10 Inventory Metrics Every Retailer Needs to Know
They may not seem glamorous, but inventory metrics equal money. In order to make the best decisions that impact your retail business’ bottom line, you need the ability to derive actionable insights from your business data. The first step to leveraging this data is understanding the key metrics that inform it.
Here are a few of the most common key performance metrics (KPIs) for retail companies:
1. Inventory on Hand: The amount of stock physically present in your warehouse/storage location. It’s important to remember with this metric that even if a product is sold, it is not subtracted from inventory on hand until it physically leaves the warehouse, so this number will usually be higher than your available inventory. (This definition is based on industry standards, though some business owners do measure it differently.)
2. Inventory Turnover: Tracks how quickly a retailer is replacing inventory (total sales / average value of inventory on hand). The higher the turnover, the less time your inventory spends collecting dust on your shelves (and the less money it costs you by doing so).
3. Sales Velocity: How well your product sells when it’s available to consumers on the shelf (sales / distribution). This metric is important to demand planning and preventing out-of-stock situations.
4. Days of Supply: The number of days it would take to run out of supply if it was not replenished (inventory on hand / average daily usage). This measurement enables retailers to see how much available inventory they need in order to maintain normal operations for some period of time after a supply chain disruption occurs.
5. Sell-Through Rate: Comparison of the amount of inventory a retailer receives from a manufacturer or supplier against what is actually sold to the customer (sales / stock on hand). This metric is useful for comparing products against each other as well as comparing how a specific product does month over month.
6. Cost Per Unit: A measure of a company’s cost to build or purchase one unit of product (variable costs + fixed costs incurred by a production process / number of units produced). Knowing cost per unit is imperative to pricing products.
7. Revenue Per Unit: The total amount of revenue a product generates, divided by the total number of units of that product sold. This metric is critical when considering where you might improve, expand, or cancel a product.
8. Cycle Time: Total time it takes from when an order is first issued until it is completed. Cycle time is a critical metric for setting realistic expectations with customers.
9. Gross Profit: A company’s total revenue minus the cost of goods sold. Many small to medium-sized retail businesses operate with a gross margin in the range of 25 to 35 percent.
10. Gross Margin: The percent of total sales revenue the company retains after paying the direct costs associated with producing products ([total sales revenue – cost of goods sold]/total sales revenue).
…And a bonus!
11. Average Age of Inventory: The average number of days it takes a retailer to sell a product to consumers ((cost of inventory at its present level / cost of goods sold) x 365). The older your inventory is, the more it’s costing you. If a product’s average age of inventory exceeds 120 days, it’s time to drastically reduce price, consider bundling it, or use whatever means necessary to get it off your shelves.
These inventory metrics will serve as the building blocks you need to garner data to empower you to make smarter business decisions.
If numbers make you woozy, we’ve got a list of the best business calculators to help you manage applying what your inventory metrics tell you to your budget.
For more information on tools and tips for growing your business, check out Stitch Labs’ Ultimate Guide to Scaling Your Retail Business.
This post was originally published by our pals at Stitch Labs, on their blog, July 21, 2016.
Written by Megan Lierley