Inventory Vs Stock: Top 4 Differences, Definitions and 9 Ways to Manage Them Efficiently in 2022
Both inventory and stock are key components of any eCommerce company. They are directly responsible for a business being able to sell products in the first place. If companies don’t maintain an optimum level of inventory and stock, their ability to receive orders and fulfil them often falls by the wayside. In this article, we will take a look at the differences between inventory vs stock, examples of inventory vs stock, definitions and a lot more. What is the Meaning of Stock? The number of finished goods available to be supplied to the end customer is referred to as stock. If the store sells items directly to customers to make a profit, it can also include raw ingredients. Examples of Stock: Packs of pens in storage for pen manufacturers. [contactus_uth] What is the Meaning of Inventory? Finished items, raw materials and work-in-progress products can be included in inventory. Inventory must be kept at an optimal level since it is linked to carrying expenses so that all sold and unsold products can be accounted for throughout the financial year. Examples of inventory: lids of pens, ink, refills etc. Inventory Vs Stock: Examples Examples of Stock Pen companies use the term "stock" to refer to finished versions that are kept and ready to be fulfilled since they sell a wide range of pens to the end customer. Every completed pen has an SKU number and a barcode that can be scanned to identify and locate finished products, allowing them to be fulfilled swiftly. If a pen company supplies other firms with pen casings/nibs, they will be classified as finished items and computed as stock. Examples of Inventory Plastic, ink, metal, paper, packing boxes and other raw materials that are utilised to make pens are examples of inventory. A few other examples are: Individual lids and containers before they are brought together in the pen.Products that have passed all quality inspections and have finished all stages of the manufacturing process.Materials such as casings, lid pipes, nib metals and screws are necessary for the maintenance, repair and operation of machinery used in manufacturing pens. Inventory vs Stock: 9 Efficient Ways to Manage Stock Inventory Prioritise The first and foremost way of efficiently managing your inventory is the organisation into categories, based on priority. This will help you in determining the frequency and quantity of the inventory, as well as knowing what you need regularly. It will also help you in identifying the commodities that are vital to your business though they may cost more and take longer to sell. An easy way is to divide the items of inventory into three basic categories, X, Y and Z. The more expensive items that are required in lesser quantities are put into category X and items that cost less but are required in larger quantities are put in category Z. The middle category Y consists of items that are reasonably priced and have a turnover rate higher than category X and lower than Y. Track The next step would be proper maintenance of the records that contain product specifications and other information about every item included in the inventory. These records should include essential data such as SKUs, barcode data, suppliers, country of origin and lot numbers. The price of these items should also be tracked from time to time so that you would know their availability and seasonal fluctuations which may lead to changes in the price. Examine Some firms conduct a comprehensive inventory count once a year. Other firms conduct random product checks on a monthly, weekly or even daily basis. Either way, it is a good practice to count your inventory frequently. Analyse At times, you may have to deal with an untrustworthy supplier who may jeopardize your inventory. It is important to analyze and take action if your supplier consistently fails to produce orders or has quality control issues. Address the issues with your provider to determine what is going on. Prepare to change business partners or deal with unexpected supply levels and the potential risk of running out of supplies. 80/20 rule In general, revenues from 20% of resources lead to benefits for 80% of the workforce. It is important to make inventory management for 20% of products a top priority. You should possess knowledge as to the time period for how long they last on the market as well as the number of items sold during that time. This is essential so that you don't throw away the goods that will make you the most money. Consistency The approach to inventory and stock management should be consistent. A hazy or shifting attitude will result in a mismatch between purchased orders and sales plus inventory. To maintain an efficient and successful system, a clear and straightforward inventory and stock management system should be implemented and followed by everyone in the organization. Sales In a discussion about inventory vs stock management, sales cannot be ignored. In the interest of being accurate, sales, inventory and stocks should all match up comprehensively. In addition to matching inventory and stock, sales numbers aid in assessing the items that are selling quickly and how certain events drive or lower sales. It is necessary to constantly analyze sales volumes to correctly manage inventory and supplies. Sales numbers also aid in estimating the inventory-to-stock ratio. Restocking Some suppliers offer inventory reordering services. At first glance, this appears to be a good thing: delegating the method for at least a few of your items saves you money and time. However, keep in mind that your providers may not share your objectives. They want to move their inventory, while you want to stock the best products for your business. Take the time to review your inventory and rearrange all of your items. Software In a smaller organization, you may maintain the first few items of the inventory list manually with spreadsheets and diaries. However, if your company expands, you will need to dedicate more time to managing stock than to your business or you will risk having too much or too little stock. These responsibilities are simplified by investing in good inventory management software. Before choosing a technical platform, consider what you're looking for, if it has the information you need and whether it is user-friendly or not. At the same time, you should select a solution that can be integrated into your existing systems. Key Difference Between Inventory and Stock When it comes to stock inventory, people do not find it easy to distinguish between the two. Inventory generally consists of three components: The finished product, work in progress and raw materials. For a Washing Machine manufacturer like IFB, the inventory will consist of: All the finished products, i.e., the washing machines ready to supply to the customer, whether at the retail site or warehouse.Inventory for IFB will also include all the washing machines that are under the process of manufacturing and are at different stages of completion. Finally, IFB inventory will also be inclusive of all the raw materials that the company has at its disposal for the purpose of manufacturing the same washing machines. This simply entails inventory consisting of all the items included in the manufacturing cycle of IFB, from the acquisition of raw material to the machines in the various stages of production and, finally, the end product. Now let us consider what the stock will be for the same manufacturer, IFB: IFB stock refers to the washing machines ready for delivery to the end-user.IF IFB supplies casing, motors or circuits to some other manufacturer, that will also be regarded as stock.We can simply say that any product that IFB sells to consumers or another manufacturer will be considered the stock of the company. Inventory Vs Stock: Comparative Table The differences between inventory and stock are listed below: [table id=25 /] Conclusion: How Does WareIQ Sets Itself Apart From Other Logistics Companies in Inventory vs Stock Management? Inventory management systems may seem like an unnecessary complication when you start your business, but as you expand and the list of products you deal in increases, it becomes highly complicated to keep tabs on stock inventory. To manage the stock inventory efficiently, there is a need for a technologically efficient system that works based on artificial intelligence and machine learning. This will ensure that the management can glance through the inventory management system and arrive at various decisions regarding any product and this is where WareIQ stands different from other Logistics Companies. WareIQ provides all these facilities that are aided with visuals and graphical representations. WareIQ clearly sets itself apart on the basis of: A single system that is capable of maintaining inventory, order and billing data.WareIQ also enables storage facilities in fulfilment centers of their own for an efficient supply cycle as required.Another amazing feature of WareIQ is the ease with which it gets set up and integrates with your system. The system is adaptable to various market fluctuations as well. [signup] Inventory vs Stock FAQS What are the different types of inventory?Inventory refers to all the items in the cycle of manufacturing; it typically includes:Finished ProductsRAW MaterialsWork-in-ProgressComponentsMaintenance and Repair Goods What is the difference in the applicability of Stocks vs Inventory?Inventory is generally used for the purpose of accounting and preparation of financial books. Stocks are typically used in day-to-day business operations. What is the use of an Inventory Management system?An inventory management system can help keep consumers satisfied by automating operations, improving stocking practices and ensuring that the things they desire are always in stock. Business owners and key personnel have a lot of options these days in choosing an efficient inventory management system. The one chosen should fit the metrics required by your business and should have a trusted consumer base. What is stock inventory control?Stock inventory control is a means of presenting and keeping track of how much stock you have on hand at a given time. It includes everything you need to manufacture a product or service, from raw ingredients to finished goods. It includes stock at all stages of the production process, from procurement to delivery to usage and replenishment.
June 01, 2022
Buffer Inventory: Meaning, Importance, Differences With Safety Stock, Benefits & Disadvantages In 2022
There are many variables and uncertainties that make operating an eCommerce business extremely difficult. Retailers constantly have to maintain the right amount of inventory to be able to fulfill orders but also not store too much to risk the items becoming obsolete or expired. Buffer stock can help businesses get through this uncertainty and can also make sure that their customers are never left waiting to receive their orders. Let’s take a look at what buffer inventory is, how it can help your business, the pros and cons and much more. What is the Meaning of Buffer Inventory/Stock? An extra amount of commodities is held on hand to meet any unexpected future demand or supply variations; this stock is called buffer stock. It is a backup stock that keeps some buffer room for any uncertainties that may arise in the future. Buffer inventory is typically used as a security net in an emergency, supply chain delays or an unexpected rise in demand. The quantity of buffer inventory you keep will be determined mainly by the items you offer, average production or order lead times and historical inventory data. A business maintains this stock in transit or on hand to guarantee no production, supply or lead time interruption. This type of stock is also known as a strategic stock, safety stock or buffer inventory. A business can make use of buffer stock at any point along the supply chain. The primary purpose is to keep production or sales processes operating smoothly. [contactus_gynoveda] Buffer Stock vs Safety Stock: What are the Differences? The words 'buffer inventory' and ‘safety stock' are used synonymously to refer to the additional stock that a business entity keeps on hand to act as a shield against supply and demand fluctuations. In certain circumstances, 'buffer/safety inventory' refers to inventory stored specifically for unexpected increases in product demand (for example, a promotion that generates more sales than planned), whereas ‘safety stock' refers to inventory retained in the event of work-in-progress products or delays due to the supplier (e.g., manufacturing shutdown). Both buffer stock inventory and safety stock serve the same function, i.e., guaranteeing an adequate inventory level to satisfy demand and fulfill orders on schedule. Why is Keeping Buffer Stock Important? Having buffer inventory is critical for your business since it allows you to save money on additional order fulfilment expenses while also providing your customers with a flawless shopping experience free of shipping delays. In addition, like any other security net, buffer inventory may help you improve your operations. The importance of buffer stock is as follows: Buffer inventory may be located at any point along the supply chain and is meant to lessen the occurrence or severity of stock-out incidents, resulting in improved supply chain continuity and customer service.It can be used in manufacturing or other inventory-related scenarios to guarantee that unexpected shortages or requests may be fulfilled with some assurance.Safety stock is often retained during uncertainty about the product's demand or lead time.The quantity of buffer stock a company decides to keep on hand on a general basis can have a significant impact on its operations.Overstocking can lead to excessive inventory carrying costs. But, conversely, stock-outs can repeatedly occur if there is insufficient stock. As a result, firms must strike a careful balance. Buffer Inventory Formula: Top 4 Methods to Calculate Buffer Stock Several factors influence how much inventory you keep on hand to function as a buffer. There is no generic solution for establishing how much buffer stock to keep. It has to be calculated based on factors that decide your business's requirements. There are various methods for calculating ideal buffer inventory levels, but regardless of the approach you use, you'll need access to advanced analytics tools that help you control inventory by giving historical order data, SKU performance insights and demand forecasting statistics. Having the relevant data at your disposal will allow you to appropriately determine the amount of buffer inventory needed to optimise inventory storage and guarantee that orders are completed on time. Safety Stock Calculation A safety stock formula is an excellent approach to quickly estimate the ideal amount of buffer inventory in case of an unforeseen circumstance. To calculate safety stock, you first need to calculate the average daily consumption of your product and multiply it by the typical lead time, i.e. the number of days it takes between the time an order is first placed and delivered to your customer. Then deduct your maximum daily use and multiply it by your max lead time. The result is the product's safety stock number. You'll need to know the maximum daily consumption, maximum lead time, average daily usage and average lead time to calculate this value. The formula for safety stock calculation is as follows: (Maximum daily sales x Maximum lead time) – (Average daily usage x Average lead time) Hezier and Render’s Method The buffer inventory approach proposed by Hezier and Render employs the standard deviation of the lead time distribution and the required service factor (i.e., the probability that a stockout will not take place). Based on historical supply chain delays, this provides a more realistic picture of the amount of buffer inventory you should keep on hand. The Hezier and Render technique is computed by multiplying your desired service factor (Z) by the standard deviation in lead time (𝜎LT) and the extent and frequency with which the average lead time varies from the actual lead time. The formula for calculation using the Heizer and Render technique is as follows: Z x 𝜎LT Analysts utilise such a calculation when the supply is questionable. By utilising the standard deviation of the lead time distribution, it provides a more accurate picture. As a result, it delivers a more precise and accurate picture of late shipments' lead time and frequency. This model, however, does not account for fluctuations in demand. Greasley’s Method Greasley's inventory calculation approach considers the standard deviation of lead time, desired service factor and average demand. The standard deviation in lead times refers to the unpredictability or volatility in lead times. In contrast, average demand denotes the number of items required to fulfill consumer demand during a specific period. The formula is denoted as follows: 𝜎LTx average demand x Z This strategy is typically utilised when demand and lead time fluctuate greatly. However, it does not consider the number of products that are still in production and are not yet available for sale. Historical Demand-Based Buffer Inventory Another method for calculating buffer inventory is obtaining and analysing historical data by evaluating inventory and order data. When you know the inventory turnover rate, SKU performance and other details, you can sensibly assess your safety stock. It's usually a good idea to access previous order and inventory data, regardless of how you calculate the buffer inventory. Inventory forecasting necessitates substantial preparation to guarantee that your company is ready to satisfy demand constantly while remaining mindful of not purchasing too much (which may increase the costs of storing excess inventory and decrease the profit margin). With demand forecasting technologies, you can quickly combine all the supply chain data from numerous channels to present an overview of the actual product and sales insights and forecasts. Advantages and Disadvantages of Buffer Inventory Advantages The advantages of a business having buffer inventory are as follows: It assists in protecting the business against variations in demand and supplyIt aids in minimising production disturbanceIt contributes to the company's revenue stabilityBecause the firm has stock to take new orders, it decreases the odds of opportunity loss. Disadvantages Though having buffer inventory may prove to be beneficial to the business, it also comes with a few disadvantages that are stated below: Storing inventory in buffer may result in losses if the items are perishable or have limited shelf lifeBuilding and preserving might incur significant expenditures and add to the overhead costsMore space will be required to accommodate the extra inventory 5 Buffer Stock Parameters Accuracy in Forecasting Accurate forecasting is crucial to understand buffer inventory. Forecasting demand and supply can assist in determining the amount of buffer stock that is necessary. Adjustment of Lead Time The lead time is defined as the time it will take for a firm to create a particular quantity of goods. Planning buffer stock must be in tandem with the lead time or else stocking will either be delayed or arrive sooner than anticipated. Frequency of Refilling The patterns and previous frequency of refilling might assist in restocking the supply. For example, the frequency of refilling once a month can help a company prepare more effectively for unforeseen circumstances. Perishability of Products The shelf life or perishability of commodities is a critical factor in buffer inventory planning. A product with a higher rate of perishability must be handled differently than a product that does not perish quickly. Seasonal fluctuations Seasonal differences must also be taken into account while keeping buffer inventory. Since the same product may sell more in the summer than in the winter, or vice versa, buffer stock cannot remain identical for both seasons. Conclusion Inventory management is critical for any organisation that wants to stay competitive and profitable while expanding its operations. Inventory shortages can result in missed sales. But on the other hand, excessive inventory results in more storage and administration costs and therefore, lower profit margins. Working with a dependable distribution partner like WareIQ to manage your inventory helps increase manufacturing efficiency. It also liberates resources, concentration, and energy for growth and development. Taking care of essential resources is critical for manufacturing competitiveness. Businesses that decrease managerial distractions cut inventory carrying costs and can focus on core skills, thus gaining a competitive edge. Outsourcing inventory management can help you achieve these objectives. [signup] Buffer Inventory FAQs What is buffer stock?Buffer stock is extra inventory stored by retailers in their warehouses. It is a surplus of goods kept on hand to meet any unforeseen future demand or supply changes. How can you maintain buffer inventory?You would need to conduct analysis of prior demand and sales figures and also forecast for future demand and any global events that could affect your demand levels, either in a positive or negative way. This will help you maintain an ideal level of buffer inventory. What types of inventory are utilised as buffer stock?Buffer inventory can consist of products with a high demand level that are constantly at risk of getting depleted. Keeping these products as buffer inventory would ensure that there are no supply-chain shortages. How can WareIQ help you maintain buffer inventory?When you partner with WareIQ, you get access to our WMS to be able to forecast any spikes or dips in demand and supply so you can maintain the optimum inventory levels and adequate buffer stocks.
May 31, 2022
What is the Weighted Average Inventory Method? What are the 4 Top Methods to Calculate Weighted Average Cost (WAC)?
The weighted average inventory method is a costing method that assigns a cost to each inventory unit based on the average cost of all units available for sale during the period. This method is used when companies purchase inventory in large quantities at different prices throughout the year. The weighted average cost per unit is calculated by adding the total cost of all units available for sale and dividing by the number of units available. This weighted average inventory method is advantageous because it provides a more accurate representation of the actual inventory cost than other methods, such as first-in, first-out (FIFO) or last-in, first-out (LIFO). However, the weighted average inventory method can be challenging to implement if many units are available for sale or if the prices of units purchased vary widely. In these cases, it may be necessary to use a different costing method. What is Weighted Average Inventory? How to Calculate It? The weighted average inventory method is a calculation that assigns a weight to each type of inventory based on its value or importance. This allows businesses to assess their overall inventory levels more accurately and better manage their stock. To calculate the weighted average inventory, using the Weighted Average Inventory Method, you need to first determine the total value of all your company's inventory. Then, assign a weight to each type of inventory based on its value as a percentage of the total. Finally, multiply every kind of inventory by its weight to find the weighted average cost for that item. For example, let's say your company has three types of inventory: raw materials, finished goods and work in progress items. Assume that raw materials make up 20% of the total value of your inventory, finished goods make up 60% and work in progress makes up the remaining 20%. To calculate the weighted average inventory using the Weighted Average Inventory Method for raw materials, you would need to multiply the raw materials by their weight and divide it by 20%. You would then need to multiply the finished goods by their weight divided by 60% for finished goods. And for work in progress, you would need to multiply it by its weight and divide it by 20%. The weighted average inventory for your company using the Weighted Average Inventory Method would be the sum of the three weighted average inventory calculations. In this example, the weighted average inventory would be (20% x Raw Materials) + (60% x Finished Goods) + (20% x Work in Progress). You can use this same method (Weighted Average Inventory Method) to calculate the weighted average inventory for various types of inventory. Just be sure to assign a weight to each one based on its value or importance. The Weighted Average Inventory Method can be a useful tool for managing your company's stock. By considering the value of each type of inventory, you can more accurately assess your overall inventory levels and make better decisions about using your resources. [contactus_gynoveda] What is Weighted Average Cost (WAC)? The weighted average cost is a financial metric used to assess the overall cost of a company's products or services. This cost is arrived at by considering the different costs associated with each production stage, including raw materials, labour, shipping and overheads. The final number is then weighted according to the relative importance of each factor. In many cases, the weighted average cost can be a more accurate reflection of true cost than simply using an arithmetic average. This is because it considers the quantity of each input and the quality or importance of that input. For example, if a company's product requires expensive raw materials but very little labour, the weighted average cost will be higher than the average arithmetic cost. The WAC is often used to set prices, particularly when offered by a wide range of products or services. By considering the different costs associated with each item, a company can ensure that it charges a fair price for each one. In some cases, weighted average cost may also be used to assess the profitability of individual products or services. The weighted average cost can be a valuable tool for financial decision-making when calculated correctly. However, it is important to remember that this metric should only be one part of a much larger analysis. Other factors, such as customer demand and market conditions, will also play a role in setting prices and determining profitability. 4 Methods to Calculate Weighted Average Cost (WAC) There are various methods to calculate the weighted average cost. Some of the most common methods are: Average Cost Method The first weighted average cost method is the average cost method. This method takes the arithmetic mean of all the costs incurred in producing the good or service. This is the most basic and simplest method to calculate the WAC. Weighted Average Cost Method The second method of weighted average inventory valuation is the weighted average cost method. This method assigns different weights to different costs incurred in production according to their importance. The weight assigned to each cost is multiplied by the cost incurred. The sum of all these weighted values gives us the weighted average cost (WAC). Marginal Cost Method The third Weighted Average cost method is known as the marginal cost method. In this method, we consider only the costs incurred in producing one additional unit of the good or service. This method is useful when we are trying to decide whether to produce extra units or not. Opportunity Cost Method The fourth and final weighted average inventory valuation method is the opportunity cost method. In this method, we consider the opportunity cost of producing the good or service. The opportunity cost is the value of the next best alternative that we must forego to produce the good or service. This method is usually used when there are scarce resources and we have to choose between alternatives. Whether we use it to calculate WAC, it is important to remember that WAC is only an average cost and not the exact cost of producing a good or service. This is because different costs are incurred at different production levels and it is impossible to assign a specific cost to each output unit. WAC only provides us with a general idea about the overall cost of production. Top 3 Applications of Weighted Average Cost The weighted average cost is used when a company has inventory that has been purchased at different prices and they want to calculate the average cost of that inventory. This is important for companies because it helps them determine how much their inventory is worth and how much they should charge for their products. There are many different applications for weighted average cost, but some of the most common ones are listed below: Stock Valuation Weighted average cost is important for investors because it allows them to see what a company's inventory is worth. This information can be used to make decisions about buying or selling stock. Product Pricing It is also important for companies because it helps them determine how much to charge for their products. If a company knows the weighted average cost of its inventory, it can price its products accordingly. Marginal Costing This is another important application for weighted average cost. This technique is used by businesses to determine the costs associated with producing one additional product unit. This information is important for companies because it helps them decide how much to produce and how to price their products. Source What are the Benefits and Drawbacks of Applying the Weighted Average Cost (WAC) Method? Benefits Several benefits can be accrued by applying the WAC method and some of the most important ones are listed below: Accurate Depiction of Actual Costs Perhaps the most significant benefit is that it provides a more accurate representation of the true costs associated with production. The WAC method considers all costs incurred during the production process rather than direct costs. Less Susceptible to Fluctuations The WAC method is less subject to fluctuations in prices than other methods, such as last-in, first-out (LIFO), or first-in, first-out (FIFO). As a result, the WAC method can provide valuable information for long-term planning purposes. Adherence to Accounting Standards Finally, the WAC method is generally accepted by accounting standard-setters and is likely to be acceptable for financial reporting purposes. Drawbacks The weighted average cost (WAC) method has a few disadvantages, which include: Bias Against Older Inventory The WAC method can be biassed if the company has a high proportion of older inventory that is nearing its expiration date. Inaccurate Cost Depiction of Individual Items The WAC method does not consider the specific characteristics of each item in the inventory, so it may not accurately reflect the true costs of the individual items. Difficult to Calculate in Some Circumstances The WAC method can be difficult to calculate, especially for companies with large and complex inventory. It also may not accurately reflect a company's actual costs if it has significant changes in its inventory levels during the year. What are the Other Common Inventory Valuation Methods & How is it Different From the Weighted Average Inventory Method? Other common inventory valuation methods include the first-in, first-out (FIFO) method and the last-in, first-out (LIFO) method. These methods can produce different results from the weighted average inventory method, depending on the order in which inventory is sold. First In, First Out (FIFO) Under the FIFO method, inventory is valued at the price of the earliest units purchased first. So, if you have 100 widgets in stock and you purchased 50 at $5 each and 50 at $10 each, the value of your inventory would be $500 (50 x $5 + 50 x $10). The advantage of the FIFO method is that it more closely reflects the actual cost of goods sold (COGS). This is because the oldest units in stock are typically the ones that are sold first. As such, FIFO provides a more accurate picture of your profits. The disadvantage of FIFO is that it can lead to higher taxes. This is because, under this method, inventory is valued at the prices that were paid for the earliest units purchased - which may be higher than the current market value. As a result, businesses may pay more taxes than they would under another valuation method. Last In, First Out (LIFO) Under the LIFO method, inventory is valued at the price of the most recent units purchased first. So, using the same example as above, if you have 100 widgets in stock, and you purchased 50 at $5 each and 50 at $10 each, the value of your inventory would be $1000 (50 x $10 + 50 x $5). The advantage of LIFO is that it can lead to lower taxes. This is because inventory is valued at the prices that are paid for the most recent units purchased - which may be lower than the current market value. As a result, businesses may pay fewer taxes than they would under another valuation method. The disadvantage of LIFO is that it may not provide an accurate picture of your actual COGS. This is because the most recent units purchased are typically not the ones that are sold first. As a result, LIFO may overstate your profits. The choice of inventory valuation method can significantly impact a company's financial statements. For example, using the LIFO method would result in a higher cost of goods sold and a lower ending inventory balance than using the FIFO method. This would lead to a lower gross profit and a higher income tax liability. Companies should carefully consider which valuation method best suits their particular circumstances. Conclusion: Choosing The Right Inventory Valuation Method for Your Business There are a few different inventory valuation methods today, and the right one for your business depends on several factors. The first thing to consider is what type of business you have. Are you a manufacturer? A retailer? A wholesaler? Each type of business has different inventory needs and each will require a different method of valuing that inventory. Next, you need to consider your financial goals. What are you trying to achieve with your inventory management system? Are you looking to maximise profits? minimise costs? Or some combination of the two? Depending on your answer, different valuation methods may be more appropriate. Finally, you need to think about your accounting system. Does it allow for multiple valuation methods? If not, you may be limited in your choices. The choice of inventory valuation method can significantly impact a company's financial statements. The most appropriate method for a particular business will depend on that business's specific circumstances. Manufacturers, retailers and wholesalers will all have different needs, and each type of business will require a different valuation method. Additionally, businesses need to consider their financial goals in choosing an inventory valuation method. Some methods are better suited to maximizing profits, while others may be more appropriate for minimizing costs. Finally, businesses need to check with their accounting systems to see if they support multiple valuation methods. Otherwise, they may be limited in their choices. WareIQ can be of assistance if you need access to the best valuation methods or help with other fulfillment and operational services. We can help you analyse the type of inventory you have and the goals you would want to set for your business in the future and recommend a valuation method accordingly. [signup] FAQs What is inventory valuation?Inventory valuation is assigning a value to a company's inventory. This value is used for financial reporting purposes and can significantly impact a company's bottom line. What are the different methods of inventory valuation?Several different inventory valuation methods include FIFO, LIFO and Weighted Average Inventory Method. Which method is best for my business?The best method for your business depends on several factors, including your business type, financial goals and accounting system. What is the impact of inventory valuation on financial statements?Inventory valuation can have a significant impact on financial statements. For example, using the LIFO method would result in a higher cost of goods sold and a lower ending inventory balance than using the FIFO method. What are the tax implications of inventory valuation?The choice of inventory valuation method can significantly impact a company's income tax liability. For example, businesses that use the LIFO method may pay less in taxes than those that use the FIFO method.
May 31, 2022
What is Stock Keeping Unit (SKU) in eCommerce in 2022? Definition with Examples.
If your business deals with a wide range of products, it becomes immaterial whether it runs on a small or large scale. Inventory management and control become a critical part of your operations. SKUs in eCommerce is more critical when the same items are being sold online and in physical stores. Stock Keeping Units help you manage and understand the nature of the products sold and the cyclicity of their demand. This article covers various aspects of SKUs in eCommerce such as what it is, what they are used for, and how to make the most out of them. What is a Stock Keeping Unit (SKU)? Stock Keeping Unit is a naming and tracking system used by merchants to identify and monitor their product inventory or stock. A Stock Keeping Unit is a one-of-a-kind code made up of alphabets and digits that identify a product's manufacturer, model, design, type, and dimensions. Companies create their own Stock Keeping Unit identifiers that are distinctive to the products and services they provide. Internal SKUs in eCommerce, from two firms offering the same item, such as t-shirts, are likely to be different. [contactus_gynoveda] Understanding Stock Keeping Units (SKUs) SKUs in eCommerce are used to help businesses account for all of their inventory precisely and rapidly. Model numbers are distinct from SKUs; however, model numbers can be integrated into SKUs if a corporation so desires. These codes ensure that your workers, consumers, vendors, and software discuss the same procedures. Item codes, component numbers, and the company's model number are used to describe SKUs. A Stock Keeping Unit isn't just for physical products; you could allocate them to other services you provide, such as bills and invoices, etc. Consider a situation where a retailer for a new, independent food and beverage store wants to come up with SKUs to start their inventory operations. They may give food items the letter F, with B denoting beverages and B2 denoting combos. The following set of alphanumeric codes will be a veg/non-veg and hot/cold beverages indicator, followed by an indicator for the size of the beverage. V may therefore be assigned to veg items, while NV could be assigned to non-veg food. The items might then be categorised further based on their shelf life. A veg patty expiring in 5 days would be FVP01062022, while a cold beverage in tall size would be BVCT020000. Importance of Stock Keeping Units (SKUs) SKUs are used for more than just identifying products and keeping track of inventory. This information will help you determine the profit margin of your business based on the data you've gathered. SKUs perform the following activities: Data Interpretation SKUs enable merchants to acquire data to analyse product importance or identify periodic and cyclical trends in their various client categories. This data allows them to store inventory that corresponds with trends in customer behaviour. Inventory Management A Stock Keeping Unit system's primary function is inventory management. Retailers can manage the storage and transport of inventory using one Stock Keeping Unit. They can use the data acquired from sales to define inventory levels and deadlines, which can function as a trigger for starting or stopping inventory reordering and exercising control. Assistance to Customers Employees may scan a Stock Keeping Unit to rapidly determine what is in stock when a client is looking for a different product version, resulting in increased sales performance and customer experience. How Do SKUs Work? SKUs in eCommerce is surprisingly simple to create. SKU numbers can be produced automatically by a system or a vendor. SKUs may be customised in an inventory management system and the system's technical team can ingest all the data created by SKUs and correctly onboard the relevant inventory onto the software. Users may search for SKU numbers in the system's backend to detect quantity levels, orders, price, and sales levels once the infrastructure is in place. Custom sales reports based on a specific Stock Keeping Unit number can also be published. What are SKUs Used For? SKUs in eCommerce can be used in a variety of ways by merchandisers. Simply put, they are accustomed to keeping track of inventory and sales. On the other hand, SKUs have the potential to accomplish a lot more when combined with a solid sales strategy. Inventory Analysis SKUs in eCommerce are utilised to manage items at a single store or across numerous locations at the most fundamental level. You can scan an SKU to discover the entire amount of inventory available. When combined with an inventory management system, ordering cycle management and supplier connections, SKUs enable a more systematic or automated method for administering your items. Future Sales Forecasting Your WMS software can provide comprehensive reports and sales statistics using product SKUs concerning each item on the list. A systematic approach to utilising this data can enable businesses to estimate sales and demand for different products in upcoming periods. These systems can be highly effective for a small-scale enterprise. Retailers may use retail analysis to analyse how each item is performing by their Stock Keeping Unit. Customer Assistance Properly estimating sales and demand will make future management easier. Knowing what to expect enables businesses to manage inventory levels. It's a narrow line that must be trodden carefully. Custom order suggestions via past order details also help you ensure that you have the correct quantity of goods on hand. Product Recommendations Employees can locate comparable items by looking at similar SKUs that are customised to meet different product range categories. For example, all fashion items on an eCommerce website may have the same starting SKU numbers, allowing the system to suggest a similar variety for customers looking to try something new. Pricing Finally, SKUs in eCommerce help provide discounts, offer attractive products, and deconstruct packaged items into individual components. Businesses might use different SKUs for goods and packaging. A single beer, for example, may have a single SKU, but a case of the same beer would have its own unique SKU for a separate price and inventory unit. How to Design and Create SKU Numbers in 2022? Depending on the software, SKUs in eCommerce can be constructed in various ways. Creating SKUs may be simple and adaptable with the right inventory management system. The steps are listed below: Step 1: Begin with SKU Numbers Each Stock Keeping Unit’s first two or three digits/characters should reflect a primary identification. This might be a department, retail category, or even a vendor. A Stock Keeping Unit number, when scanned, specifies the top-level merchandising group and position of any product in your shop. If you own more than one business, you can also use SKU numbers to designate retail locations. You May Like: What is Merchandise Inventory? Step 2: Create Distinctive Designations Using Middle Values Use the middle digits of SKU numbers to attribute distinctive qualities to your product, such as dimension, shade, product category, or other required details. Arrange them in whatever way makes sense when arranging the items you offer. Step 3: Add a Sequential Number to the SKU at the End Employing sequential numbering for the last series of a Stock Keeping Unit number, such as 1, 2, and 3, simplifies the setup process and helps you distinguish old vs fresh goods amongst all your products. Trying to tie the last digit of a Stock Keeping Unit code to a supplier product ID might also be helpful in some cases. Methods that make logical sense for the products you sell should be employed. Step 4: Incorporate SKUs Into Your Inventory Management System You can generate SKUs and maintain inventory manually in notebooks or an excel file, but utilising a systematic approach with inventory tracking is more straightforward and efficient. A system-based approach allows you to monitor as much or as little product data as you desire. However, most small businesses can start by entering the following simple data: Product DescriptionProduct nameProduct categoryBrief descriptionAny other relevant data Step 5: Make Use of Barcode Generation After creating a Stock Keeping Unit number, it needs to be integrated with your inventory management system. Here, you need to create barcodes that can be scanned into the system. These barcodes are placed on the items along with product labels. Barcodes can be generated using conventional barcode generation systems or through your inventory management system. Once barcodes are generated, you can print and stick them to your products. Learn more about the differences between barcodes and SKUs here. Examples of Properly Named SKUs in eCommerce Example 1 - ADMWALKWHI7213 The SKU created can be understood as follows: AD: Name of the Manufacturer (Adidas)M: MaleWalk: Walking ShoeWHI: White Colour7: Shoe Number213: Item Number Example 2 - BBHGTSHBLK02003 The SKU created can be understood as follows: BBH: Baby HugG: GirlTSH: T-ShirtBLK: Black02: Age003L Item Number 5 Best Practices for Stock Keeping Unit or SKU formatting Be Simple Since Stock Keeping Unit numbers are so simple to create for your company, it might be tempting to incorporate as much data as you can. Choose 2-3 features that you wish to convey in your SKU number to avoid lengthy SKUs. Keep individual codes short if you want more features. Begin With the Most Important Features After determining important features, choose the most important one and add it to the beginning of the SKU number. Some stores like to begin with the most basic feature and work their way down. For example, begin with the identifier for the shoe brand before going on to type, size, and item number. Do Not Start SKU Numbers With a Zero Most SKUs today are scanned into software stems and zeros at the start of a number are frequently perceived as non-existent. As a result, the SKU 003BBHGTSHBLK02 might also be interpreted as 3BBHGTSHBLK02. To reduce the confusion created by this issue, make sure that none of your Stock Keeping Unit numbers begin with a zero. Many firms work around this by starting the SKU number with a brand or supplier identity, as shown in the example above. Avoid Using Letters That Could be Confused for Numerals It may be tempting to use every letter of the alphabet because SKU numbers are alphanumeric. To avoid misunderstandings, try not to use characters that resemble digits. The letters O and I, for example, are frequently mistaken as zero and one. Do Not Repeat the Manufacturer's Numbers It may look easier just to use the manufacturer's number or include it in the SKU when creating a numbering scheme. However, this eliminates the benefits of having a custom SKU formula built to meet your company's particular needs. Conclusion: How to Use SKUs to Grow Your Business and Improve Your Customer Service? Consumers increasingly expect and want a personalised, seamless experience. As a result, in terms of generating an engaging and intriguing shopping experience, eCommerce, as well as physical retail, have become highly critical. Merchandisers must keep their stores/eCommerce sites updated with the best-selling and most in-demand products to keep customers interested. Having a detailed view of and easy access to optimised SKUs is crucial for creating enticing assortments and quickly updating product suggestions and trends to keep up with the latest market trends. SKUs are essential for merchants to be competitive in today's dynamic, fast-paced retail industry. They simplify extracting relevant information from product identification data that is particularly unique to your company and its products. They enable you, your workers, and your clients to instantly verify the availability of products via an SKU query. Even small commercial enterprises should make use of SKUs. Create a decent SKU structure today and gain advantages across your business. This can be done with a 3PL fulfillment company like WareIQ. WareIQ offers a whole range of ecommerce fulfillment services including creating and managing SKUs for all your products and access to our custom WMS that will make managing your inventory a breeze. [signup] Stock Keeping Unit FAQs (Frequently Asked Questions) Can you use the same Stock Keeping Units for 2 products?Whether the 2 products have major or minor differences, you should ideally use different SKUs to avoid any confusion. What all information should an SKU contain?A list with the most important information is listed below:- Color- Size- Item Type- Variation- Department- Store Location- Supplier How can you calculate your SKUs in eCommerce?You first need to make a note of all the products and their variations in your inventory. The SKUs should reflect this number exactly. Does WareIQ help you create SKUs for your products?Yes. Using our custom WMS, SKUs can be created and managed for all the products that you want to sell.
May 30, 2022
What is Cost Per Unit? How to Calculate Cost Per Unit? Top 5 Strategies For Minimising it.
A business’s survival depends on the bottom line. Whether your business is into providing products or services, the key metric you have to monitor is the net profit. Net profit is defined as the difference between total revenue and total cost. Analyzing revenues and expenses gives a clear indication of whether a company is performing and working effectively. A key way of increasing your profit margins is to calculate cost per unit and find ways of reducing it as much as possible. What is the Meaning of Cost Per Unit? Cost per unit is the sum of all the expenses that a company incurs to produce, store and sell one unit of a product or a service. It is also known as the cost of goods sold. There are various elements to calculate cost per unit. They are classified into two groups – fixed costs and variable costs. In order to calculate cost per unit, the first step is to ascertain operational profitability. Fixed Costs: Fixed costs are those that stay the same irrespective of the volume of production. Examples include capital equipment, rent, insurance, etc. Variable Costs: Variable costs vary based on the volume of output. Examples of this are direct materials and direct labour. Both can be reduced by employing the cheapest labour or outsourcing production to the most efficient manufacturer. [contactus_gynoveda] Importance of Cost Per Unit Calculating cost per unit is important because it is a key determinant of net profit per unit or earnings per share (EPS). EPS is a key performance indicator used by shareholders to assess performance. It also helps you to price your products appropriately. Knowing the cost of production will let you make a well-informed decision about the markup value. It helps you amplify the SKU (stock-keeping units), which are your highest profit generators, and assists in boosting customer loyalty and satisfaction. Also, if you know the different costing elements, you can work towards reducing the different components. If your cost of production is accurate, you can undertake SKU rationalisation and decide which products to keep and discontinue. These measures will help in space rationalisation and price optimisation with the key goal of improving cash flows, increasing return on invested capital, and boosting operating margins. A large organisation can lower unit costs through economies of scale and optimise the market offering price. You must calculate the cost per unit for all the various SKUs. How to Calculate Cost Per Unit (with Examples)? You must ascertain the total fixed cost and the total variable cost of production to calculate the cost per unit. Their sum must be divided by the total number of units produced to derive the unit cost of production. Cost Per Unit Formula The cost per unit is (Total Fixed Costs + Total variable Costs)/Total number of units produced. Cost Per Unit Formula Example 1: Let the Total Fixed Cost be Rs 1,00,000. Total Variable Cost is Rs 2,50,000. In a year, 50,000 units are produced. Cost Per Unit= (1,00,000+2,50,000)/50,000 which makes the cost of production Rs 7 per unit. Cost Per Unit Formula Example 2: Let Total Fixed Costs be Rs 1,00,000. The unit cost per unit is Rs 3. The total number of units produced in a year is 20,000. Cost Per Unit = (Total Fixed Cost/ Total Output) + Variable cost per unit = 1,00,000/ 20,000 + Rs 3= Rs 5+Rs 3 which makes the cost of production Rs 8 per unit. If there is a reduction in the volume of units produced, total variable costs will reduce but the fixed cost per unit increases as the denominator decreases. If there is an increased output, total variable costs will increase proportionately but the fixed cost per unit will come down. Difference Between Cost Per Unit and Price Per Unit [table id=22 /] Based on this difference between its price per unit and cost per unit, the company can determine how much discount it can offer on its SKUs as a part of its marketing campaigns. At the bare minimum, a company should at least cover its breakeven costs. 5 Strategies to Minimise Cost Per Unit Improve Logistical Strategy It is important to build a logistics platform with a third-party logistics provider that has the required number of people, processes, and technology to report costs and service performance. Plan, execute, and optimise your transportation network with effective communication to all the involved parties. Use technology and analyse data to optimise freight. Look at procurement processes, mode selection, and supply chain network design. Don’t forget the KPIs, including reporting, monitoring, and logistics process improvement. Examining trends over time helps cut unnecessary costs and inefficiencies in the supply chain. Reduce Material Expenses Some ways to do this include the following: Substitute lower-cost materialsEliminate unnecessary product featuresReduce wasteNegotiate until you get the lowest possible price for the best quality productLeverage suppliers for faster delivery times and lower financing costsImplement a system of Just-in-Time inventory to reduce excessive stocking and material-carrying costsDecide when to trade off material carrying costs with higher discounts from the supplierMake use of bargaining opportunities to access materials available at prices lower than their cost of productionBarter finished goods for raw materialsOffer faster payments for better price discountsNegotiate long-term supply arrangements to ensure a steady supply chain and stable material costs Reduce Overall Holding Costs You can reduce overall holding costs by doing the following: Optimise reorder levelsMake minimum order quantities work for youAvoid overstockingGet rid of your dead stockDecrease supplier lead timeUse inventory management software Minimise the Volume of Wasted Inventory, Reshipments, and Cancellations Use an efficient inventory management system to minimise overstocked inventory, leading to outdated, unsold inventory and incorrect customer demand forecasting, leading to overaccumulation of stock. Be aware that the product life cycle is becoming shorter and people’s shopping habits also constantly change. Optimise inventory levels to reduce wastage and also logistics costs. Set up inventory buffers to prevent problems across the supply chain and avoid overselling and underselling inventory across marketplace channels. Buffers are supplies or products kept in place to deal with demand forecasting or supply chain fluctuations that can arise in the future. Improving supply chain management helps reduce excessive inventory across various processes on the supply chain. Avoid excessive safety stocks to prevent stockouts unless you are in a cyclical or seasonal industry. Project future demand levels properly. Consolidate your supplier base to get the benefit of improved delivery time. Centralise the inventory function and use the ABC inventory management system to manage inventory properly. Negotiate required minimum order quantities with your supplier. To avoid reshipments and cancellations, review product weights and sizes and ensure you have the correct measurements of each product and its packing boxes. Accuracy is important to avoid shipping delays. Discrepancies between the actual sizes and weights and the numbers provided on the shipping container can cause unnecessary problems and delay delivery. Automate warehouse and order fulfillment operations to ensure minimal human error. Electronic documents for electronic signature verification help avoid human mistakes resulting in reshipments and cancellations. Eliminate Underperforming Products To do this, you can then follow the points listed below: Assess the product’s profitability regarding its return on investment and return on time spentAssess customer feedback about the product’s acceptance in the market. If it is unfavourable, then it is better to eliminate itRe-evaluate your product offering to see whether you can recalibrate or revitalize it. If it is a divergent product, look to eliminate itDo a BCG or a GE-McKinsey Matrix to assess the product's performance and stability How WareIQ Helps Reduce Fulfillment Costs Per Unit Inventory Optimisation Inventory gets stored in proximity to areas of high demand, ensuring same-day and next-day delivery. WareIQ provides a Warehouse Management System and expertise for efficient management of inventory and warehouse processes. Payment Based on Utilised Storage Space You only pay for the warehousing facilities you use, so you incur lower inventory storing costs. Reduced Supply Chain Expenses WareIQ provides a one-stop shop for all your logistics needs, from managing inventory to shipping orders, solving COD, NDR, or fraud issues, and analysing performance. This enables eCommerce businesses to focus on growing their business and outsource all inventory management and shipping requirements while ultimately reducing shipping costs. Bulk Carrier Pricing WareIQ is integrated with all major selling platforms and on-demand courier companies. We find the fastest and most reliable option for each order to get it delivered to the customer; this also enables you to get the best pricing and fastest delivery on each order. Innovative Technological Solutions WareIQ unifies network, technology, and expertise to offer end-to-end fulfillment services. [signup] Cost Per Unit FAQs What is the importance of cost per unit?Calculation of the cost per unit is an essential aspect for any company because it helps in determining The main purpose to calculate cost per unit is that it helps businesses get a clearer picture of the exact price they need to charge for specific products in order to maintain their required profit margins. What factors contribute to reducing cost per unit?A few factors that can help to reduce cost per unit are listed below:- Considering remote working for employees- Travelling less- Hiring interns- Using internet marketing- Reducing inventory levels- Paying invoices early- Outsourcing bookkeeping processes- Printing less What is the primary differentiator between cost unit and unit cost?Cost unit is the base unit that is required for buying the least amount of a given product where as unit cost is the least cost to purchase a unit of a product. What are some features of cost per unit?A few features of cost per unit are:- Number- Area- Volume- Length- Weight- Time- Value How can WareIQ help to reduce and calculate cost per unit?WareIQ provides multiple services across the fulfillment spectrum to enable you to optimize every process of the supply chain. We also give help you implement strategies to lower your cost per unit for all your products.
May 29, 2022