It’s a delicate balance for online store owners, keeping enough merchandise in stock to meet customer demand but not too much that you’re tying up capital and inventory space. The ability to improve inventory turnover, or velocity, can help you achieve this balance and contribute to the profitability of your ecommerce store.
Inventory turnover can be one of the most important financial ratios for store owners to monitor and manage. It measures the liquidity of your inventory and can help you determine how to increase sales through inventory control.
Put simply, ecommerce stores with high turnover are selling inventory faster. That means less cash tied up by the company. Stores with low inventory velocity may be holding obsolete inventory that is difficult to sell, which erodes company profits.
By calculating your inventory velocity, you can measure and improve how your ecommerce store is controlling and selling merchandise. You can determine velocity by dividing the cost of goods sold by the average inventory for the period you are measuring.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
With all ecommerce store owners have to keep track of, it’s easy to overlook the hidden costs of inventory that’s not turning over, including space, insurance, taxes and capital costs. A regular calculation of inventory turnover can help online retailers focus on reducing overhead costs and improving velocity.
This is the time between the signal of customer demand and releasing an order to the supplier. A high variability in cycle time can have a negative impact on the your inventory flow. The goal is to simplify your communications and processing with suppliers to reduce lead time as much as possible.
This represents the time lag on the supplier end between receiving the purchase order and shipping the order. Ecommerce store owners can improve this by quickly responded to changes in demand.
Measuring variability of demand can help you segment your inventory and determine which type of reorder policy to use. For example, for products with consistently high demand you may want to use a schedule based order process. For items with low demand, it’s better to order on an asneeded basis, rather than keeping the products in stock.
In addition to the metrics above, online store owners should track the following data points to make accurate predictions on when to reorder merchandise. Getting the timing right on ordering and replenishing will further improve your inventory turnover rates.
At any given time, you should be able to view the number of items you have sold in each product category. Viewing this data for a selected date range enables better inventory decision making.
By pulling data from your ecommerce platform you should be able to see the number of products remaining in your inventory. It’s critical to follow this metric closely to avoid out of stock items and lost sales.
If you know how many days until your stock will be depleted, you can place your reorders with confidence. This metric is based on the quantity available divided by velocity, which determines, on average, the number of days left until the product will be out of stock.
Lead time is the amount of time it takes your supplier to deliver goods once you have placed a reorder request. Keep track of the average lead time from each of your suppliers to plan future orders accordingly.
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