What Is Inventory Analysis? 8 Inventory Analysis Strategies (2026)

Inventory analysis involves evaluating your inventory to ensure there is just enough stock on hand to meet customer demand. Successful businesses routinely analyze inventory to determine purchase orders, lease warehouse space, and boost profit margins.
Inventory analysis examines and evaluates your inventory to ensure there is enough—but not too much—stock on hand to meet customer demand. The goal is minimizing carrying costs without overordering, while also avoiding stockouts that cost you sales. It’s one of the core inventory management processes that businesses use to improve their inventory performance.
Analyzing inventory data means studying key metrics like average inventory levels, inventory turnover rate, supplier turnaround times, and safety stock levels among others. This data helps inventory managers make informed decisions about purchasing, production, and sales.

An analysis of inventory will collect data on several categories of inventory items. They include:

• Raw materials. These are the basic goods or components that a company uses to manufacture a final product. For example, fabric and thread are a garment maker’s raw materials.
• Work-in-process (WIP). WIP, also known as work-in-progress, refers to goods that are in the process of being manufactured but are not yet completed. An example would be a half-sewn blouse on an assembly line.
• Finished goods. These are final products that are ready for sale to customers. For a clothing retailer, completed shirts, pants, and dresses on the rack are finished goods.
• Cycle stock. This refers to the regular amount of inventory a company expects to sell during a specific period, replenished in cycles.
• Safety stock. Safety stock is extra inventory kept as a buffer against unexpected spikes in demand or delays in new supply. Anything extra that isn’t cycle stock or safety stock is considered excess inventory.
• Maintenance, repair, and operating (MRO) supplies. MRO inventory refers to items used to support production and business operations, but are not part of the final product. Examples include office supplies, lightbulbs, and spare machine parts.

Here are some common goals of inventory analysis:

1. Improve cash flow and profitability. By holding only the necessary amount of inventory, a business frees up capital that would otherwise be tied up in stock. This improves cash flow and increases profitability by reducing storage costs.
2. Optimize inventory levels. The main goal is to find the sweet spot between having too much and too little inventory. This inventory control approach prevents both excess stock and insufficient inventory—a particular concern with popular items.
3. Minimize costs. Inventory analysis helps you generate cost savings by reducing holding costs (e.g., storage, insurance, obsolete inventory, spoilage), ordering costs (e.g., transportation, handling), and stockout costs (e.g., lost sales, customer frustration). Upon identifying inefficiencies in your inventory costs, you can make improvements that free up cash for other purposes.
4. Anticipate demand.
   “The more you know about your demand, the less uncertain you are about demand,” McGill University management professor Javad Nasiry explains in a blog post. “That means you can manage your inventory better and reduce inventory levels in your warehouses, because keeping inventory is costly.”
5. Purchase planning. Understanding your inventory levels and needs helps you optimize purchases from suppliers.
   “Depending on the purchasing volume, vendors may offer allowances for scenarios such as prompt payment, which further drive down inventory costs,” Nilesh Mehta, founder of Bridge Investment System Consulting, notes in a blog post.
6. Enhance customer satisfaction. A well-managed inventory system ensures that popular products are always in stock, which leads to fewer back orders, faster fulfillment, and improved customer service.
7. Support informed decision-making. Inventory analysis touches many corners of your business, from supply chain management to marketing. It provides the data needed to make better decisions about purchasing, production schedules, sales promotions, and pricing strategies.

Different businesses need different approaches to inventory analysis. Your choice depends on goals like reducing holding costs, maintaining proper safety stock levels, and improving cash flow. Here are eight well-established methods of inventory analysis—some of which are used in concert with one another:

1. ABC analysis
2. VED analysis (GMROI)
3. HML analysis (DIO)
4. SDE analysis
5. Material requirements planning (MRP)
6. Economic order quantity (EOQ)
7. Fast, slow, and non-moving
8. Custom par levels