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 days

Reorder Point

Reorder Point = (Average Daily Demand × Lead Time) + Safety Stock

Diagnosis 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