In this article, we explore what a change in inventory means and how to measure it. We will also walk you through our 7-step framework for accurately recording and interpreting inventory change, with real-world examples. Read on to learn more.
A change in inventory denotes the difference in a company's stocked items or their value between two points in time. Monitoring these changes is significant because they can reflect a company's sales performance, production efficiency, and supply chain management.
Example: If Tech Co. started January with 1,000 units and concluded February with 1,200 units, this indicates an inventory increase of 200 units.
There are several known methods for recording inventory change. These include:
By prioritizing the oldest inventory items for sales, the First-In-First-Out (FIFO) method can show a more prominent inventory change during periods of fluctuating acquisition costs, especially when prices are rising.
The Last-In-First-Out (LIFO) method emphasizes the sale of the newest inventory items first. This method is particularly relevant to the concept of inventory change in volatile markets. By selling newer items, the residual stock primarily consists of older, possibly cheaper goods.
The Weighted Average Cost method provides a smoothed perspective on inventory change. Instead of showing sharp changes in inventory valuation during periods of price fluctuation, this method offers a consistent, averaged view. As a result, inventory changes appear more gradual and are less affected by short-term price swings.
The basic formula to calculate inventory change is straightforward:
Inventory Change = Ending Inventory − Beginning Inventory
Where:
If the result is a positive number, it indicates an increase in inventory during the period. If the result is negative, it indicates a decrease in inventory.
Fresh Foods Supermarket, a grocery chain, aims to determine its inventory change for March. Their inventory value at the beginning of March is $1 million. By the close of March, the inventory value rose to $1.2 million.
To find the inventory change:
Inventory Change = Ending Inventory - Beginning Inventory
Plugging in the values: $1.2 million (end) - $1 million (start) = $200,000
The $200,000 increase in inventory suggests two potential scenarios for Fresh Foods Supermarket:
Here’s our comprehensive 7-step framework for accurately recording and interpreting inventory changes. Simply follow the steps below:
Ensure all inventory transactions are documented in real-time. Use a consistent method for recording each transaction.
Example: Apple Inc. records each iPhone sale immediately. If 500 iPhones are sold in a day at a store, their system updates this in real-time, reducing inventory numbers from, say, 2,000 to 1,500 by day’s end.
Periodically perform a physical count of the inventory. Do this monthly, quarterly, or annually based on the business type.
Example: Starbucks does a monthly count of its coffee beans. If records show 1,000 bags but a physical count finds only 980, they will investigate the discrepancy.
Decide on an inventory recording method. Stick with your chosen method.
Example: Ford Motor Company uses FIFO. If they have 1,000 older tires and 500 newer ones, they'd use the older stock first, ensuring no old inventory is left unused.
Use the formula: Inventory Change = Ending Inventory - Beginning Inventory. Determine your beginning and ending inventory.
Example: Nike starts the month with 5,000 sneakers and ends with 4,200. Their inventory change is a decrease of 800 sneakers.
Understand the implications of the inventory change.
Example: Adidas sees an increase in inventory from 4,000 to 4,500 units. This could mean they produced or bought 500 more units than they sold, or sales have slowed.
Consider factors that might influence inventory levels.
Example: Walmart might increase toy inventory from 10,000 to 15,000 units in November, anticipating higher sales during the holiday season.
Assess inventory change regularly to spot trends or opportunities.
Example: Best Buy notices a consistent 10% monthly increase in TV inventory, prompting them to reconsider their purchasing strategy or boost promotional efforts.
UrbanReads, an expanding city-based bookstore, aims to enhance inventory management to match their growing customer base and ensure they never run out of bestsellers.
They decided to follow our 7-step process for recording and interpreting inventory change:
UrbanReads adopts a Point-of-Sale (POS) system to instantaneously register every sale. At the start of the month, they recorded an inventory of 2,500 copies of "City Tales."
Mid-month, UrbanReads conducts a physical count for "City Tales" and finds 2,100 copies on shelves. This physical count confirms the sales data from their POS system, which shows 400 copies sold.
UrbanReads uses the FIFO method, ensuring the first books received from the publisher are the first ones sold. Given that books aren't perishable, this choice is primarily for efficient stock rotation.
Using the formula, the inventory change for "City Tales" is calculated as:
2,100 (ending inventory) - 2,500 (starting inventory) = -400 books.
The decrease of 400 books indicates that "City Tales" is selling well. This sales pace prompts the store to consider placing a new order soon to prevent stockouts.
UrbanReads notes that a local book club recently selected "City Tales" as their book of the month, which may be contributing to the surge in sales. Understanding these external factors can help them anticipate future demand spikes.
UrbanReads decides to monitor the inventory of "City Tales" on a weekly basis given its popularity. They aim to capture and adapt to any rapid changes in sales trends.
Monitoring inventory change is vital for businesses, as it reflects both operational efficiency and consumer demand. We hope this article has given you a better understanding of what a change in inventory means.
If you enjoyed this article, you might also like our article on inventory conversion period or our article on Min Max inventory method.
