The importance of a correct approach to calculating average daily inventory sales

  • Sep 20, 2021
  • 5 min read
Cover: The importance of a correct approach to calculating average daily inventory sales

A competitive advantage for retailers today is the timely response to fluctuations in demand for their goods. Customers who choose the LEAFIO AI Retail Platform to manage their stock can adapt quickly to changes in demand, as the average daily usage (ADU), which reflects the current demand for goods, is used as a basic calculation when generating an auto-order. In our system, this ADU (average daily usage) is the number of sales over a certain time period. 

When calculating the average sales per item, it is very important to get the period required for the statistics right. If the period is too long for a product with frequent sales, the average sales indicator will react slowly to changes in demand, resulting in an order that does not match demand (lags). Conversely, if a short period is used for rare sales, the average will be inaccurate (the amount of goods in the order will not match the demand). If you have one day in a period with an occasional large sale, the ADU will be overestimated. Conversely, if there is not a single sale in the period, the average sale will be 0. To reduce the impact of such situations, LEAFIO assigns items to three groups according to the frequency of their sales:

  • Rarely sold goods;
  • Moderately sold products;
  • Frequently sold and FRESH products.

The customer can decide which average sales value will correspond to each group or can use the default value.

  • The following thresholds can be selected for the rare products group: 0.1; 0.2; 0.3; ... 0.8 (default value 0.5). All products with an ADU lower than this will belong to this group.
  • The following ADU values can be set for the frequently sold and FRESH products group: 0.6; 0.7; 0.8; ... 2.0 (default value 1.1). This group includes all products with average sales equal to or higher than the selected value.
  • All goods that fall within the range between the above values fall into the moderately-selling goods group.
Average daily usage (ADU)
Average daily usage (ADU)

Average sales indicator ADU

For the order to be created correctly, for each product group the ADU inventory is recalculated by the system after a certain period, which is set in the settings.

  • For the rare items group, it is possible to select 5; 10; 14; 18; 21 (the default value is 14) days.
  • For the moderately-selling items group, 3; 5; 7; 10 (the default value is 7) days.
  • For frequent sellers and FRESH products, the average sale is calculated on the day the order is placed, since this group includes products with greater fluctuations in demand.

Also, according to the group, the system determines which period to take the sales for ADU calculation. The less often an item is sold, the longer the period needed to calculate the correct average sales value. These periods can be set separately for each group in the individual company settings:

  • Rare goods (in days) - 21, 30, 45, 60, 75, 90, 120, 180 (default value 60);
  • Average sales (in days) - 14, 21, 30, 45, 60, 75 (default value 30);
  • Frequently sold and FRESH goods (in days) - 7, 14, 21, 28 (default value 14).

ADU is calculated for all active products with active schedules for which orders are automatically generated.

What can the minimum ADU value be used for?

To avoid cases where the calculated value is very small or equal to zero, it is possible to specify by an additional setting the minimum ADU value below which the system will not set the average sale. The minimum selling average can be selected from the following options: 0; 0.01; 0.02; ... 0.05; 0.1.

Valid days for calculating average sales 

To correctly calculate the average sales for a given period, the system will identify valid days and exclude from them those days that may in some way artificially lower or raise it. The criteria for determining such days are as follows:

  • The balance or sale of the product on that day must be greater than 0.
  • The product must not be in stock.
  • Days with wholesale sales are excluded.

The wholesale criterion for infrequent and average sales can be chosen from the following values: 0; 5; 10; 15; 20; 40 (in units of goods). If there are more sales than the specified quantity on any given day, that day will be excluded from the calculation of the average sale.

Inventory optimization

Inventory management involves overseeing and optimizing the storage, tracking, and organization of a company's goods or assets to ensure efficient.

Since ADU for frequently sold items is not limited in the maximum possible value and can be higher than the selected criterion for this group, wholesale is determined by a different logic, namely: you must specify how many times the sale for the day must be greater than the current average sale for the system not to consider that day as valid. The selectable criteria are 0; 10; 20; ... 300 times. For example, if we have a current average sales value of 5, the criterion of 20 times selected and 120 items were sold on the day, then this day is excluded from ADU calculation.

  • Days with irregular demand are excluded.

Leafio also has an option to exclude days with predictably irregular demand. This includes the days before March 8th, Thanksgiving, Easter, etc. These days are date-dependent and they can be predicted in advance. The customer chooses the days with irregular demand, which will be excluded for all products when calculating the cleared average sales.

By dividing products into 3 groups and being able to specify your settings for each group, our customers get flexible functionality for calculating average sales, which in turn allows them to react quickly to changes in demand in today's retail environment.

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