We’ve covered a wide range of eCommerce inventory management best practices, like considering dropshipping, centralizing your inventory and handling product variants. However, each of these best practices come together for a more fruitful inventory management strategy when you have metrics to back your choices and help you make decisions for the future.
That said, all companies are different in the ways they handle inventory management. Therefore, a non-profit is going to have completely different inventory goals compared to a for-profit business.
However, what brings them together is the idea that keeping costs low is the main objective. Combine that with the target of making your customers feel good and you’ve got yourself a solid inventory management strategy, for both eCommerce websites and physical retail shops.
After all, your customers are the ones that are going to receive your inventory, so if they get the inventory late, or they buy an item that’s out of stock, or the inventory looks like it’s been stored under a pile of rocks in a basement, you’re going to have trouble keeping those profits high to eventually find better ways to lower your costs.
Since both customer experience and cost factor in so much with inventory management for every business, let’s take a look at the most promising metrics for inventory management that cater to these two areas.
Inventory Management Metric #1: Inventory Turnover
The first, and most basic formula to consider for your inventory management is called inventory turnover. It takes your cost of sales and compares it to the average value of the inventory. This calculation is often done for a year’s time. The year time frame is just a suggestion, since you can make the calculation over a quarter or month or anything you want.
Regardless, the formula states that Inventory Turnover = Cost of Sales/Average Inventory Value.
As you can see, it doesn’t take long to achieve a result with this formula, meaning that just about any business could set aside some time to utilize this for their own inventory management process. The simple metric takes your inventory and reveals how well it performs against the amount of money you spend for sales.
Inventory Management Metric #2: Gross Margin Percent
The gross margin percentage (sometimes referred to as gross profit percent) evaluates how much money you bring in against a certain item. Therefore, we’re trying to calculate the amount of profit for that item. You can also use this metric for inventory categories or the entire inventory count.
In order to find the gross margin percentage, you would complete the following: (Sales – The Cost of Sales)/Sales.
Another way to look at is is like this: 1 – (Cost of Sales/Sales).
The main reason so many companies take advantage of the gross margin percent metric is because it goes hand in hand with inventory returns. The formula offers quite a bit of flexibility. For example, you could potentially use the total from one sale, along with the cost of one sale, or you could divide the cost of sales for the year by the total sales from the year.
Inventory Management Metric #3: Customer Order Fill Rate
Many sources state that an average customer order fill rate sits around 95%. This means that you’re fulfilling your orders on the first shipment 95% of the time. It’s a simple calculation, but it may require a decent amount of information depending on the company.
In short, you look at how many times you have successfully serviced your customers, and divide this by the total number of of orders, giving you the percentage.
You’re objective is to achieve a 100% fill rate.
The reason we like this metric so much is because the fill rate requires you to know your inventory inside and out. The highest fill rates are found where managers have significant knowledge of the inventory.
Furthermore, improving the fill rate pushes you to keep the shelf space full, avoid multiple sales cycles and improve the productivity of your workers.
Inventory Management Metric #4: Cost of Carrying
One of the main costs you’ll see when managing inventory is the cost of carrying, or the amount of money spent for buying, storing, insuring and organizing your inventory.
Once again, this is a basic metric, but it forces you to truly understand what’s going on with your inventory, including the wide variety of costs that come along with it.
The metric asks you to add up all of the carrying costs, then divide it by the overall cost. With this metric, you’re trying to keep the percentage low. For example, a company might find that they need to keep their cost of carrying percentage below 25% in order to make money in the long run.
Inventory Management Metric #5: Average Sell-Out Days
Average sell-out days ties into inventory by helping you figure out if any of your inventory strategies are working. The metric takes your inventory and cost of goods sold to reveal the average number of days it takes your company to clear the inventory.
The formula looks like this: Average sell-out days = (Your Average Inventory/The Cost of Goods Sold) x 365.
Once again, you can manipulate the formula to find the average sell-out days for a quarter or month.
Are You Utilizing These Inventory Management Metrics?
As we talked about before, inventory management has a lot to do with cost savings and customer relations. The whole goal is to make your inventory management so efficient that your customers will either not notice a thing or they’ll be singing your praises on the internet.
I would recommend walking through these metrics in order. Therefore, if you feel intimidated, or you don’t understand something, you’re at least beginning with the most basic metric of them all. Start off with inventory turnover, then once you can use that metric to help you business, move onto the gross margin percent.
If you have any questions about the most promising metrics for inventory management, feel free to let us know in the comments section below.
Catalin Zorzini is the founder of Ecommerce Platforms, a blog about everything ecommerce and WebAppMeister, a clever comparison engine for online tools. He likes hot soup and hot jazz.
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