8 Ways eCommerce Sellers Can Optimize Inventory Turnover and Why You Should
Without good inventory turnover, it’s difficult, if not impossible to meet your expenses or make a profit. Whether your eCommerce business is retail or wholesale, a healthy inventory turnover is the key to a thriving business. Today, we’re going to look at what inventory is, why it’s important, and how you can improve yours.
What is Inventory Turnover?
Let’s start at the beginning. Inventory turnover is the amount of inventory or stock sold in a given period.
As an eCommerce seller, it’s not enough to know which items sell quickly and which collect dust on the shelves. Knowing your inventory turnover is crucial in understanding the effectiveness of your pricing and restocking strategies and enables you to see how efficiently your eCommerce business is operating overall.
You can use this information to make smart purchasing and selling decisions, saving yourself money and boosting your profits in the long run. Regularly evaluating your stock turnover helps you forecast sales, predict how much profit you are likely to realize, and plan your expenses accordingly.
Why is Inventory Turnover Important?
Let’s have a look at Melinda’s situation. Melinda used all her savings to start her clothing store. She wanted to save money on shipping fees, so she ordered eight months’ worth of stock when she opened her online store.
Unfortunately, the shop is not doing as well as she’d hoped.
Her friend suggested she invest in online marketing such as paid ads and influencers. While this is a great idea, all Melinda’s money is currently tied up in her stock, and she does not have a large enough following to market the items on her own.
On top of this, her warehouse charges keep on piling up. She cannot afford to keep her stock in storage for another month.
Worse, her items are all summer clothes, and summer is coming to an end. This means she will have to wait for next summer to sell her stock, and by that time the trends will have changed.
Melinda will have little choice but to sell her clothes at a loss, assuming she can sell them at all.
Ashley, on the other hand, also started a clothing store using all her savings. However, she hired a reputable company that offers inventory management services.
With their help, she was able to strike the right balance between over- and understocking. Her purchase order system is automated, so items are rarely, if ever, out of stock.
Because she has a good inventory turnover ratio, she is liquid enough to stock new products in response to trends and can afford to pay for advertising if stock is not selling fast enough. She also saves on warehouse charges because she is selling her stock quickly.
With the money she is making and saving, Ashley has invested in a second branch for her business and has hired a manager.
What Is Inventory Turnover Ratio?
In simple terms, inventory turnover rate is the number of times a business sells its entire inventory stock in a given period. The period used is usually a year, but it can also be monthly or quarterly.
How Do You Calculate Inventory Turnover Ratio?
To calculate inventory turnover, select the period you want to use. It could be quarterly, monthly, or annually.
Before you start your calculations, collect the following information:
• Total cost of goods sold (COGS)
• Beginning inventory (value of your stock at the start of the period)
• Ending inventory (value of your stock at the end of the period)
• Average inventory (add your beginning and ending inventory and divide the result by two)
Divide your COGS by average inventory. This gives you your Inventory Turnover Ratio.
What Is a Good Inventory Turnover Rate?
A “good” turnover rate varies from business to business. A restaurant chain and a clothing store may have very different inventory turnover ratios, for example.
In general, though, an inventory turnover ratio between 4 and 6 is a healthy balance. You are not running out of stock too fast, nor do you have an excess of stock accumulating warehouse fees.
Usually, the higher the turnover ratio, the better the eCommerce business is doing but not always. A low turnover ratio implies that your sales are weak and that you have excess inventory. However, a very high turnover ratio could mean that you are understocking, and insufficient stock levels can lead to backorders and lost sales.
Knowing your ratio can help you to re-evaluate your marketing strategies channels and perhaps even your target audience.
8 Ways You Can Improve Inventory Turnover
Now that you know what your inventory turnover rate is, it’s time to start tweaking it in order to grow your sales and improve your bottom line.
There are several tactics you can use to
improve your inventory turnover ratio:
1. Regularly assess your pricing strategy
Price isn’t the only factor in a customer’s decision to purchase a product, but it plays a significant role. In some cases, lowering your price might increase your inventory turnover—after all, everyone loves a bargain!
But don’t just lower prices without thinking it through. Carefully assess your pricing strategy so you don’t sacrifice profit for sales. Also remember that there are some markets where a low price will trigger buyers to question the authenticity or quality and may actually drive customers away.
2. Focus on your most popular products
Once you analyze your inventory and pinpoint your most popular products, make the most of that data. Research similar products that are also doing well. For retail stores, consider approaches such as targeted marketing campaigns that will help you generate even more sales from your best-selling items.
3. Push the pre-orders
Getting buyers to pre-order can be an uphill battle, but the key is building trust and confidence. This starts with a user experience that is streamlined and pleasant, from the moment your customer opens your eCommerce website to the moment they open the package they’ve ordered from you.
When the customer experience is frictionless, users will be more likely to order in advance. You can also include reduced pre-order pricing to entice them further.
4. Make better predictions
You can carry out forecasting both internally and externally.
Internally, liaise with your marketing and sales teams to study trends in the industry and your past inventory records. Pinpoint the products which are selling off quickly and stock them.
Externally, you can use online surveys, questionnaires, and polls on your website and social media platforms. Find out what products customers want and stock accordingly.
5. Modify your inventory levels
Reducing the volume of your stock is an excellent way to improve your inventory turnover rate. The strategy here is in reducing the shipping, transportation, and storage costs that excessive stocking can incur.
6. Streamline your supply chain
While the goal is to minimize costs, avoid basing your vendor choices only on price. Find out about lead times and in-transit times because these also affect inventory turnover. Also look for ways to integrate your vendors to reduce costs. This can be done by using a vendor management system.
7. Automate your purchase orders
You only have 24 hours in a day, and as an eCommerce business owner, you never run out of things to do. Taking regular stock inventory can be less time-consuming and more efficient with an automated PO system to send you updates on low stock levels so you can order more.
8. Collect data
Data collection is perhaps the most crucial step in managing inventory turnover. If you are too busy to take proper inventory and categorize it, use an inventory management system to simplify your work for you.
Final Thoughts
With proper inventory turnover management, your sales will soar and profits will rise. By constantly turning over stock while simultaneously decreasing inventory levels each period, your business will have better cash flow, allowing you to grow through investments in new inventory, advertising, and other marketing campaigns.
Sometimes, eCommerce sellers have the necessary data but don’t know what to do with it. Whether you need periodic reviews or a complete overhaul of your current system to improve this ratio and increase your profits,
we can help.
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