One of the primary components of any eCommerce business is inventory management. The key to good inventory processes is strategic management. Every company that aims to reach success should work hard. Mainly it should spin around the idea of managing inventory carefully. And all that includes not only selling and stocking items. It is way much more. And one of the core inventory management points is product and market evaluation. Here, the inventory turnover ratio comes. It is an essential e-commerce element. You need to know some things. Like how to calculate the inventory turnover ratio and how to improve it. So we’ll view some exact tips about this topic.
What is Inventory Turnover
Let’s see the definition of inventory turnover. Inventory turnover refers to the stock amount that has been sold in a particular period. If you know your company’s stock turnover ratio you can get profit. For example, then you can get many relevant insights referring to the bestselling products. Also the company’s overall cost management.
The low inventory turnover ratio means that something goes wrong with the business! It usually happens due to slow product restocking. Another reason is overstocking. of those products that are not easy to sell. And the contrary is a high inventory turnover ratio. It supports the regular cash flow and the rise of product demand.
What is Inventory Turnover Ratio?
The inventory turnover ratio is an e-commerce metric. It represents the level of IM in comparison to the sold product cost and average inventory. And it is viewed within a particular inventory turnover period. With the ITR, you can see how many times the average inventory was sold. In addition, you can see the frequency. Like how many times a business could sell within a year. Sold inventory is also called turned. And a point here is inventory turnover days.
How to Calculate Inventory Turnover Ratio?
As already mentioned, the ITR (like turnover ratio) shows how much inventory is sold in a certain period. For inventory turnover ratio calculation, it is vital to know the cost of goods sold (COGS) and average inventory.
- Average inventory is used as companies can happen to have higher or lower inventory levels.
- COGS measures the production costs of goods and services of a company. For example, materials, labour or other factors of sound production.
Inventory Turnover Ratio Formula: Cost Of Goods Sold / Average Inventory
Good Inventory Turnover Ratio
If we mention some points, then 4-6 is the most optimal variant of a good inventory turnover ratio. It means that the balance of ready to sell inventory and restocked ones.
- a company’s turnover ratio is 1,
- they have sold 100 items within a particular period
- and they have 100 in stock.
- a company has sold 500 items
- and still has 100 in stock,
- Its inventory turnover ratio is 5.
How to Improve Inventory Turnover Ratio?
We have looked through the essential points of the inventory turnover ratio. But just knowing what it is or how to calculate cannot solve the questions of how to increase this rate. Anyway, it is much more needed. If you improve the inventory turnover, you can run your inventory management more efficiently. In its turn, this will cut warehousing costs, thus boosting sales. So let’s discover the top 5 tips on how to improve inventory turnover.
It’s not a secret and not something super surprising to say. But we remind: not all the products have the same level of popularity. For example, seasonal items or fashion trends affect inventory significantly. That’s why it is imperative to forecast yearly and quarterly orders. They will be based on the popularity of things and the demographics of your buyers. Also, analyse your sales data. Thus you’ll see the bestseller and trending items. Use this info in your sales forecast and planning.
Automation comes to help in almost any situation. And in the process of Inventory management and e-commerce automation is as well the most valuable solution. It is crucial for proper inventory management, especially when selling on multiple channels at the same time. A lot of automation tools give you data regarding the moment when sales are made. They can include real-time stock updates. Inventory systems, like eSwap, provides automated messages and notifications.
3. Pricing Strategy
Pricing is one of the trickiest e-commerce elements. Especially it is in the case of selling multiple items globally. One common pricing strategy cannot work for all your items at all times. Instead, consider using various pricing strategies for multiple factors. Those can be free shipping, seasonal pricing, bulk discounts and so on.
4. Inventory Replenishment
In the case of maintaining historical data, problems appear easier to fix. For example, there are automated tools for inventory reorder. They are usually based on sales data. Inventory replenishment can help to prevent both overstock and understock. And this in its turn affects turnover.
eSwap includes a feature that creates purchase orders automatically. It is good for real-time inventory upkeep. Based on sales data, it recommends when and how many units of products to order.
Make your customers preorder items from you. If you do this, they will register for some products. And thus, you get instantly proved sales. This will surely increase your turnover. But ensure to have those inventory. Your customers will preorder if you use clever marketing. Also, you need products that are high in demand. Build your marketing strategy centralised at preorders of popular items and get the results at once.
We need many major steps to improve turnover. Some of them are marketing analysis, clever promotions, automated inventory mechanisms and restocking. Those are tremendous strategies to keep in mind. These steps can boost sales. Thus it will make inventory management more efficient. As a result, the business in total will get expanded and improved.