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How to Optimize Inventory Turnover for eCommerce

How to Optimize Inventory Turnover for eCommerce

Too little stock means lost sales and customers left empty-handed and disappointed. It’s not a stretch to say that, for most companies, the movement of inventory through the supply chain is your business. How good your operation is at that is the strongest indicator of future success. Since almost all retail businesses develop around their inventory management strategy, stock turnover rate is one of the most prominent aspects for any merchant. An annual inventory turnover ratio of 4 would indicate that your stored inventory of T-shirts turns over (sells and is restocked) four times a year. This is a healthy ratio for an e-commerce business where products don’t expire and storage space is (hopefully) not too expensive.

Inventory Turnover Ratios for Ecommerce: Everything You Need To Know

An automated inventory system might not be able to account for spoilage. So, complement the system with periodic physical audits from trained employees and external auditors. The company reported a 72% reduction in dock-to-stock time, 99% order accuracy, and real-time omnichannel order synchronization.

Why is inventory turnover important?

Though inventory is actually a type of asset lying with the company, it can be monetized, only if inventory sells and fetches cash. It is the reason why companies don’t consider inventory as a cash equivalent when they calculate ‘Quick Ratio’ to gauge their liquidity position. (Quick ratio is another ratio that is frequently used to compare a company’s economic strength). Dropshipping is a method of retail fulfillment that doesn’t require you to keep inventory on hand. Instead, you purchase the product from a supplier who then ships it directly to your customer.

What is a bad inventory turnover ratio?

An inventory turnover ratio any lower than two could indicate that sales are weak and product demand is waning. This could result in excess inventory on the warehouse shelves and wasted space and resources.

Although it’s usually not a good idea to sacrifice profit for turnover, it’s sometimes necessary—for example, when it’s more costly to store « dead stock » in your warehouse than sell it off quickly. These businesses, for example automobile and consumer electronics companies, need to sustain a higher inventory turnover ratio. That’s because holding onto goods in these highly competitive, rapidly evolving areas can be exceptionally costly.

Calculate Inventory Ratio with Extensiv’s Calculator

And if you already have a delivery team, start improving your efficiency today with OptimoRoute. We offer a 30-day free trial, so you can take our software for a spin with zero risk. Just under half (49%) of consumers say they are more likely to buy a product online if same-day shipping is available. And more than a quarter of consumers will abandon their online purchase if same-day shipping isn’t available. The JIT method isn’t just effective for retailers with time- and temperature-sensitive products, though.

Inventory Turnover Ratios for Ecommerce: Everything You Need To Know

You can use a formula to calculate it, giving you an exact number to go by. In contrast, consumer goods like personal care products and foodstuffs have shorter production times, sell quickly, and sell a lot. The demand for these items is inherently higher, contributing to a faster turnover. For distributors, the average inventory turnover (and what makes a good inventory turnover) depends on your industry. The inventory turnover ratio is a precise figure that represents inventory turnover. This benchmark reveals how quickly your company uses and replaces inventory within a predefined time frame.

What can cause a decrease in inventory turnover?

For example, a local business offering the same products as a national franchise might sell a lower volume of products less quickly. In simple terms, inventory turnover ratio reflects how fast a company sells an item and is used to measure sales and inventory efficiency. Inventory turnover is also known as inventory turns, stock turnover or stock turn. A low inventory turnover ratio typically shows either weak sales or a lack of demand in your industry. In some cases, a low ratio will illustrate an imbalance between how frequently you’re restocking items and your actual sales numbers.

Check out our guide to learn how to build relationships with window shoppers and create a lasting impression that sells. The story shouldn’t come to an end after a customer has made a purchase. Returning customers are highly likely to buy from you again (and it’ll cost you less than acquiring new ones). Think about re-engaging with customers via email or social media campaigns with new arrivals, special offers, promos, or personal discounts.

The goal of the JIT method is to get orders to customers quickly while minimizing product holding costs. When you use the JIT method, which reduces the overall inventory in your warehouse at any given time and subsequently results in higher stock turnover, you don’t use safety stock. Some businesses, such as food stores that sell items with short shelf lives, need a higher inventory turnover ratio—you don’t want milk sitting on your supermarket shelf for six months. Grocery stores typically see annual inventory turnover ratios just over 15 (as of 3 Q 2020). Summing everything up, the inventory turnover ratio is a must-track metric for an e-commerce business.

Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period. A company can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell its inventory. After that, if you still have a low inventory turnover, consider reselling your extensive goods back to your suppliers at a discounted rate. Some suppliers will accept the goods if they can buy them at a discounted rate and sell on to other retailers later. This will help you to get rid of excess stock and improve your inventory turnover rate.

Whatever inventory turnover formula works best for your company, you will need to draw data from the balance sheet, so it’s important to understand what these terms and numbers represent. Finding the optimal inventory turnover ratio or the perfect inventory turnover ratio for a business can be very tricky. But businesses can follow a thumb rule that the optimal inventory level for their business is the one that covers all their sales without any inventory shortage or surplus. It can be achieved through synchronized purchase and sales of the inventory.

Finally, calculate inventory turnover for each product line in every warehouse individually. This will help you find out when your inventory is not earning enough return on investment. Reducing the quantity you typically buy from the supplier can help improve inventory turnover.

There’s a level of stock at which it’s necessary to place a new order with a supplier so that your remaining stock is enough to cover your customers’ needs before the next shipment arrives. As mentioned above, efficient inventory management is critical for e-commerce businesses as they have a significant Inventory Turnover Ratios for Ecommerce: Everything You Need To Know amount of their working capital invested in the goods sitting in the warehouse. And the quicker they can convert this investment back into cash, the better. So apart from streamlining sales, they need to implement efficient inventory management practices to help move stock quicker through the business.

  • It is a risk as no business can guarantee that it will be able to sell its entire inventory in all types of market conditions.
  • It is better for retailers to reduce their carrying costs by resisting the urge to buy in bulk, even where there are economies of scale or discounts to be had.
  • Low inventory turnover means you’re not selling your products quickly enough.
  • However, multiple factors and industry-specific variables play a significant role in deciding how the inventory turnover ratio should be interpreted.

Likewise, you might target your inventory-to-sales ratio by identifying slow-moving products and working to reduce your inventory of those to minimal levels, so you don’t have excess capital tied up in them. You could do that by increasing advertising, lowering prices, or reducing reorder quantities, among other things. But if the sell-through rate increases too fast then your inventory levels will decline and you risk running out of stock. The inventory-to-sales ratio works in the opposite direction to the inventory turnover ratio, so a lower number is better. For example, an inventory-to-sales ratio of 1 would mean that every dollar invested in inventory is producing only 1 dollar of sales each year. This shows that capital is being tied up in inventory that isn’t selling and the business is likely to be in trouble.

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