Nothing is better for a business owner than inventory flying off the shelves and having to keep up with rising demand.
But what happens when certain goods start collecting dust on the shelves? Aging inventory can cause serious issues for businesses, from increasing storage and warehousing costs to reduced profit margins.
Therefore, it is important to understand inventory aging and how to track it for better visibility into stock movement so that you can make necessary adjustments.
Understanding Aged Inventory
Aged inventory is products that stay on the shelves for prolonged periods because of slow sales or no sales at all at their full retail price. When products stay longer than they should, they lose market value and add to storage costs as they take up space from faster-moving goods. Retailers have to track aging inventory because products that remain unsold after their threshold (maybe 6 months or more) must be marked down and/or moved to clearance so you can bring in new products.
Many factors contribute to aged inventory:
- Inadequate marketing of the products
- Stocking up products that only sell seasonally
- Too many products that exceed customer demand
- Poor positioning on the retail shelves
What Is an Inventory Aging Report?
An inventory aging report, also known as an aged stock report, is a tool for determining how long products have been in stock. It is usually reported in time brackets of 0-30 days, 30-60 days, and 61-90 days.
An inventory aging report typically lists the different stock-keeping units (SKUs) or products reported in their respective categories, models, or sizes. It also includes the number of units still available and the average age of those products.
An inventory aging report gives retailers insight into any potential issues like obsolete goods, slow-moving items, or overstocked inventory. It also shows which products could be sold with a price reduction and which ones need to be discarded immediately.
You can track aged inventory manually with a spreadsheet, but that may be too cumbersome and leave room for errors, so using inventory management software is ideal. This software keeps track of new inventory and automatically records the average time each product spends on the shelves from the day they arrive until the day they are sold.
How to Calculate Inventory Aging?
Calculating inventory aging typically involves knowing three main formulas. They are:
Cost of goods sold (COGS)
This is the total amount spent producing or acquiring the goods you are selling. It consists of raw materials, transportation, labor, and indirect costs.
COGS = (beginning inventory + purchases) – ending inventory X price per unit.
- Beginning inventory refers to the products you have left from the previous reporting season
- Purchases are new purchases
- Ending inventory is what you did not sell at the end of the set period.
For example:
If your beginning inventory for women’s blouses was 50 units and you made new purchases of up to 3000 units, you would have 3050 total units. Assuming you sell off 2000 units by the end of the month or quarter (depending on your reporting frequency), this leaves you with 1050 units unsold.
The COGS for that season would be:
3050 units – 1050 units = 2000 units.
If you sold each unit at $2, your COGS would be valued at $2 x 2000 = $4000.
Average inventory cost
This is the average value of a business’s inventory over a duration. Prices of goods can rise and fall during expected seasons of demand, but the average inventory cost gives you a general overview of how much you’ve spent on the goods despite these fluctuations.
The average inventory cost can be calculated using the formula:
Annual cost of goods sold (COGS) ÷ Total ending inventory.
Let’s say your annual COGS is valued at $4000 and you haven’t been able to sell off 200 units all year. With each blouse still priced at $2 and your ending inventory at $400, the average inventory cost would be: 2000 ÷ 400 = $50
Inventory turnover ratio (ITR)
Inventory turnover ratio (ITR) refers to how many times you completely sell and replace your inventory within a given period, typically a year. Knowing your ITR helps you make better decisions when fixing prices or creating discounts.
The formula for ITR is: ITR = Cost of Goods Sold (COGS) ÷ Average Inventory Value
For example, let’s say you sell women’s blouses:
- Your COGS for the year is $4,000
- Your average inventory value (the typical dollar value of blouses you keep in stock) is $1,000
- ITR = $4,000 ÷ $1,000 = 4
This means you’re selling and replacing your entire inventory 4 times per year, or approximately once every quarter. A higher ratio usually indicates efficient inventory management, while a lower ratio might suggest overstocking or slow-moving items
Average inventory age
Also called Days Sales of Inventory or DSI, this metric tells you how long, on average, your inventory sits in your warehouse before being sold, measured in days.
Average inventory age = (Average Inventory Value ÷ COGS) x 365
Using our previous example:
- Average Inventory Value = $1,000
- COGS = $4,000
- Average inventory age = ($1,000 ÷ $4,000) x 365 = 0.25 x 365 = 91.25 days
This means it takes about 91 days (roughly 3 months) to sell through your average inventory. The higher the average inventory age, the longer items sit in your warehouse, increasing storage costs and risk of obsolescence. The lower it is, the more frequently you’re turning over inventory, though you’ll need to balance this against the risk of stockouts and reordering costs.
5 Ways to Reduce Aging Inventory
Here are 5 ways to reduce aging inventory in your business.
Improve demand forecast
When you assume a product will sell faster than it actually does, you set yourself up to accommodate aged inventory. Using real-time data from warehouse management software like Da Vinci helps you predict how a product will sell by tracking changes in demand so you can plan accordingly.
Investigate reasons for slow sales.
When units aren’t selling as you projected, you should find out why. A common cause is seasonality, changing trends, or poor marketing. Knowing the exact cause of slow sales can help you adjust and make changes or not stock up on the product altogether.
Control inventory purchases
Categorizing your goods by the ones that sell the fastest, those that sell at a slow pace, and everything in between can be a great start to controlling your inventory purchases. You can reduce aged inventory by only stocking up on products that are in season or selling fast. For example, swimwear sells the fastest before and during the summer, so it makes sense to increase inventory this season and slow down as sales start dwindling in August.
Multi-channel sales
If a product is performing poorly on one channel, you can promote it across other channels to increase its chances of selling. Exposing these products to a new audience may be the trick to clearing up your shelves.
Optimize Pricing
Reviewing and adjusting your pricing may help reduce aging or obsolete inventory. Also, when you set your prices strategically according to expected demand and market trends, you would stimulate sales. Some common pricing strategies to use are:
- Bundles and discounted pricing: Group similar or complementary products and sell them as one unit.
- Penetration pricing: Offering very low prices when you enter the market and gradually increasing the price as you build a loyal customer base.
- Competitive pricing: Setting pricing according to what your competitors are charging or slightly lower.
Optimize Aging Inventory Management with Da Vinci WMS
With Da Vinci WMS inventory management feature, you can spot high performers in the market with real-time data, automated inventory records, and in-built data analytics. These solutions can help you calculate inventory costs and make better decisions to reduce aged inventory.
Learn more about our tools and request a demo today.