Constantly managing inventory effectively and efficiently is vital to the success ecommerce brands. Across your manufacturing, freight, and fulfillment partners can feel like a 24/7 job, balancing supply, demand, capital, space, lead times, and transit times. Inventory turnover ratio is a way of measuring how many times you’ve sold through and replaced your inventory in a given period—how many times it’s turned over, in other words. Knowing your inventory turnover ratio gives you key insights into your business’ performance. A higher inventory turnover ratio indicates a healthy business, while a lower ratio can spell trouble. To calculate the inventory turnover ratio, divide your business’s cost of goods sold by its average inventory.
Your inventory turnover ratio is an important KPI that you should be keeping an eye on. Think of it as the canary in your retail coal mine—if it starts to drop, you know there’s crucial work to be done optimizing your purchasing and adjusting your sales tactics. Using your cost of goods sold to calculate your inventory ratio can be more accurate. Sales figures include a markup, which may inflate your ratio and give you a higher number. Over-ordering or producing larger batches of a product than you can sell is a common culprit of a low inventory turnover ratio.
So for e-commerce businesses, it’s important to ensure that customers experience a flawless interaction at every step of the journey. It may require a thorough analysis of your sales channels to find and remove the bottlenecks. ShipBob’s fulfillment solutions include both a warehouse management system (WMS) for in-house fulfillment, as well as hands-off tools and fulfillment services for brands that don’t want to run their own warehouse. For both solutions, ShipBob offers an international fulfillment network and dashboard with a built-in inventory management system.
Kimberlee Leonard has taken her professional experience as an insurance agency owner and financial advisor and translated that into a finance writing career that helps business owners and professionals succeed. Her work has appeared on journal entries Business.com, Business News Daily, FitSmallBusiness.com, CentsibleMoney.com, and Kin Insurance. Rather than being a positive sign, high turnover could mean that the company is missing potential sales due to insufficient inventory.
Companies gauge their operational efficiency based upon whether their inventory turnover is at par with, or surpasses, the average benchmark set per industry standards. Higher stock turns are favorable because they imply product marketability and reduced holding costs, such as rent, utilities, insurance, theft, and other costs of maintaining goods in inventory. A high inventory turnover generally means that goods are sold faster and a low turnover rate indicates weak sales and excess inventories, which may be challenging for a business. Your inventory management approach significantly impacts your turnover ratio.
Ultimately, you can write off and destroy unsold goods (which is a worst-case scenario) or donate them to charity organizations. Data is your most valuable asset because it helps you see your business in real numbers and gives you plenty of insights into how you’re doing and what can be improved. Analyze and compare your previous years’ turnover for various groups of goods to define which remain to be on demand, which were trending but not anymore, or which sell only seasonally, etc. This way, based on the numbers, you’ll be able to plan your supply more accurately.
Since wholesalers stock thousands of SKUs, this is unfortunately too time-consuming to be done on a frequent basis. Since poor-performing SKUs contribute little to the company revenues, they are understandably ignored. Thrive’s Thermostock product identifies these SKUs and automatically turns them to nonstock or calculates an optimal Min to hold. The inventory turnover ratio measures a business’s efficiency and how it manages its inventory. A high inventory turnover ratio means a company sells its inventory quickly and efficiently. In contrast, a low inventory ratio migh indicate that a company is not effectively managing its inventory, which can result in increased holding costs and reduced profitability.
However, both high and low inventory turnover ratios can be problematic for businesses. The inventory turnover ratio measures how many times a business sells and replaces its inventory within a certain period of time. The right inventory management software gives you real-time visibility into inventory levels across channels, as well as analytics tools and data tracking capabilities. These features make it easier for you to find dead stock, forecast demand, and monitor your inventory turnover over time. However, it’s important to note that different industries may have different ideal ratios due to varying production cycles and sales patterns. It’s also worth noting that while high turnover rates are desirable in most cases, they can also indicate insufficient stock levels or inadequate marketing efforts.
This high turnover rate indicates that the retailer effectively rotates its stock, preventing produce from sitting too long, which would lead to spoilage. This strategy ensures that customers receive fresh goods, enhancing customer satisfaction and loyalty, which are significant drivers of long-term business success. That said, companies within the same industry can also vary in their turnover rates. Inefficient supply chains, an excessive amount of inventory, and other operational inefficiencies can lead to stagnant, obsolete inventory. For example, a local business offering the same products as a national franchise might sell a lower volume of products less quickly. A high inventory turnover ratio indicates that a company is efficiently managing its inventory, which can lead to lower holding costs and potentially higher profits.
A treasure tip for eCommerce businesses is optimizing your website for mobile. In 2018, over 52% of all website traffic worldwide was generated through mobile devices. You’re missing out on many potential customers if your website isn’t easy to use on a smartphone. To get deeper into the topic, read our detailed guide on average inventory and its formula. So, let’s say your sales for the year totaled $500,000, and your average inventory value on any given day was $100,000. Promotions and discounts are a quick way to turn specific items and increase sales overall.
In fact, just about any eCommerce business revolves around managing its inventory. Inventory management is not just about selling items and stocking them, but really more about how well you evaluate your products and, based on that evaluation, how you market them. An efficient inventory process, backed by smart strategy and management, is key. Demand forecasting involves predicting the future demand for your products based on historical sales data, market trends, and economic indicators. This can help you plan your inventory levels more accurately, reducing instances of overstocking or stock-outs.
By carefully evaluating your pricing structure and making strategic adjustments, you can encourage customers to purchase more products more quickly, leading to a higher inventory turnover ratio. You need to be sure that your offered price allows your target audience sufficient purchase motivation while also providing your company with enough profit margin to sustain its operations. Below, you can find the accepted average inventory turnover ratios by industry. However, before applying this universal approach to your business, look at your business specifics. If a company sells seasonal products, it may only sell the inventory once or twice a year. Therefore, the turnover ratio for such a company will naturally be lower than for companies that sell products year-round.
If the SKU doesn’t have a big profit margin, you may want to consider cheaper warehousing alternatives. To time inventory replenishment correctly, you need to calculate reorder points and safety stock carefully over time. Additionally, you may consider setting automatic reorder notifications when your unit count for any particular SKU hits a certain level. Many tools enable this, and some even help you automate reordering inventory altogether. Whether your inventory turnover is too high or too low, here are some measures you can take to try and combat or regulate the issue. Alix delights in finding ways to deliver actionable insights to retailers and restaurateurs.
The Inventory Turnover Ratio measures the number of times that a company replaced its inventory balance across a specific time period. You need to approach pricing wisely and be flexible to stay on top of the competition and drive sales. Regularly reviewing your pricing strategies can help you warm up the demand for products with slower turnover and help beat excess and obsolete stock. Increasing the turnover ratio by having less inventory on hand doesn’t necessarily mean that you’ll face trouble. It’s a pretty common practice, especially if a business is in its early stages of development. However, this will require more attention to inventory management and knowing the correct numbers to analyze.
What counts as a “good” inventory turnover ratio will depend on the benchmark for a given industry. In general, industries stocking products that are relatively inexpensive will tend to have higher inventory turnover ratios than those selling big-ticket items. The inventory turnover rate takes the inventory turnover ratio and divides that number into the number of days in the period. This calculation tells you how many days it takes to sell the inventory on hand.
Some brands go so far as utilizing this model for backorders to secure the capital upfront. Maybe it becomes part of a semi-regular rotation — giving people all the more reason to sign up for your email list and pay close attention. Separating out long-term and short-term storage can improve a facility’s inventory turnover ratio, and even save some brands money in certain scenarios. When you know how fast items turn over, you can make sure to order popular items well in advance and in sufficient quantities to meet customer demand. This prevents stockouts, which results in fewer backorders and more happy customers. Just as calculating your inventory turnover ratio helps prevent you from amassing too much inventory, it can also help prevent you from ordering too little.
Simply put, the higher the inventory ratio, the more efficiently the company maintains its inventory. There is the cost of the products themselves, whether that is manufacturing costs or wholesale costs. There is the cost of warehousing the products as well as the labor you spend on having people manage the inventory and work on sales. The more efficient the system is, the healthier the company is with its cash flow. Clear replenishment rules help you ensure you can fulfill orders, keep your customers satisfied, and don’t overpay for warehousing.