Inventory Health Analysis
Overview
Inventory health balances two risks: stockouts (lost sales, unhappy customers) and overstock (carrying costs, obsolescence). This skill provides tools to measure, classify, and optimize inventory levels.
Framework
IRON LAW: Not All SKUs Deserve Equal Attention
ABC classification shows that ~20% of SKUs drive ~80% of revenue.
Treat A-items (top 20% revenue) with tight control and frequent review.
C-items (bottom 50% revenue) get simple rules and less attention.
Equal treatment of all SKUs wastes resources on low-impact items.Key Metrics
| Metric | Formula | Healthy Range |
|---|---|---|
| Inventory Turnover | COGS / Avg Inventory | 4-12x/year (industry-dependent) |
| Days of Inventory (DOI) | 365 / Inventory Turnover | 30-90 days |
| Stockout Rate | Stockout incidents / Total demand occasions | < 2-5% |
| Fill Rate | Orders filled completely / Total orders | > 95% |
| Carrying Cost | Avg Inventory × Carrying Cost % (typically 20-30%/year) | Minimize |
| Dead Stock % | Items with zero sales in 6+ months / Total SKUs | < 10% |
ABC Classification
| Class | Revenue % | SKU % | Strategy |
|---|---|---|---|
| A | ~80% | ~20% | Tight control, frequent review, safety stock optimized |
| B | ~15% | ~30% | Moderate control, periodic review |
| C | ~5% | ~50% | Simple rules, min/max levels, consider dropping |
Safety Stock Calculation
Safety Stock = Z × σ_d × √(Lead Time)
Where:
- Z = service level factor (1.65 for 95%, 2.33 for 99%)
- σ_d = standard deviation of daily demand
- Lead Time = supplier lead time in daysReorder Point
Reorder Point = (Average Daily Demand × Lead Time) + Safety StockDiagnosis Steps
Phase 1: Overall Health Check
- Calculate turnover and DOI for total inventory
- Compare to industry benchmarks
- Identify trend: improving or deteriorating?
Phase 2: ABC Classification
- Rank all SKUs by revenue contribution
- Classify into A/B/C
- Check: are A-items well-stocked? Are C-items over-stocked?
Phase 3: Problem Identification
- Overstock: DOI > 90 days, dead stock > 10%, carrying costs rising
- Stockout: Fill rate < 95%, lost sales reports, customer complaints
- Imbalance: A-items understocked while C-items overstocked
Phase 4: Optimization
- Set safety stock by ABC class
- Implement reorder points for A-items
- Liquidate dead stock (discount, bundle, donate)
- Reduce lead times through supplier negotiation
Output Format
# Inventory Health Report: {Business}
## Summary
| Metric | Current | Target | Status |
|--------|---------|--------|--------|
| Turnover | {X}x | {X}x | 🟢/🟡/🔴 |
| DOI | {X} days | {X} days | 🟢/🟡/🔴 |
| Fill Rate | {X%} | >95% | 🟢/🟡/🔴 |
| Dead Stock | {X%} | <10% | 🟢/🟡/🔴 |
## ABC Distribution
| Class | SKUs | Revenue % | Avg DOI | Issue |
|-------|------|----------|---------|-------|
| A | {N} | {%} | {days} | {stockout risk?} |
| B | {N} | {%} | {days} | ... |
| C | {N} | {%} | {days} | {overstock?} |
## Top Issues
1. {issue with specific SKUs and data}
## Recommendations
1. {action with expected impact}Gotchas
- Seasonal products need separate treatment: Swimsuits in January will show as "dead stock" but shouldn't be liquidated. Use seasonal adjustment or analyze by season.
- Inventory turnover varies hugely by industry: Grocery: 20-50x/year. Fashion: 4-6x. Electronics: 6-12x. Always benchmark within industry.
- Low turnover ≠ bad if intentional: Strategic inventory (buying ahead of price increases, securing supply) may justify lower turnover.
- ABC classifications shift: A product that was A-class last year may be C-class this year. Reclassify quarterly.
- Carrying cost is often underestimated: Include: warehouse rent, insurance, obsolescence, capital cost (opportunity cost of money tied up), handling labor. Total is typically 20-30% of inventory value per year.
References
- For EOQ (Economic Order Quantity) model, see
references/eoq-model.md - For seasonal demand forecasting, see
references/seasonal-forecasting.md