1. Analysis for Inventory Control and Management
Great job in preparing and exploring the data! In this chapter, you will create some important metrics for your inventory analysis, and you will be introduced to a classification technique known as ABC analysis.
2. Analysis workflow
At this stage, you will be focusing on the analysis and visualization part. You have already made a good start by obtaining basic calculations such as COGS, revenue, and profit, but you want to go a bit deeper to get more insights for your final output.
3. Preliminary insights
And you have also found some interesting insights.
There are 104 items within five categories, for which decoration and jewelry categories have the highest average costs of goods sold per item of around five dollars.
Home and accessories had the largest profit in 2020, reaching an amount of up to $110,000.
Finally, the item "Grow a flytrap or sunflower" is a top seller with more than 16,000 items sold.
4. Inventory analysis metrics
To further investigate the data, you will use more elaborate calculations and methods for inventory analysis. In this second part, you will deal with the average value of inventory, Inventory turnover, and ABC analysis.
5. Average inventory and turnover
The average value of inventory is often used to know the value of an item during a specific period that accounts for seasonal fluctuations. It is calculated as the average of the total cost at the start and end of a particular period.
Inventory turnover is an efficiency ratio that shows how often a company uses its supply of goods during a given period.
It can be calculated by dividing COGS over the average value of inventory.
6. ABC analysis
ABC analysis is a technique that helps you prioritize inventory management by classifying your items into three categories: A, B, and C.
You can do ABC analysis in four steps. First, you need information on the revenue of your items; then, you calculate the percentage they represent from the total revenue. Once you have the percentages, you must sort the column in descending order to allow the computation of a cumulative increase. Finally, you classify the items according to a rule of how much they cover of total revenue. A items will cover up to seventy percent of total revenue, B items will cover the following twenty percent, and C items will represent the remaining percentage.
7. Following steps
You have done great work so far. In the following exercises, you will focus on more elaborate analyses, such as contrasting revenue among years, calculating an efficiency ratio, and classifying the importance of your items.
These new measures will help you see the data in a better way to find new approaches to solving the problem.
8. Let's practice!
It is time to dig for more information with these new metrics. Let's do it!