Selling in any capacity necessitates strong inventory management to understand product costs, earnings, and turnover. However, as you move into multi-channel or multi-marketplace e-commerce, inventory management becomes more complex and a mistake can drastically cut into your earnings, forecasts, and profitability.
Optimizing, updating, and controlling your inventory will ensure that you remain profitable and that your costs don’t exceed maximum. While you can’t control everything, the following key inventory metrics can help you to plan the future of your store and make better decisions. The key to success is frequent or monthly reviews and ensuring that you have the capacity to collect the data you need.
How to manage and analyze multi-marketplace inventory
Inventory management is a major strategic function of an e-commerce business. This article documents key inventory metrics and how to measure them. By focusing on the metrics below, you can see a direct improvement in overall e-commerce company performance.
Monthly & Annual Dollar Value of Inventory as Percentage of Sales
Inventory as a percentage of sales is a valuable metric and Key Performance Indicator (KPI) which you can use in numerous ways throughout your organization.
To achieve it, use the following calculation:
- Add the value for all recorded sales during the period (gross sales)
- Subtract costs such as returns, damaged goods, promotions, and sales, etc. (net sales)
- Divide gross sales by ending inventory (Inventory to sales ratio)
This calculation can be written out as:
(Period) Ending Inventory Value / Sales for (Period) x 100 = Inventory as a Percentage of Sales
For example, if you have $250,000 in ending inventory for the quarter and sales of $1,200,000, this calculation would look like this:
$250,000 / $1,200,000 x 100 = 20.83%
You could use this data to calculate optimal inventory dollar values, check different marketplaces for profitability, check how price differentiation and costs affect sales, and use it to streamline your current operations. Inventory as a Percentage of Sales is also typically used in the finance department, and to calculate other costs such as labor, overhead, non-variable overhead, etc.
You should create and maintain monthly inventory dollar value records, which you can use to track data, create predictions and forecasts for the next year, and track the total value of inventory needed at any given time.
You should also understand the optimal inventory dollar value necessary for the business to run so that you can minimize total value, reduce investments, and reduce risks.The #Skubana Guide to Multi-Marketplace #Inventory Management is here! Click To Tweet
Inventory turnover allows you to track the rate of goods sold compared to the amount on hand or in inventory. This metric is important because it allows you to make informed decisions regarding production, inventory size, sales tactics, purchases, and more.
To correctly calculate inventory turnover, you must know your cost of goods sold (COGS), your beginning inventory for a period, and your ending inventory for a period.
In most cases, you want to calculate monthly, quarterly, and annually, but you can also calculate turns for your industry.
This calculation looks like this:
COGS / ((Beginning Inventory + Ending Inventory) / 2)
Let’s say you had a COGS of $1,200,000, a beginning inventory of $500,000 and an ending inventory of $75,000. Your equation will look like this;
$1,200,000 / (($500,000 + $75,000) / 2) = 4.17
Your inventory turnover rate for this period is 4.17, indicating that you sold your average inventory 4 times during that period.
You can use this data to determine if your inventory sales are in line with your goals for the period, if your current inventory for that item is too high, to identify your best-selling products, and to define future inventory goals. It’s always important to measure turnover rate by category and by SKU so that you can take a closer look at product performance in a meaningful way.
Tracking Inventory Aging
Inventory aging is an important metric that allows you to track SKUs to determine how long they remain in your warehouse before a sale. This is crucial because maintaining stock for long periods of time can be costly.
Tracking inventory aging allows you to determine average inventory aging so that you can pinpoint slow sellers and liquidate them before they become a problem. It will also allow you to better understand the speed of your inventory turnover so that you can make better purchase decisions to balance between fast order fulfillment and increased inventory.
- What is old stock to you? What’s the average amount of time a product spends in your warehouse? What’s the maximum amount of time to maintain profitability?
- What warehouse management system do you use? First in, First Out? Last in, First out? Is it the best option for your products?
Understanding your fulfillment rate allows you to see if you keep enough inventory on hand, if you keep too much, and if your current method is costing you money.
Fill rate is quite simply the percentage of orders that can be filled at the time they are they placed. If this number is 100%, you can review your current stock levels to ensure that you don’t have too much. If your fill rate is low, your reviews, customer satisfaction, and Amazon account could be suffering.
Ideally, you should be able to balance between keeping enough inventory on hand to maintain a high fill rate, while reducing it enough to decrease costs.
Calculating Average Inventory
Average inventory reports allow you to predict sales, forecast future stock, define reorder points, and create fail safes to ensure that you don’t sell out.
You can use your total sales patterns over the last several periods (user inventory reports, inventory purchase records, sales receipts, etc.) to calculate everything you need to know about your inventory.
- Average days on hand (how much inventory do you stock?)
- Average monthly days on hand
- Average annual days on hand
- Annual and monthly excess inventory average (how much inventory do you have remaining at the end of the month)
You can use this data to make decisions about stocking to optimize your inventory, prevent best selling products from going out of stock, cut slow-selling products, and otherwise save money.
Calculating Days on Hand
Days in Period / Turnover Rate
So, if you were to use the equation we used above, with a turnover rate of 4.17, and the Turn we used was one-quarter, or 3 months, we could use the following calculation.
90/4.17 = 21.5
It takes you an average of 21 days to sell your inventory.
You can use this to calculate how often you need to restock, to calculate Minimum Order Quantities, (MOQ) and to ensure that you don’t sell out products.
Reorder points allow you to automatically re-order at a certain point so that you don’t sell out. For example, if you know that this product is your best-selling SKU, a stock out event will lose you revenue. If you know that it takes a minimum of 7 days from your order point to receive a new shipment, you could set a reorder point of every two weeks, with an arrival time at 21 days, just in time to prevent a stock out. If you know that it takes a minimum of 14 days, you could either place a new order every 7 days or increase the size of your order to increase total inventory on hand.
Minimum Order Quantity
If your inventory turns over slowly, you could save money by redefining your minimum order quantity and placing more orders of fewer items. This will reduce the burden on your warehouse, so that you can lower total costs. However, if you are currently experiencing a very high turnover, it may be more appropriate to order more items less frequently to reduce the burden on management.
Understanding costs enable you to see where your money is going, which products are costing you money, and where your profits are. While you should analyze costs from every part of your inventory, you should pay special attention to the following:
Carrying Cost Per Unit
Carrying costs make it easier for you to calculate profits and losses.
You need to know occupancy/warehousing costs, pallet cost, picking cost, tax, insurance, and labor costs for the product.
For example, if you spend the national average of $13,20 per square foot per year, you rent 5,000 square feet, and your product takes up 0.125 of your inventory.
You could calculate:
Monthly Rent: 5,000 x 13.20 – $66,000 / 12 = $5,500 per month.
Warehousing Costs for Product (monthly): $5,500 x 0.125 = $687.50
You can use a similar percentile calculation to distribute labor, insurance, tax, and other costs between products. Once you know total costs, you can divide them by SKU to determine costs per unit sold.
For warehousing costs that would look like this:
Let’s say that you have 5,500 units of stock in your warehouse, which will remain in your warehouse for an average of 21 days.
First, you need to calculate how much it costs to rent your warehouse for the turn. In this case, 21 days is 67-70% of a full month’s rent, depending on the length of the month. Averaged at 68.5%, you can calculate that at $687.50 month, 21 days of rent is $470.93. You can simply divide this rate by your stock on hand.
Total Rent for Warehouse Space for Turn / Stock on Hand
$470.93 / 5,500 = $0.085
This allows you to see exactly how much you pay for the individual SKU per turn so that you can deduct it from your profit. You should repeat this calculation with labor, electricity, management systems, insurance, etc., to get a better idea of total costs.
Making Inventory Decisions
Inventory analysis can help you identify stock that costs you money and can help you to identify opportunities to streamline pricing, improve earnings per product, or cut products entirely if adjustments cannot make them profitable.
Inventory Stock Levels
In most cases, you can significantly reduce carrying costs by reducing the number products in your warehouse. By ordering more frequently, in smaller quantities, you reduce time expenditure and labor, which make up the largest portion of warehousing costs. Vendor MOQ can impede this if they require you to order a very large amount. For example, if you are forced to order several turns worth or even several quarters worth of stock at once, costs could be significantly higher than planned.
Slow Performing SKUs
Not all SKUs sell or turn over quickly enough to drive a profit. Analyze your sales and turnover rate by product and cut non-performers. These products should either be discounted or destroyed to free up inventory space and management for new products. Creating a logical inventory process to begin liquidating slow moving items will help you to reduce stock so that you do not lose money on large amounts of inventory should it not sell.
If you dominate a market for a product and cannot meet demand, you may be able to increase the price.
Setting Achievable Goals for Inventory Optimization
Understanding your inventory enables you to make decisions and set goals to optimize your inventory for the future. For example, you can set achievable goals based on your own data like the following:
- Reduce excess inventory per period by X%
- Reduce stock-outs by X%
- Bring dollar value of inventory as percent of revenue by X%
Tracking your inventory over the long-term means creating sustainable structures to track data, hold processes accountable, and ensure that you are meeting targets, products are selling as forecasted, and you are not spending money needlessly.
This should include monthly demand analysis and forecast updates, daily or weekly reorder point calculations, and regular strategic planning of performance targets.
No matter where you are, chances are that there is room for improvement, and you can optimize your inventory to save money. Of course, handling everything manually is time-consuming. If it seems like a lot, book a free demo of Skubana to find out how our software can automate these processes.