Black Champion U. Miller has explained the term ‘Inventory’ as
“expandable physical articles held for resale, for use in manufacturing a product or for consumption in carrying on business activity”
Industries in the modern world are facing extreme pressure as the trends and likings of consumers change even before they are able to predict it. Inventory and warehouse managers need to respond proactively as the trends change in fact they are needed to be a step ahead of the consumer.
Although it is a bitter truth, it’s true that the industry with good demand forecasting and inventory management techniques can any day overtake a company with better quality products but having flawed demand forecasting abilities.
Inventory management’s goal is to increase profits and performance of the entire supply chain and order fulfillment process by articulately forecasting demand, reducing inventory carrying cost, managing quality, and increasing the value of the inventory. Moreover, they should ensure that the products inside are the ones that would generate profits.
Online or offline retailers will never invest money in holding an inventory that doesn’t bring in revenues frequently. For making a profit in any business the retailers need moving inventory that gets sold quickly and frequently. And therefore, you need to analyze the movements and functioning of products through the supply chain and order fulfillment process.
In this write-up, I will be discussing one of the inventory classification techniques or aka inventory analysis technique called the FSN technique. FSN technique helps you to identify and do the analysis of the fast-moving, slow-moving, and non-moving inventory/products. So if you want to know how to do, FSN analysis read on-
What is Fast – Moving, Slow – Moving and Non – Moving Inventory Management Technique
Also known as the FSN analysis, FSN meaning Fast-moving, the slow-moving and non-moving in inventory management. FSN is one of the inventory management techniques and it is about segregating products based on their consumption rate, quantity, and the rate at which the inventory is used.
Fast-moving inventory, as the name suggests, comprises the stock that moves quickly and needs to be replenished very often. Generally, the stock that lies in this category has an inventory turnover ratio of more than 3 and constitutes around 10-15% of the total inventory.
Slow-moving inventory is the inventory that crawls slowly through the supply chain and has an inventory turnover ratio between 1-3. It is generally 30-35% of the total stock.
The inventory that rarely moves with the inventory turnover ratio below 1 and makes 60-65% of the total stock is called the Non-moving inventory.
How to Identify the FSN Inventory – FSN Analysis
Inventory can be classified based on different parameters like consumption rate, average stay, annual demand percentage, reorder frequency, and how repeatedly the products are used or moved from their location.
To figure out which product falls under which category you need to calculate the parameters mentioned above, like average stay and consumption rate during a period.
The formula for the average stay and consumption rate is –
Average stay = cumulative no. of inventory holding days [or unit of time] ÷ (total quantity of items received + opening balance)
Consumption rate = Total issue quantity ÷ Total period duration
After the calculation of the average stay and consumption rate is done, then the calculation of cumulative average stay and cumulative consumption rate is carried out, followed by deriving the percentages of both. And then, with the help of these percentages, we can identify and segregate the products into FS & N.
Cumulative average stay = average stay of item + average stays of all items that stay longer in inventory than itself
Cumulative consumption rate = consumption rate of item + consumption rate of all items consumed faster than itself
Percentage average stay = (cumulative average stay of item ÷ cumulative average stay of all items) x 100
Percentage consumption rate = (cumulative consumption rate of item ÷ cumulative consumption rate of all items) x 100
According to cumulative average stays –
- Fast-moving products are 10% or less of the average cumulative stay.
- Slow-moving stocks are 20% of the average cumulative stay.
- Non- moving items constitute around 70% of the average cumulative stay.
This means that the fast-moving products stay only 10% or less of the average stay of the inventory and hence travels quickly through the supply chain.
According to consumption rates the FSN can be categorized as –
- Fast-moving inventory is 70% of the average consumption rate
- Slow-moving inventory is 20% of the average consumption rate
- Non-moving inventory is 10% or less of the average consumption rate.
The consumption rate of the F products will always be high because of the apparent reason that they are sold quickly and have a higher inventory turnover ratio.
To make sure that FSN analysis is accurate, you need to take both averages stays in inventory and consumption rate of the products into account. This determines the final FSN status of the stock based on which you make decisions for your inventory management and inventory forecasting.
Let’s take an example to understand how the calculation is done. Here’s FSN analysis in excel.
Let’s carry out the analysis for ten materials, and the time duration to be for 10 days.
Below is the calculation of the item with SKU01.
Opening balance – 40
|Date||Receipt quantity||Issue quantity||Return quantity||Adjustment quantity||Closing balance||Inventory holding days|
The average stay of the material = cumulative no. of inventory holding days [or unit of time] ÷ (total quantity of items received + opening balance)
So, the Average stay of the material is = 596/125
= 4.76 days
We also have to calculate the consumption rate which
Consumption rate of the material = Total issue quantity ÷ Total period duration
= 6.5 Nos/ day
The next step would be listing down of all the 10 materials with their average stays and consumption rates
|Item code||Average Stay||Consumption Rate|
Now classifying the products on the basis of cumulative average stay percentage by arranging them in descending order with the highest number of average stay on the top.
F= 10% or less
S = 20%
N = 70%
|Item Code||Average Stay||Cumulative avg stay||% average stay||FSN classification|
*This graph is for demonstration purposes only, generally in average stay ,the F = 10%, S = 20%, N = 70%
Similarly, the subsequent step is to classify the inventory concerning the consumption rate.
|Item Code||Consumption Rate||Cumulative consumption rate||% Consumption rate||FSNClassification|
*This graph is for demonstration purposes only, generally in consumption rate ,the F = 70%, S = 20%, N = 10%
The final classification is conducted by combining both of the results of segregation achieved above.
|Item Code||FSN (consumption rate)||FSN (Average stay)||Final FSN classification|
*This graph is for demonstration purposes only.
Why You Should Use FSN Analysis Technique – Advantages
As you saw in the above example, you can calculate the average time spent by a product in the warehouse and the consumption rate, and this data can help you a lot in managing your inventory efficiently. Below is the list of reasons explaining the importance of the FSN technique.
- An easy way to find dead stock and reduce its accumulation in the inventory
- An effective way to categorize inventory in a way that the categories in which the products are kept say a lot about the behavior of the product in a supply chain
- The technique also empowers the retailers to decide on the future of the business of each product, whether to increase the purchase of a particular product or to not
- A fantastic technique to find the active products in the inventory and also if you carry the analysis regularly you can see the trends shifting from one product to another
- This information about changing patterns can help you in handling those products and keeping the inventory updated
- The products that don’t need to spend money on are easily spotted
- Nonmoving inventory control is all about getting rid of the non-moving products at the correct time to avoid the inventory carrying cost, and replace those products with the products that bring in the profits also becomes uncomplicated as you know the products that aren’t doing well
- This also enables you to keep fast-moving products at a location in the warehouse that is more accessible
The major disadvantage of this technique is that it is a calculation that is based on formulas and information provided by you, so the issue is the information, or even a single human error can flaw the calculations.
This can lead to wrong analysis, and you are managing your inventory based on that faulty outcome. You could consider a slow-moving product as a fast-moving product and tell your supplier to send more of it. However, then you realize there isn’t much demand for that product. So, there is a loophole in this technique.
Also, sudden changing trends in the inventory are very tough to figure out with this technique alone as you have to calculate again and again.
To know about FNS analysis through a video watch the below-given youtube video
If you want to segregate the inventory and figure out the demand or movement of products, this is one of the best techniques; however, the companies use a combination of ABC analysis, FSN analysis, and VED to classify their products depending on their needs.
I hope you can learn the FNS analysis technique from the above-given information. There are many advantages of this method, like a better understanding of the product’s motion and conduct so that you can forecast your inventory effectively and decrease inventory carrying costs and increase the bottom line.
Properly using this method can take you ahead of your competitors in a whisker.
However, don’t forget the disadvantages as a small error can lead to a misunderstanding that can cost you money and time both. Also, going out of stock can lead to consumers getting diverted to your competitors.
And at last, here’s a tip that I want to give you. Use an inventory management software that can spare you from the efforts of classifying the inventory and keeping track of it manually. Take a 15 day free trial of an automated inventory management software to see if you like it or not.
“Non moving inventory is like a mole in a business that does nothing yet does a job of increasing your inventory carrying cost, decreasing your bottom line and devaluing your invested money”
A creative human existing on the planet just like others, nothing new. A poet who loves to write stories that can influence people and hence can write anything (believe me I can). Would choose watching movies over novels. Loves to laugh, observe, and talk nonsense because if making sense was the reason for our existence then, believe me, God wouldn’t have put all of us here in the first place. Also, a Content Writer at Orderhive who strives to deliver something unique.
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