Inventory is key to a healthy online business. Too much inventory can cause problems, but so can having too little. Getting it right is a balancing act. This is particularly true for FBA sellers, since their Inventory Performance Index (IPI) score goes a long way in determining how much storage space they can claim, as well as their holding costs. If they don’t, they can incur increased costs, miss out on sales, and disappoint customers, none of which are good for business.
So how do you manage your inventory effectively? Many turn to Amazon or Walmart Marketplace Management providers and the answer lies in key metrics. These will help you track how well your inventory is doing and help you identify key areas for improvement, both in costs and operations.
Choosing The Right Metrics To Track
First things first, you have to choose the right metrics for your business in order to track what matters the most. With this in mind, the metrics you choose to focus on should:
- Reflect your company goals and strategic objectives
- Not be vanity metrics. Instead choose metrics that provide you with deep insights and can help you improve the efficiency of your inventory management process
- Be narrow. If you go too broad with your metrics, you won’t get the insights you need to take action quickly
Once you’ve chosen the metrics that will give you the information you want and need, you can start tracking them with digital marketing agency.
The key is to regularly check in on your metrics to see how you’re doing. This will give you an idea of how your inventory is performing over a certain period of time. Usually it’s best to check your inventory metrics monthly.
The Top Inventory Metrics To Track
1. Average Days to Sell
This metric tracks how long it takes your company to turn inventory into sales. It tracks goods from the moment they arrive in your inventory to the moment a customer clicks the “buy” button. Some products may spend longer in your inventory than others like, say, seasonal items, so this metric provides you with an average for how long it takes you to turn inventory into sales.
You can calculate your Average Days to Sell by dividing the number of days in your chosen time period (i.e. a month) by your Inventory Turnover (CoGS / average inventory).
2. Average Inventory
Average Inventory essentially calculates how much inventory your company has during a certain timeframe. It helps you determine how much stock you tend to have at any given time, and can identify key points throughout the year where you might need to adjust your inventory.
You can calculate your Average Inventory with this formula: (beginning inventory of your chosen timeframe + ending inventory of given timeframe) /
3. Perfect Order Performance
This metric shows you how effective you are at delivering orders that are complete and without damage.
As metrics go, this one is good for determining the quality of your products going out and the effectiveness of your shipping. For example, a low complete rate means there might be shipping issues, while a high number of damaged deliveries could lead to unhappy customers.
You can calculate your Perfect Order Performance with this formula: (% of orders delivered on time) x (% of completed orders) x (% of damage-free orders) x 100.
4. Order Cycle Time
You might also have come across this metric as Order Lead Time, and it basically measures the time it takes from a customer placing an order to them receiving it. This can give you insights into your dispatch and shipping process and highlight areas that could be improved.
For example, if the cycle time is particularly lengthy, it’s worth looking into where the hold up is – is it in the warehouse? The shipping process? Or somewhere else?
5. Inventory Turnover
We touched briefly on Inventory Turnover in relation to the Average Days to Sell metric, but let’s dig a little deeper. This metric calculates how many times inventory is sold and replaced in a given time period. It helps you determine which products need to be replaced often and which ones have the quickest turnaround rate.
You can calculate your Inventory Turnover with these two formulas: sales / average inventory or CoGS / average inventory
6. Sell Through Rate
Determine the percentage of units sold during a specific time period by figuring out your Sell Through Rate. This metric can be calculated using this formula: units sold / (units sold + on-hand inventory).
This will give you an idea of how many units you need to order in during any given time frame. If you regularly track your Sell Through Rate, you should quickly be able to determine how many products you need for each week, month, and year.
Improve Your Inventory Management
The key to improving your inventory management is to track the right metrics. Choose a couple to focus on that will help you reach your goals and check them regularly to see how your business is performing.
When you do this, you can begin to create a slick inventory process where you always have the right amount of products on hand at any given time.
