Inventory turnover ratio tells sellers how well they manage stock. Here’s how to calculate and improve upon it.
Sometimes, you introduce a product that flies off the shelves, but others may sit in storage for weeks. On the flip side, a product that may not sell… may suddenly surge in popularity.
There’s no way for sellers to predict the future, but they can gauge their past sales to better prepare for future spikes. For example, sellers can measure their inventory turnover ratio, one of the primary eCommerce metrics that demonstrates true selling performance.
Inventory turnover ratio tells you how well you manage stock. You can use it to improve your supply chain, pricing, product lifecycle, and even promotions.
What Is Inventory Turnover Ratio?
Also called stock turnover ratio, this KPI shows how many times a seller has sold out and replenished its inventory in a specific time period. Merchants typically calculate this metric for two reasons:
- Forecast the duration of current inventory
- Determine the optimal stock level for a specific sales period
A high turnover ratio indicates stronger sales. That said, overall selling performance depends on effective inventory control.
Why Track Inventory Turnover Ratio?
While a high inventory turnover rate points to healthy sales, a low ratio means some issues need to be addressed. Here are specific advantages to tracking this metric:
- Optimize cash flow. You’ll have a detailed view of your financial health. If turnover is low, sellers can identify issues in their supply chain, or other reasons why inventory isn’t selling.
- Reduce stockouts. While a high turnover ratio may be beneficial, it can also indicate that stock is being depleted too quickly. This helps sellers develop more efficient management, ensuring you order the optimal amount of stock at the perfect time.
- Improve profitability. This leads to stronger sales and overall improved profitability. Plus, you can better plan for busy sales periods and have the right amount of stock for specific marketing campaigns and promotions.
How to Calculate Inventory Turnover Ratio
Here’s the inventory turnover formula:
Cost of goods sold (COGS) ÷ Average value of inventory
Some companies may use overall sales instead of COGS. COGS is usually recommended because it measures the value of your inventory, and offsets other factors that may impact the ratio, such as seasonal trends.
Inventory Analysis
While we know a high turnover ratio is good, determining what constitutes a good ratio can be challenging.
For starters, anything over 8 means you have healthy sales while maintaining efficient stock management. A turnover ratio of 7 or lower may indicate excess inventory, poor sales, or ineffective stock management.
If any competitors have public financial records, consider calculating their inventory turnover and comparing it to your own figures.
What If My Turnover Ratio Is Low?
While there are many reasons why your inventory turnover ratio is low, this issue also offers different solutions.
Adjust Pricing
Change your pricing strategy to focus on aged inventory management. You can do this by creating multi-item packages, advertising these products, or discounting them. If these tactics don’t work, consider selling them to a secondary channel, such as an off-price retailer.
Streamline Your Supply Chain
Common tactics include buying from a domestic manufacturer, improving delivery, using inventory financing, and diversifying sourcing. Even strengthening relationships with existing suppliers and investing in technology can make a huge difference.
Improve Sales Forecasting
Inventory reports and sales numbers offer more than insight into your profitability – they can help improve sales forecasting. This way, you can better anticipate busy and slow seasons, helping you better manage when and how much stock to order.
Conduct Competitor Research
You can only calculate inventory turnover for competitors if their sales records are public. But competitor research goes a long way, however. Use this tactic to discover industry trends and gauge your competitor’s marketing strategy to improve your market share.
Try Automation
Automated technology, such as order management software, cuts costs and improves efficiencies. How this technology works is it will track inventory levels and reorder the right amount of stock when you’re running low.
Similar Inventory Management KPIs to Track
Inventory turnover ratio isn’t the only metric that gauges your sales and inventory health. Sellers can also track inventory-to-sales ratio and days sales of inventory.
- Inventory-to-sales compares the amount of inventory you’re holding to your overall sales. A high ratio means you’re carrying too much stock, so you’ll need to better allocate your resources.
- Days sales of inventory measures the amount of days it takes to turn inventory into sales. You’ll want to achieve a lower figure, since this proves you sell your inventory quickly.
Do You Need Help With Inventory Turnover?
Are your products flying off the shelves? Or gathering dust in your warehouse? If you’re unsure where your inventory management and sales stand compared to competitors, you should calculate your inventory turnover ratio.
Is your turnover low? If so, you may need help with your selling strategy. Our team of Amazon consultants can identify new opportunities to help your brand optimize growth.
