Supply chain analytics are extremely important when it comes to managing supply chains, manufacturing, warehouses, and other aspects of inventory. These analytics tell you what to reorder, when to reorder, and how much to reorder. These are all things you need to know in order to keep your business humming along at an efficient pace.
Here are four key supply chain analytics you must track to make the most of your time, warehouse space, capital, and other valuable resources. We’ll describe how to calculate them and then give examples and explanations of each so you’ll get a clear picture of what they mean in a practical sense.
Days of Supply
The Days of Supply is found by dividing the Inventory On Hand by the Average Daily Usage/Sales. Whether the items in question are assets that are used internally or products that are sold, the fact is that they are meant to be consumed by someone at some point.
Example: You have 100 copies of a product in stock and you normally sell 5 every day. So your Days of Supply are:
- 100 / 5 = 20
There is 20 days’ worth of this particular product in stock at the moment. This calculation is nice and simple, but the calculations will get a bit more complicated as we progress.
Inventory Turnover Ratio
The Inventory Turnover Ratio is calculated by dividing the Annual Cost of Goods Sold by the Average Annual Cost of Inventory on Hand.
Example: If you have an Annual Cost of Goods Sold of $1 million and an Average Annual Cost of Inventory on Hand of $100,000, your Inventory Turnover Ratio would look like this:
- 1,000,000 / 100,000 = 10
If this company sells electronics or other types of hardware, this could be a perfectly healthy Inventory Turnover Ratio. However, if this is a grocery store or a food producer, this could be considered a low ratio. It all depends on the type of business and its industry. If your business sells items with short expiration dates then it needs to have a higher Inventory Turnover Ratio. The opposite is true if you sell items with extremely long expiration dates.
There are two steps to this one. First, add the Lead Time, Safety Stock, and Basic Stock together. Second, multiply the result by the Unit Sales Per Day.
Example: Let’s say your Lead Time is 7 days, which is how long it takes new products to arrive in your warehouse. Your Safety Stock is 10, which is the number of days’ worth of items you have in stock to prevent shortages as you wait for the new items to arrive. Your Basic Stock is 30, which is the number of days’ worth of items you normally have in stock. And the Unit Sales Per Day is 5.
Plug those numbers into the equation and we get:
- (7 + 10 + 30) x 5 = 235
So when the quantity in stock falls below 235, we know it’s time to reorder more in order to avoid any possible problems. We don’t necessarily have to reorder more immediately when that happens, but it’s just a helpful rule of thumb.
Economic Order Quantity
There are several steps to this, which we will go through one by one. First, multiply Annual Demand in Units by the Cost Per Order. Multiply that total by 2 and then divide it by the Annual Carrying Cost Per Unit. Finally, take the square root of it to arrive at the Economic Order Quantity.
Example: The Annual Fixed Costs are $50,000 and the Cost Per Order is $10. The Annual Carrying Cost Per Unit is $20. So this is how it looks:
- 50,000 x 10 = 500,000
- 500,000 x 2 = 1,000,000
- 1,000,000 / 20 = 50,000
- √50,000 = 223.61
This number tells you the ideal number of copies of a certain product to reorder at a time to make the most of your space while keeping carrying costs as low as possible.
Stay on Track
By calculating your Days of Supply, Inventory Turnover Ratio, Reorder Point, and Economic Order Quantity for each and every part in your inventory, you have a good chance of maximizing efficiency. That might seem like a daunting task because it’s a moving target and you’re most likely adding new products and discontinuing others from time to time, so it’s hard to keep up with everything.
The way to make this all doable is to use a supply chain management solution, such as Fishbowl, to handle most of the legwork. Run reports to instantly generate inventory turnover ratios, reorder points, and other key data points and then set up the system to automatically alert you when it’s time to reorder, based on solid data.
Fishbowl and its supply chain analytics will put you in control of your supply chain.
There are many supply chain analytics a company can use to monitor its effectiveness in that area. Some of the most important analytics are:
- Days of supply
- Inventory turnover ratio
- Reorder point
- Economic order quantity