Inventory Turnover Ratio: Calculation + How to Improve 2023

And here are some actionable tips that might help improve the inventory turnover ratio by boosting your sales and avoiding excess inventory. A business with a higher inventory turnover ratio is likely to react better to the demand, have lower carrying costs per item, and gain more revenue than that with a low inventory turnover. When combined with an ERP system, inventory management software can help in streamlining your supply chain, SKU assignment and management, automated purchase orders and other functions and features. That will reduce errors, add efficiencies, give you more control, increase customer satisfaction and generally make your company more profitable. It’s important to know what that stock segment is so you can keep plenty of inventory on hand. Is the purchasing strategy no longer working and inventory is piling up?

• The inventory sell-through rate illustrates how quickly you are selling your products.
• Companies use this ratio to make informed decisions about pricing, demand planning, and supply chain management.
• As an example, let’s assume you’re calculating your annual turnover for 2020.
• And while returns and exchanges will never completely go away for product businesses, that doesn’t mean you’re powerless to minimize their frequency.

Consider whether your business is using an ‘open-to-buy system as part of your inventory management procedures. Open-to-buy systems are software budgeting systems for purchasing merchandise. These systems are designed to make inventory management and replenishment more efficient by helping retailers monitor merchandise, inventory control, and financing. If your inventory turnover ratio lies in this zone, it demonstrates that your restock rates and sales rates are in balance.

Negotiate Purchase Rates Regularly

But just like the inventory turnover ratio, a practical approach needs to be taken to allow for supply constraints and spikes in demand. In contrast, companies with local suppliers and steady sales can be much more aggressive with their inventory strategy. They might maintain a very high inventory turnover ratio of 10 to 15, meaning they need less storage space and have less capital tied up in stock.

• Inventory turnover ratio is the business metric that tells you how healthy your product business is.
• Ultimately, the inventory turnover ratio measures how well the company generates sales from its stock.
• This is all relative to scale, however, as a local business may not sell items as quickly as a national franchise.
• While there’s more potential to get it right than to get it wrong as Professor Kumar said, it’s best to take a quantitative, data-driven approach to a product bundling strategy.
• Keep an eye on escalating turnover rates and look for underlying issues.

As an example, let’s assume you’re calculating your annual turnover for 2020. Connect with our sales team to learn more about our commitment to quality, service, and tech-forward fulfillment. Our team is dedicated to providing premium service for high-growth brands with a commitment to trusted fulfillment solutions, quality and accuracy, customer satisfaction, and environmental responsibility. See why industry leaders and top brands choose DCL for their fulfillment needs. Low-margin industries tend to have higher ratios than high-margin industries, so always compare yourself to brands within your vertical. We check our reports and see that the shoes sold in a year had a cost of $5000.

Retail Operating System designed wholesale & ecommerce merchants

It’s super-important to calculate your inventory turnover ratio in order to avoid this situation developing. With a well-balanced supply-and-demand chain, your business should be able to stay in the clear. Understanding your company’s inventory turnover will also help you make better, smarter business decisions all around.

If inventory turnover is low, it’s possible that your product messaging and/or overall listing isn’t resonating. Successful eComm brands have brilliant content marketing strategies in place…but before they do that, they need to learn, grow, improve, and make mistakes. You can use the ending stock to calculate your ITR if your store doesn’t face seasonal fluctuations. However, the more data points you use in your calculation, the more accurate it becomes. Preordering can help you learn how much inventory you’ll need to maximize your storage space and minimize overstocking and stockouts. However, a short preordering period might not be enough to gain actionable insights for precision forecasting.

Why should ecommerce business owners be concerned about Inventory Turnover Ratio?

Unless you only sell a few products, you probably won’t need to store 100% of your product range in multiple locations; Instead, look to stock the best-sellers that get shipped most often. An influx of sales can cause you to constantly have to replenish inventory, and if you can’t keep up with demand, you may experience stockouts. There is no right or wrong turnover rate — but optimizing your product line, replenishment strategy, and even warehouse can help your bottom line.

Our customers have access to a broad network of industry partnerships, EDI connections, retailer relationships, ERP, and ecommerce integrations. Increased turnover is often due to high demand for a particular item, thanks to a strong marketing campaign, a promotion, or a celebrity using your product. Or maybe you’ve moved to a Just-In-Time method, holding just enough stock to meet demand. Turnover might decrease due to a downturn in sales, potentially caused by negative publicity, the death of a trend, or an economic crisis. If you don’t pay attention to product performance, you might fail to drop slow-moving items from your catalog. Work out your average inventory value using the same method as above.

For example, Steve Jobs of Apple used the price anchoring technique to sell over 300,000 iPads at launch and more than 15 million before the iPad 2 launch. Slowing moving products is one of the biggest reasons merchants struggle to improve their turnover ratio. Besides typing up capital, they could also incur unnecessary expenses. If you are looking for a 3PL that will help you manage your inventory in real time, check out ShipBob. With ShipBob’s technology combined with global fulfillment, you can gain a holistic view of your operations with just a few clicks.

Identify supply chain issues

We can help you to improve your inventory management so that you can reduce your inventory turnover ratio. Encouraging customers to preorder is one of the best ways to increase turnover by locking in sales and ensuring that your inventory isn’t too overstocked. Also, explore made-to-order products that can be produced on-demand (Printful or Printify) and dispatched quickly to your warehouse or even directly to your customers.

You may want to pay careful attention to which SKUs are selling faster / better than others. If one SKU is selling well and another isn’t, invest more in what is selling. Let’s say your company has a beginning inventory of $7000, and purchases are made of the value of $5000, and you are left with an ending inventory of $2000 for a given period. Consumer discretionary brands, which refer to nonessential but desirable goods like luxury clothing, replenish their inventory nearly seven times per year.

How to Improve Inventory Turnover

This could be monthly, seasonally, annually—or any other increment of time that’s meaningful to you. What constitutes a “good” inventory turnover ratio will vary depending on the industry your business operates in, but most ecommerce businesses consider a ratio between 2 and 4 to be healthy. A high inventory turnover ratio usually indicates that products are selling in a timely manner, and that sales are good in a given period. However, an inventory ratio that is too high could mean that you need to replenish inventory constantly, which could lead to stockouts.

When you’re just getting your feet wet, you can use the average ITR in your industry as a benchmark. These businesses, for example automobile and consumer electronics companies, need to sustain a higher inventory turnover ratio. Inventory Turnover Ratios for Ecommerce That’s because holding onto goods in these highly competitive, rapidly evolving areas can be exceptionally costly. Lower chance of stockouts – With fewer products being shipped, you product availability should be much higher.

What is a low inventory turnover ratio?

A high inventory turnover usually means that a company is selling many goods quickly, and there is much demand for their products. For a given period, you divide your total cost of goods sold (COGS) by the average inventory value over that same period. Want to improve your inventory turnover ratio by reducing refund rates? Using an inventory management solution can help you to integrate all of your sales channels into one holistic view, so that you have clear tracking of status and can set up auto-replenishment. If you have multiple warehouses or are working with a 3PL, you can also shift inventory from one warehouse location to another to ensure that you have adequate stock in each region you serve. If you run an ecommerce business, you don’t want to sit on your beginning inventory over a period of months or years.

The higher the ratio, the more efficient the company is at selling and replacing its inventory. This can be due to a number of factors such as strong demand for the company`s products or efficient management of inventory levels. The time it takes a company to sell through its supply can vary greatly by industry. If you don’t know the average inventory turns for the industry in question, then the formula won’t help you very much. For instance, retail chains and grocery stores typically have a much higher ITR. As a result, these businesses require far greater managerial diligence.

The first step is to calculate your inventory turnover by individual SKU. Don’t do this manually, especially if you have thousands of SKUs; you can automate this process with e-commerce inventory optimization software. Above all, to improve inventory turn, you want to stock what sells. Many companies get so caught up in increasing revenue that they compromise profits. If the time for a single SKU to turn over is too long, then it’s draining your resources, even if it eventually sells. Today, you can use software to track your inventory and automate the calculation of your ITR and other vital metrics.