Why is it important to know your inventory turnover rate?

Why is it important to know your inventory turnover rate?

As an e-commerce retailer, it is important to know your turnover rate and understand the factors behind it. It is the rate at which you sell and replace your inventory, and it is a key metric for measuring the efficiency and profitability of your business. In this blog post, we will explore why e-commerce retailers need to know their turnover rate, and how inventory management solutions can help retailers manage and optimise their inventory.

What is an inventory turnover rate and how is it derived?

First, let’s define what inventory turnover rate is and how it is calculated. Inventory turnover is the number of times a retailer’s inventory is sold in a specific period. It can be calculated by dividing annual revenue by average inventory. This gives you two different ways to express your inventory turnover rate: as a percentage (aka ROI), and as a ratio.

For example, if you sell 100 items in one month and your inventory comprises 100 items, your turnover rate is 1.0. If you sell 200 items in the same period, your turnover rate is 2.0. The higher your turnover rate, the more efficient and profitable your business is.

A high inventory turnover rate may indicate that the business is effectively managing its inventory and selling its products quickly, while a low turnover rate may indicate that the business is not selling its products as quickly as it should be and may need to change its inventory management strategy. Knowing your inventory turnover rate can help you make better decisions about how much inventory to keep on hand and how to price your products to maximise your sales and profitability.

Inventory turnover rate in e-commerce

What makes turnover rate a critical metric for e-commerce retailers (especially multi-geography sellers)? There are several reasons.

First, knowing your turnover rate allows you to measure the efficiency of your inventory management. If your turnover rate is low, it may indicate that you are holding onto inventory for too long, which can lead to lost sales and reduced profitability. A high turnover rate may indicate that you are not keeping enough inventory on hand, which can lead to stock-outs and lost sales. By understanding your turnover rate, you can determine how much inventory to keep on hand and how much to order, as well as how much money is tied up in inventory.

In addition to measuring the efficiency of your inventory management, knowing your turnover rate can also help you plan your e-commerce operations better for future sales and demand. By analysing your turnover rate over time, you can identify trends and patterns in your sales and demand. You can then use this information to make more informed decisions about how much inventory to stock and when to order new inventory. You can also allocate your resources more accurately for maximum efficiency across relevant stores, regions, and fulfilment centres.

How to optimise inventory turnover to ensure stock availability?

There are several ways that e-commerce sellers can optimise their inventory turnover to ensure they have the right quantity of stock available. Some of these strategies include:

Conducting regular inventory assessments to identify slow-moving or excess inventory and taking steps to clear out that inventory through sales or other means.

Using data and analytics to better understand customer demand and buying patterns and using that information to adjust inventory levels accordingly.

Implementing a just-in-time inventory management system, which involves only ordering and stocking the exact amount of inventory needed to meet current customer demand.

Using tools and technologies, such as inventory management systems, to automate and streamline inventory management processes, making it easier to keep track of inventory levels and demand.

Using automated tracking systems such as RFID tags or barcodes for all products throughout their lifecycle from receiving through shipping.

By implementing these and other strategies, e-commerce sellers can optimise their inventory turnover, ensuring they have the right quantity of stock available to meet customer demand and avoid lost sales and revenue opportunities.

Why e-commerce businesses need automated inventory management systems for more efficient tracking

While e-commerce brands and sellers may implement strategic and operational changes to adapt to demand and drive sales, they cannot overlook the importance of technology and digitising processes. Hence, automated inventory management plays a critical, almost make-or-break, role in the modern e-commerce landscape.

An inventory management solution is a digital tool that allows retailers to track and manage their inventory levels, orders, and shipments in real time. This type of solution can help retailers in several ways.

First, an inventory management solution can help retailers prevent stock-outs and lost sales. By providing real-time visibility into inventory levels and orders, the platform can alert store managers when inventory levels are low and help them quickly reorder products before they run out of stock. This can help retailers to avoid lost sales and keep their customers happy.

Second, using inventory management systems allows retailers to have a better understanding of their inventory levels at any given time. This is important because having too much or too little inventory can be costly for any retailer. Too much inventory can lead to higher storage costs and the potential for products to become obsolete, while too little inventory can lead to lost sales and disappointed customers.

Automated inventory management can help you better understand your inventory turnover rate, which is a key metric for e-commerce businesses. Automating processes in the inventory lifecycle also enables you to manage your inventory efficiently and avoid overstocking or under-stocking products. Any modern automated inventory management platform will provide real-time data on how your inventory is moving across stores, warehouses, and fulfilment centres. This type of business intelligence data is extremely useful in helping you adjust your inventory management strategy to strike the right balance between having enough inventory on hand to meet demand and avoiding holding onto inventory for too long.

Overall, inventory management systems are a valuable tool for retailers because it helps them better manage and optimise their inventory, which can lead to increased efficiency, cost savings, and improved customer satisfaction.

Conclusion

Inventory turnover is one of the most important metrics for e-commerce businesses, and it is key for retailers to understand their inventory turnover rate in comparison to their competitors. The faster your inventory turns, the more money you’ll save by not having excess stock sitting around for months or even years at a time! Automated inventory management solutions can also help them optimise their inventory by providing insights into which products are selling well and which ones are not. Retailers can quickly identify low-performing products using an automated system that sends alerts when items don’t sell well so merchants can adjust pricing or promotions accordingly (and with no human intervention).

Ordazzle offers an end-to-end Inventory Management solution you can trust. With our API-driven inventory management solution, you can scale your business to process not just thousands, but millions of orders a day, tracking order movements, logistics, and even returns and cancellations through a single, integrated dashboard.

Would you like to try our solution and see the value it can offer your business? Get in touch for a consultation today!