Management of inventory is crucial in ecommerce, if your business is to be profitable, sustainable and able to grow.
You have to be able to track your products from channels to return rates.
As you no doubt know, inventory management is a challenge and it doesn’t matter how much experience you have, what your target audience is, how big your business is or what you sell.
And, if you plan to grow your business, it’s even more important to determine how to maximize management of your inventory.
So, study your sales history.
At the minimum, you should leverage three key performance indicators (KPIs):
1. Inventory turnover
Inventory turnover is a ratio. It’s useful in marketing, manufacture scheduling, pricing products and buying from vendors.
If your inventory turnover is too high, it probably means one or two things – your prices are too low and/or you risk running out of inventory.
On the other hand, if your inventory turnover is too light, you are pricing too high, your messaging is ineffective or you’re selling the wrong products.
In accounting terminology, inventory turnover is the cost of goods sold divided by your inventory period.
Here’s the KPI formula: Cost of goods sold ÷ average inventory for period.
In a given period, inventory turnover indicates how often you sell and replace your inventory.
Next, divide the number of days to determine it takes to sell your current inventory.
2. Carrying costs
Carrying costs, also known as holding costs, is the total expense of holding your inventory.
Carrying costs include fulfillment, rent, storage, salaries and utilities.
Also to be considered are inventory costs such as insurance, perishability, shrinkage, breakage and theft.
Quite often, retailers calculate their carrying costs as their total inventory cost divided by four.
3. Opportunity costs
Opportunity costs is the expense associated with making incorrect assumptions and decisions.
It is the most-salient inventory KPI.
A couple of examples:
- Perhaps you are trying to sell a product that isn’t a good fit for your marketplace.
- Or, perhaps a new product launch goes awry.
To avoid making the wrong subjective decisions, one basic solution is divide your inventory into these elements:
- Quick turnover in high-profit items.
- Passive or slow turnover in low-profit items.
- Passive or slow turnover in low-profit items.
Obviously, you’ll want to focus on the high demand, profitable products .
And get out of the passive or slow turnover in low-profit products.
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“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
-Theodore Roosevelt
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