Inventory Aging Meaning, Formula, Examples, How To Reduce?

To further entice buyers, they even call out that the items are in “short supply” in the advert. Routine inventory audits ensure your stock records match what’s actually sitting in your warehouse. Not only does this improve inventory accuracy, but it can provide visibility into what stock items aren’t moving (leading to better inventory control). Most often, the average age of inventory is calculated over the period of one calendar year. While some companies may choose to assess this figure more or less frequently, one age analysis per year is fairly standard among modern ecommerce merchants. Demand trends tell you how well a product performs by honing in on fluctuations in consumer demand and buying patterns from your customer base.

• An aged inventory report (aged stock report) is a financial report that measures the average number of days inventory sits unsold in your warehouse.
• The higher your average inventory age is, the longer it takes to sell through product, and the higher your holding costs will be.
• Aged inventory reporting details how long products have been in stock so you can craft a plan to get them out the door.
• The management and effectiveness of the two businesses can be easily compared using the age of inventory analysis.
• Aged inventory refers to low-demand products that sell slowly or don’t sell at all.
• Let’s consider a case study to understand the significance of the average age of inventory in evaluating a company’s performance.
• These metrics provide insights into how efficiently a company is managing its inventory and can help identify areas for improvement.

Average Age of Inventory

By comparing this ratio to industry benchmarks, the retailer realizes that its inventory turnover is higher than the average for similar businesses. The inventory turnover ratio can also provide valuable insights into pricing and purchasing decisions. A high ratio suggests that inventory is being sold quickly, indicating strong demand. In such cases, businesses may consider raising prices to maximize profitability.

Improve storage cost-efficiency

A high inventory turnover ratio indicates that a company is effectively selling its inventory, which can lead to increased cash flow and profitability. On the other hand, a low inventory turnover ratio suggests that a company may be struggling to sell its inventory, leading to potential issues with cash flow and profitability. Aged inventory refers to low-demand products that sell slowly or don’t sell at all. These items are problematic for retail brands’ financial health because they tie up working capital in unsold merchandise and collect expensive carrying costs that shrink profit margins. Every business has a certain level of aging inventory, especially in retail stores selling multiple products.

Why the DSI Matters

Warehouses and retailers are constantly endeavoring to reduce such items to maximize profit and properly use space. You can enhance warehouse management through real-time inventory tracking and supply chain management software. Radio-frequency identification (RFID) tags, for example, enable precise inventory tracking, helping prevent both stockouts and overstock.

Types of Inventory with Examples, Effective Inventory Management Tips

And they can switch suppliers before overstocking damaged goods or redesign a higher-quality version of the product. That way, they’re not stuck accumulating carrying costs that’ll wreck margins and lower their gross profits. If you find yourself with an abundance of aging inventory, one way to manage this concern is by dramatically discounting the items that fall into the ‘aged’ category.

• The average age of inventory, also known as the average age of stock or average inventory age, is a measure that indicates the average length of time inventory items are held in stock before being sold or used.
• Inventory turnover is a critical metric that measures the efficiency of a company’s inventory management.
• Mathematically, the number of days in the corresponding period is calculated using 365 for a year and 90 for a quarter.
• But the lower your average inventory age, the higher the customer demand, which means you need to be extra vigilant about reordering stock on time.
• With this info at your disposal, you can avoid marking down items on a whim (or, worse yet, reordering a product without knowing the quantity you already have in stock).
• It’s best practice to conduct an inventory aging analysis every year to compare current inventory reports against those from the previous period, granting you an evolving view of your inventory health.

And your warehouse management team knows that more inventory isn’t on its way, and they can use that space for other products (this small gesture can seriously improve your fulfillment relationships). Knowing which of your items are slow-moving or unsellable, you’re empowered to make informed decisions to increase demand for those items (and subsequently increase your revenue). In order to efficiently manage inventories and balance idle stock with being understocked, many experts agree that a good DSI is somewhere between 30 and 60 days. This means looking at aging reports and realizing which products are worth keeping in stock for their potential return on investment.

What the Average Age of Inventory Can Tell You

To calculate the Age of Inventory, divide the average average age of inventory inventory by the cost of goods sold (COGS), then multiply the result by the number of days in the period. This gives the average number of days the inventory is held before being sold. Knowing the age of your inventory empowers you to make smart buying decisions and protect your brand’s bottom line. A slow turnover rate might imply weak sales or a large volume of excess inventory, whereas a faster ratio likely signifies strong sales or insufficient inventory levels. Either way, ITR is an important tool for analyzing areas of inventory improvement. Average inventory estimates the amount (or value) of a company’s inventory over a specific time period.