What is Inventory Analysis?

For ecommerce and DTC (Direct to Consumer) businesses, understanding how inventory moves and behaves is crucial for making informed decisions that drive profitability and customer satisfaction. Inventory analysis is the process of examining your inventory to identify patterns, assess inventory health, and optimize stock levels. This analysis helps ecommerce businesses determine which products are driving revenue and which are draining resources.

In this blog, we'll explore the importance of inventory analysis for ecommerce, different inventory analysis methods, and how to apply these techniques to ensure effective inventory management.

Why is Inventory Analysis Important for Ecommerce?

Inventory is one of the largest investments for most ecommerce businesses. Effective inventory analysis ensures that your stock levels align with customer demand, reducing the risk of overstocking or stockouts. By applying the right inventory analysis techniques, you can:

• Optimize Stock Levels: Ensure you're carrying the right amount of inventory to meet demand without overcommitting capital.
• Improve Cash Flow: By maintaining optimal stock levels, you can free up cash that would otherwise be tied up in excess inventory.
• Enhance Customer Satisfaction: Avoid stockouts by predicting demand accurately, ensuring that your products are available when customers need them.

For more insights on optimizing inventory, check out our guide on optimal inventory levels in ecommerce.

Key Inventory Analysis Methods for Ecommerce

There are several methods and techniques that ecommerce businesses can use for inventory analysis. Choosing the right one depends on your goals—whether it’s understanding product profitability, managing inventory costs, or improving overall inventory efficiency.

1. ABC Analysis

ABC Analysis is a powerful tool for categorizing inventory based on its value to your business. The idea is to classify inventory into three categories:

• A items: High-value products that contribute significantly to sales but require tighter inventory control.
• B items: Moderate-value products that are less critical but still important.
• C items: Low-value products that are easy to manage and have the least impact on revenue.

This method helps you focus your attention and resources on the most important inventory items. For a deep dive into ABC analysis, visit our blog on ABC analysis for ecommerce inventory.

2. FIFO and LIFO Methods

First In, First Out (FIFO) and Last In, First Out (LIFO) are inventory valuation methods used to determine the cost of inventory sold and the value of remaining stock.

• FIFO assumes that the oldest inventory is sold first, which is ideal for products with expiration dates or seasonal items.
• LIFO assumes that the newest inventory is sold first, which can be beneficial for businesses experiencing rising costs.

Understanding these methods helps ecommerce businesses better assess the value of their inventory and make decisions based on cost and product shelf life.

3. Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a method used to determine the optimal order quantity that minimizes both ordering and holding costs. It involves calculating the ideal order size to reduce the total cost associated with inventory management. This method helps balance order frequency with inventory costs.

To explore inventory purchasing strategies that help you optimize EOQ, check out our inventory purchasing guide for ecommerce.

4. Inventory Turnover Ratio

The inventory turnover ratio measures how often inventory is sold and replaced over a certain period. A higher turnover ratio indicates efficient inventory management and strong demand, while a low turnover ratio may suggest overstocking or slow-moving products.

To calculate the inventory turnover ratio, use the formula:

Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory

This metric helps ecommerce businesses identify which products are contributing to profitability and which need more strategic planning.

5. Dead Stock Analysis

Dead stock refers to inventory that hasn’t sold for a long time and is unlikely to sell in the future. Identifying dead stock helps ecommerce businesses take corrective actions, such as running clearance sales or bundling slow-moving products with popular ones to move them out.

Regularly performing dead stock analysis ensures that your inventory doesn’t drain valuable resources, allowing you to invest in products that generate higher returns.

Best Practices for Inventory Analysis in Ecommerce

• Use an Inventory Management System: Implementing a robust inventory management system is key to accurate inventory analysis. Systems like Fabrikatör provide real-time inventory tracking and analysis tools that simplify inventory decisions. Learn more about ecommerce inventory management in our comprehensive guide.
• Regularly Analyze Your Inventory: Inventory analysis is not a one-time activity. Regularly reviewing inventory data helps keep your inventory strategy aligned with changing demand and market conditions.
• Integrate Multiple Methods: Use a combination of methods like ABC analysis, FIFO, and inventory turnover ratio to gain a complete understanding of your inventory’s performance and potential areas for improvement.

How to take leverage Inventory Analyses?

Inventory analysis is a critical process for ecommerce and DTC businesses looking to optimize their inventory management practices. By understanding and implementing different inventory analysis techniques—such as ABC analysis, FIFO and LIFO methods, and dead stock analysis—you can ensure that your inventory is aligned with market demand, improving cash flow, profitability, and customer satisfaction.

Tools like Fabrikatör can help streamline inventory analysis, providing insights and automation to keep your inventory efficient and effective. To learn more about how Fabrikatör can help you manage and optimize your inventory, visit our site.

About Fabrikatör

Fabrikatör is an inventory management tool designed for seamless integration with your Shopify store, focusing on streamlining your inventory operations. Key features include:

🔮 Inventory planning & forecasting
📦 Simple purchase order creation
🔄 Management of preorders and backorders
📊 Custom report generation, such as the Sales Performance Report, for data-driven decisions

In Fabrikatör, the "Sales Performance Report" serves as a form of ABC Analysis. Imagine tracking sales performance for products like The Sea, Summer, The Grass, and The Sun. Based on their sales, Fabrikatör categorizes items in this report as follows:

• A: Outstanding performers
• B: Moderate performers
• C: Lower performers
• D (Idle): No sales in the past 30 days

With Fabrikatör’s Sales Performance Report, you can:

📊 Gain insights into inventory composition to prioritize management efforts
📦 Add the Sales Performance Report to your dashboard for a real-time view of inventory
🛍️ Focus on critical items, optimizing inventory, procurement, and storage strategies
🔍 Spot operational improvement opportunities
👍 Enhance customer experience
📈 Boost overall profitability in the competitive eCommerce market

Get a free demo today to see how Fabrikatör can enhance your inventory management strategy.