Inventory turnover is an important metric that shows how well an online business is managing and moving its products. For eCommerce retailers, inventory turnover is one of the most important indicators of business health. The premise is simple: the more inventory being moved, the more profitable and successful an eCommerce business is likely to be. And since inventory and profits go hand in hand, smart inventory management should be an essential part of every brand’s inventory control strategy.
What Is Inventory Turnover?
Inventory turnover is a crucial key performance indicator (KPI) used to measure overall business performance. Simply put, inventory turnover refers to the number of times in a given period a business sells and replaces its inventory. It measures the rate at which inventory has been sold and replaced.
Knowing inventory turnover rates offer valuable insights into what products are selling best and how a company manages its overall costs. Higher turnover numbers indicate lower holding costs, higher profits and good cash flow, as demand for certain products is high. High volume, low margin industries like retailers and supermarkets usually have the highest inventory turnover.
Lower numbers can indicate soft sales and excess inventory. They can also be a result of slow or late restocking of products or overstocking on products that do not sell well. Low inventory numbers can also seriously undercut a company’s profits. Carrying costs, insurance, damage, obsolescence, taxes and loan interest can add up to almost 30% of the annual cost of inventory.
How to Calculate Inventory Turnover Ratio
The first step for finding the inventory turnover ratio is to choose a timeframe to measure, such as a quarter or a fiscal year. Then, divide the cost of goods sold (COGS) by the average inventory for the selected time period. Simply stated, it looks like this:
Cost of Goods Sold ÷ Average Inventory = Inventory Turnover Ratio
Average inventory is used in the ratio because companies might have higher or lower inventory levels at certain times of the year. For instance, inventory is usually higher during holidays or high sales times of year.
Inventory Management and Why It’s Important
Once the inventory turnover ratio is established, companies need to know how much inventory they actually have and where it is stored. That is where smart inventory management practices come into play.
eCommerce inventory management is an organized approach to sourcing, storing, tracking and shipping an eCommerce business’s inventory. Good inventory management strikes a balance between the amount of inventory coming in and going out. Its goal is to let a company understand inventory levels and where stock is stored.
Inventory management affects every aspect of a business from warehousing costs to the ability to fulfill orders accurately and on time. It uses software to track the flow of products from suppliers through the entire production process to the customer. In the warehouse, inventory management tracks stock receipt, picking, packing and shipping.
Strong inventory management strategies are an invaluable way for eCommerce companies to increase efficiency and reduce operational costs. Ultimately, smart inventory control management is key to achieving optimum inventory control and higher profits.
How eCommerce Brands Can Optimize Inventory Turnover
Determining the right amount of inventory can be a balancing act for eCommerce retailers. Here are a few practical ways eCommerce brands can improve their inventory turnover:
Run Special Sales Events: Holding special sales events is an effective marketing strategy that can boost profits and reduce inventory. Flash sales that offer quick discounts tap into customer FOMO to create dynamic urgency and excitement. When customers feel they might miss out on limited-time deals, they’ll likely buy more than they normally would. This not only clears out inventory, but boosts profits, brand awareness and customer loyalty.
Bundle Products: Bundling slower-selling products and selling them for a lower price than if bought separately is another smart way to move inventory. By grouping select products together at discounted prices, customers feel like they’re getting more for their money. As a result, they are likely to buy more bundled offers, which clears out even more inventory.
Develop Smart Product Pricing Strategies: Are products being sold at the best prices so a business can stay competitive and still make a good profit margin? If not, it is time to review (or develop) a smart product pricing strategy. The right pricing approach helps business growth, boost revenue and profits and reduce inventory.
Practice Inventory Forecasting: Inventory forecasting is a method used to predict inventory levels for a future time period. Also known as demand planning, inventory forecasting uses data, current trends and upcoming events to predict inventory levels. Inventory forecasting also helps purchase order management by keeping track of sales and inventory demand. It can increase revenue while decreasing unnecessary costs of excess inventory.
Stock Inventory That Sells: While this may seem like a no-brainer, many businesses overlook this simple yet effective strategy. Stocking high-demand products is important in terms of inventory turnover and profitability. In the same vein, it is just as important to avoid stocking products that sell slowly. Good inventory forecasting and trend analysis determines the items that will sell quickly from those that will not.