost impossible to set future goals that are reasonably obtainable. With a report from PeopleVox, 33% of businesses determined failing in sticking to their goals and process as their top pain point at growing the business. With a deep understanding of your inventory, you are more likely know what your customer desires, how well your business is fitting in the market, and how you can better adjust your planned inventory to achieve your goals.
  • Less error-prone: When it comes down to tracking inventory, people often choose to use manual inventory tracking with excel or spreadsheet rather than software. While your inventory status can be tracked with pen and paper for more customizability and an easier start, manual inventory tracking often yields more errors, according to a controlled study in 2009 at UNLV. On average, participants make 10.23 errors with only visual confirmations when given 30 data sheets to process the data. The data being processed is often large and complex, so even 1% error rate can be costly to the overall growth of the business.

Common Inventory Segmentation Methods

A common concept that is often skipped over when setting up an initial inventory management system, is segmentation. We'll go over a few of the most common methods for inventory segmentation below.

ABC Analysis

ABC analysis, short term for 'Always Better Control', is a method that categorizes items based on their value. Not all items have equal value and using the Pareto Principle, typically, 80% of a business's value comes from 20% of its inventory. Knowing that it's often optimal to split your inventory into three categories, A, B, and C.

  • 'A' inventory includes items that have the highest value and gives the business the most revenue upon selling, which should be refilled as soon as possible and never go out of stock.
  • 'B' inventory holds items that frequently come and goes, however, does not yield as much profit compared to items in the 'A' inventory.
  • 'C' inventory is the rest of the items that rarely sell, and account for the lowest portion of your inventory value.

ABC analysis works especially well for common business inventory management, as it clarifies what items are the most important to business, and helps to reduce items that a business may not want or need at the moment.

HML Analysis

Similar to ABC analysis, HML analysis also looks at the value of each item upon analysis, however, ignores the sales value, and only focuses on cost, thus the name 'High Medium Low'. This is a great method for businesses to see how much it would cost them to be fully stocked, and thus stay on budget and only get necessary things.

FSN Analysis

FSN analysis looks at an item's rate of consumption, frequency of restocking, and groups them into categories of fast-moving, slow-moving, and non-moving. Analyzing items in the inventory using FSN analysis can be very helpful to identify active items in the inventory, getting rid of non-moving items to avoid carrying over cost, and make sure the inventory is moving at the desired speed.

VED Analysis

For production settings, VED Analysis may be the best approach for your organization.

VED analysis focuses on how critical it is for an item to be in stock for production. Rather than focusing on the value of the product, VED Analysis categorizes items based on necessity, Vital, Essential, and Desirable.

  • Vital category consist of items that are needed for production to occur, where nonavailability severely impacts production.
  • Essential category is more about items that have replacements and alternatives, where nonavailability can be tolerated for a short period of time.
  • Desirable category are items that are optional for the production, a long period of nonavailability is acceptable.

How Explo Can Help

With a solid inventory dashboard and segmentation, you'll be on the right track to build and scale your inventory management system. Check out how retail platforms use Explo to automate their inventory management, and more.

If you would like to learn more about inventory management, along with how Explo can help, feel free to reach out to yize@explo.co! We would love to help to bring your business to the next level with dashboards and data visualizations.

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