The ability to accurately analyze your inventory performance can be the difference between business success and business failure.
Yet, inaccurate inventory reporting – or lack of reporting altogether – remains a huge challenge for many online retailers.
After all, which inventory metrics should you be tracking? How can you use this data to maximize profitability and drive down costs? And perhaps more importantly, how do you even go about getting this information and working out the relevant inventory calculations?
With the ecommerce industry becoming more and more competitive, these metrics are no longer nice-to-know data, but rather they provide crucial insights that will help you successfully scale your business.
So, with this in mind, we have listed those worth focusing on below as part of your inventory analysis.
One of the most effective ways to maximize profitability is by monitoring the performance of your inventory.
After all, as your business expands and you sell across more and more channels, having an understanding of metrics such as inventory turnover and stock demand can help you identify your most profitable product lines, as well as those costing your business.
As an example, your best performing products can shed a huge amount of light on what’s selling well, helping you keep on top of product demand, while also giving you valuable insight into the opportunities you could better capitalize on.
Let’s say, for example, a certain product line is selling incredibly well.
Ask yourself what other similar products could be in high demand that you’re not yet selling? Or even whether your existing best-sellers could sell well in new markets?
While your inventory management system should be able to track historical sales data to establish the reorder points (you can see the reorder point formula here), it is worth also being aware of seasonal trends – for example the different points in the year that sales for individual products peak.
Unfortunately, not all your inventory will sell well – at least it’s unlikely.
The good news, however, is that by identifying your least successful products through effective inventory analysis, you can come up with a plan to shift this slow-moving stock.
In fact, we’ve come up with a list of inventory reduction strategies to help you free up warehouse space (and save on the associated carrying costs) and maximize profits.
Do, however, work out whether these inventory items are performing badly all through the year, or only certain times, as this can also help inform your reorder points.
You should also consider the performance of your inventory in individual markets. Is something selling well in France, for instance, but not the UK?
Use this insight to determine where best to target your promotions, or alternatively transfer stock between warehouses.
That’s not all though.
By understanding stock demand in different markets, you may be able to justify charging a premium if demand is high and competition is low.
Also known as inventory churn rate and stock turnover, your inventory turnover rate essentially refers to the number of times your inventory is sold and replaced within a specific time period.
In short, it tells you just how efficient your business is at converting the money you’ve invested in your stock, into sales and subsequently profits.
Let’s say you have £5 million worth of inventory.
If you sold your entire inventory in the space of a month, your cash flow will be far better than if it took you three months.
But how to you calculate inventory turnover?
While we have outlined the complete inventory turns formula here, along with a step-by-step example, the calculation is as follows:
Inventory Turnover=Cost of Goods Sold (COGS) ÷ Average Inventory
Which raises the question; what is Cost of Goods Sold and average inventory, and how do you calculate them?
Cost of Goods Sold formula
Cost of inventory at the beginning of the year + Additional inventory costs (purchased during the year) – Cost of inventory at the end of the year=Cost of Goods Sold
Average Inventory calculation
(Cost of inventory at the beginning of the year + Cost of inventory at the end of the year) ÷ 2=Average Inventory
Here is more guidance on calculating your average inventory and COGS.
You may also want to work our your Average Days To Sell Inventory by using the following formula:
Average Days To Sell Inventory=(Average Inventory ÷ Cost of Goods Sold) x 365
While we’ve already touched on stock demand, it’s worth highlighting its importance as a core inventory metric, as the ability to anticipate this demand can make a huge difference to your business’s success.
In fact, by forecasting your projected sales, you can align your stock with the anticipated demand throughout the year – something that can be achieved using reporting data extrapolated from inventory management software.
More specifically, it can help to ensure that you don’t have unnecessary excess stock during the times when demand for individual products is low, but that you are equipped to deal with expected peaks in demand.
Ultimately, this will allow you to maintain your safety stock levels, which should be high enough to cover both your supplier’s transit time and customer demand, but low enough to avoid unnecessarily high inventory carrying costs.
You can learn more about calculating your safety stock levels here.
Keep in mind that while this process can be done manually, if you have a large number of SKUs this can become incredibly complex and time-consuming, resulting in human error such as overselling or stock outs.
If you’re not already using inventory management software, it’s therefore worth researching options that can calculate daily average consumption per item and work out the reorder point based on supplier lead time.
While it’s incredibly important to report on the performance of your inventory, by drilling down on which sales channels are proving to be the most and least successful, you will be able to make smarter business decisions.
This should be reviewed overall and for specific products or product categories.
Ultimately, this insight will allow you to make informed decisions into whether to invest more on certain marketplaces or sales platforms, or whether to cut your losses altogether.
Accurate inventory reporting does rely on having the right system in place to track these metrics.
In addition to this, when selling across multiple channels, multichannel inventory software will make the process of obtaining and comparing this data a whole lot easier.
So, there we have it.
The inventory metrics that you should not only be tracking, but that you should be drawing insights from in order to increase efficiency, cut costs and boost profitability.
Speak to us to find out how Linnworks can connect and automate your commerce operations so you can capture every revenue opportunity.