Did you know pillows have expiration dates? So do running shoes. You may have thought only perishable food items had shelf lives, but many unexpected items have best-by dates.
Expiration isn’t the only time-based threat to inventory. Even seemingly nonperishable items that can sit on shelves for years and years can have hidden costs. That’s why it’s important retailers understand the concept of inventory aging and how it’s reflected in an inventory aging report.
What is aged inventory?
Aged inventory is products in stock that are subject to low demand—that is, they sell slowly (or sometimes not at all) at their full retail price. When products languish on warehouse shelves for an extended period, they may lose their market relevance, incur storage costs, and take up valuable storage real estate for new products with more market relevance.
Tracking and reporting inventory aging is vital for small businesses, as it directly impacts cash flow, profit margins, and overall operational efficiency.
What is an inventory aging report?
An inventory aging report, also known as an aged stock report, is a strategic tool that provides a snapshot of the age distribution of products in stock. It categorizes inventory based on how long the business has held items, usually in brackets such as 0–30 days, 31–60 days, and 61–90 days.
By visualizing how long products have been in inventory, businesses can gain insights into potential issues, such as slow-moving items, too much inventory, and obsolete inventory. Reports can also indicate when merchandise might be due for a markdown, which could in turn prompt a sale.
Typically, these reports will contain:
- Your various stock keeping units (SKUs) or individual product types (In a clothing retail context, this would be a single combination of garment model, size, and color.)
- Number of units available per SKU
- Average inventory age of those units
You can generate an inventory aging report manually using spreadsheets, but this process can be time-consuming and error-prone. Consequently, many retailers use inventory management software that can automatically generate inventory aging reports in real time.
How to calculate inventory aging
- Average inventory cost
- Cost of goods sold (COGS)
- Inventory turnover ratio (ITR)
- Average inventory age
Calculating inventory aging involves three distinct calculations. The three inventory aging calculations you’ll need to know are average inventory cost, cost of goods sold (COGS), and inventory turnover ratio (ITR).
Average inventory cost
Average inventory cost refers to the value of a business’s inventory over a set period. Although inventory balances can rise and fall with the retail seasons or with shipping and receiving schedules, average inventory cost gives you a sense of overall inventory valuation despite these fluctuations.
To calculate average inventory cost, you can use the following formula:
Average inventory cost = annual COGS / total ending inventory
Cost of goods sold (COGS)
COGS refers to the price of producing the goods a business sells. COGS covers expenses that arise directly from production, like raw materials or labor costs, and indirect costs, like overhead. To calculate COGS, for input into your average inventory cost calculation, use the following formula:
COGS = (beginning inventory + purchases) – ending inventory
Beginning inventory is the amount of inventory you still have from the previous reporting period (a month, a quarter, etc.). Ending inventory refers to inventory you didn’t sell during that same period.
Inventory turnover ratio (ITR)
Your ITR refers to how often the business sold and replaced inventory during a set period, usually one year. Calculating ITR can help you make informed decisions on merchandise pricing, discount marketing, and inventory purchases. The formula for calculating ITR is:
ITR = COGS / average inventory value
A slow inventory turnover ratio usually indicates excess inventory or weak sales; a faster turnover ratio indicates the opposite: insufficient inventory levels, but sometimes also strong sales.
Average inventory age
Finally, you can input your average inventory cost and COGS into a formula to calculate the average inventory age. This reflects the average number of days it takes to sell certain SKUs, or individual inventory units. This calculation is sometimes known as days sales in inventory (DSI). The formula is as follows:
Average inventory age = (average inventory cost / COGS) x 365 days
Average inventory age example
For example, let’s say your clothing retail business’s average inventory cost is $250,000, and your COGS is $750,000. Using the above formula, your average inventory age would be:
Average inventory age = ($250,000 / $750,000) x 365 days
Average inventory age = approximately 122 days
The higher your average inventory age, the longer it takes for any given product to sell, and the higher your inventory holding costs will be. 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.
Generally speaking, an ideal average inventory age is between 60 and 90 days, but an item typically isn’t considered dead stock until it hits 180 days.
Tips for reducing aging inventory
- Generate accurate demand forecasts
- Master strategic inventory planning
- Optimize retail prices
- Invest in inventory tools
- Optimize warehouse management
Once you have an understanding of your inventory aging key metrics, you might learn that you need more efficient inventory management practices. Here are a few tips for reducing aging inventory:
Generate accurate demand forecasts
Implementing accurate demand forecasting is key to preventing excess inventory and, consequently, aging stock. By analyzing your own historical data—or, if your business is new, market trends—businesses can align their procurement strategies with projected demand, reducing the risk of overstocking and other inventory inefficiencies.
You can get at some of this valuable historical data by conducting frequent inventory audits. Audits of this sort are a tool for identifying slow-moving inventory items before they become aged inventory. Regular checks allow businesses to adjust stock levels promptly, minimizing holding costs and optimizing warehouse space.
Master strategic inventory planning
Developing a comprehensive inventory management strategy is crucial for avoiding aging inventory. This includes planning for foreseeable challenges such as low demand, excess stock, and slow-moving products.
For example, swimwear is in highest demand in the months immediately preceding summer and for most of June and July. Sales tend to taper off in August and September. Proactively incorporating inventory patterns like this can help prevent the accumulation of aged inventory.
Optimize retail prices
Regularly review and adjust retail prices based on market demand and product lifecycle to help prevent inventory from aging and offload obsolete inventory. Strategic pricing can stimulate sales, reducing the likelihood of items sitting on shelves for extended periods. Some pricing strategies include:
- Discount and bundled pricing. Offering sales and marketing promotions is one of the more common ways to offload obsolete inventory. You can temporarily discount a particular SKU or put it on clearance, or you can bundle slow-moving SKUs with top-performing ones.
- Competitive pricing. Set your prices based on what the competition charges for similar products.
- Penetration pricing. In a competitive market, penetration pricing involves setting prices low upon entry and raising them as customers get better acquainted with your brand.
If you’re not in a financial position to adjust prices just yet, you can also consider improving your product listings. Make slight changes to a product’s photos and description copy to prompt sales. You can also add social proofs, like reviews and testimonials, or implement cross-selling to prompt shoppers to buy products that are complementary to those already in their cart.
Invest in inventory tools
Investing in advanced inventory management tools that provide real-time insights into aging inventory is a proactive step toward a better inventory control strategy. These tools can automate the generation of aging inventory reports, making it easier for businesses to stay ahead of potential issues.
Optimize warehouse management
Efficient warehouse management is integral to minimizing storage costs (like long-term storage fees) and preventing aging inventory. Proper storage practices maximize shelf life and facilitate easy access to high-demand products.
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. Smart sensors can monitor storage equipment health, predicting maintenance needs to reduce downtime. Automated systems can optimize picking routes to improve overall warehouse efficiency.
Inventory aging report FAQ
What is the purpose of inventory aging reports?
The purpose of an inventory aging report is to help retail business owners identify slow-moving SKUs, which can inform strategies to increase ITR and reduce inventory aging.
How often should you report aging inventory?
The average age of inventory is typically calculated over the course of one year (365 days).
What is a good inventory age?
A good inventory age typically falls between 60 and 90 days.