Rationalize SKUs on pace with cash flow, margin, lead time, and MOQ, and be sensible to what a customer really needs. One pallet holds all 300 electronics, but you’d need 11 extra pallets to house the 275 remaining units of pillows. The next quarter comes and goes, and the company decides to calculate their inventory turnover ratio again.

Those are pretty unpleasant outcomes that restrain your business from growth and seriously damage your revenue. So, if you see that your inventory turnover ratio is low compared to what’s usual for your niche, you need to investigate what causes it and improve. The solution is to look around your niche and benchmark your inventory turnover ratio against what similar businesses have, giving you a clearer picture of whether you need to optimize.

Improving Inventory Turnover With Inventory Management Software

The Pareto principle applies to a lot of areas in business and life; when it comes to inventory, it means 80% of your company’s sales, sales revenues are likely generated by 20% of the SKUs you carry. Aim to increase inventory purchase amounts to bring your ratio down to a more moderate, and profitable, range. Cost of goods sold, aka COGS, is the direct costs of producing goods (including raw materials) to be sold by the company. Few things disappoint a consumer faster than getting a product that doesn’t look, feel, or function as it appeared to online. Make sure your product photos are well lit and provide an accurate representation of your goods.

So, if you want to increase annual sales (and move more inventory), refining your customer experience is a good place to start. Now that you understand what inventory turnover is and how to calculate your ratio, it’s time to arm yourself with tactics to improve your inventory turnover ratio. Companies will almost always aspire to have a high inventory turnover. After all, high inventory turnover reduces the amount of capital that they have tied up in their inventory. It also helps increase profitability by increasing revenue relative to fixed costs such as store leases, as well as the cost of labor.

Is a high inventory turnover ratio good?

Let’s explore 11 ways to improve your store inventory turnover ratio. The perfect inventory turnover ratio for your store depends on the product. Automating purchase orders can take the stress out of reordering inventory. Under the JIT (or “Just in Time”) method of inventory management, a merchant has just enough stock to meet demand, but only just; once demand is met, the merchant will need to replenish their stock levels quickly. This approach to inventory management and replenishment can be risky, but it can help lower your inventory turnover.

However, two or more of these factors make improving their eCommerce ITR more challenging. Sadly, several sellers struggle to improve their ratio, making scaling at large more challenging. For example, let’s say one pallet can only fit 25 pillows — each of which has a manufacturing value of $5 and a retail value of $50. However, that same pallet can fit 300 units of compact electronics — each of which has a $10 manufacturing value and $90 retail value — in the same amount of space. Whether your inventory turnover is too high or too low, here are some measures you can take to try and combat or regulate the issue.

• Using your cost of goods sold to calculate your inventory ratio can be more accurate.
• Inventory turnover ratio is also an essential part of your financial statement analysis, as it is used to determine whether or not the businesses is running efficiently.
• Company Alpha made sales of $1.2 million last year, and the total amount they paid to get those items into stock was $400,000.
• In some industries, an inventory turnover ratio between 2 and 4 is optimal, whereas in others an inventory ratio between 5 and 10 might be more ideal.

Let’s look at the best inventory turnover ratios for different industries. The inventory turnover ratio is calculated by simply dividing the total cost of goods sold for a specified time by the average inventory for that designated period. The more a product sells, the more spending on storage costs for safety stock can be worth it.

Inventory Turnover: 10 Strategies to Help Your eCommerce Business

Any eCommerce business can use the inventory turnover calculation to help understand how quickly their products sell. For an online business, fast and reliable shipping can help to enhance sales. Thus, fast and safe shipping is critical to moving out your inventory efficiently.

For example, such software enables your company to switch to the perpetual inventory method in accounting with a continuous real-time record of inventory. Computerized point-of-sale systems and enterprise asset management Inventory Turnover Ratios for Ecommerce software immediately reflect changes in inventory by tracking sales and inventory depletion or restocking. A primary way to apply inventory turnover ratios in a practical manner is to optimize your inventory management.

Make better decisions

Now, if you can shorten your cycle times and squeeze four cycles into a year, you will come out with $16 instead. Just by improving the rate at which you move your inventory, you have $15 in profits rather than $8. Fulex’s warehouse management software gives you a detailed look at your stock levels and build inventory reports that allow your to analyze your current stock levels. You can also set reorder point notifications which will automatically remind you when your inventory needs to be replenished at the warehouse. Average inventory is typically used to even out spikes and dips from outlier events that can occur and represent one segment of time, such as a day or month. With over 40 years of operational expertise, we give our customers trusted solutions, quality service, and flawless fulfillment.

If you aren’t selling as much as you’d like, it’s important to consider your value proposition. If yours are vastly higher with no good reason, then you’re going to struggle to make the sales you want. Inventory analysis can be difficult if you have a large number of SKUs and low sales. However, one useful technique you can use is ABC analysis, which involves looking at historical data to determine which SKUs you should prioritize in your marketing and sales strategies. Marketing is often trial and error, and with some testing, you’ll soon find a channel and strategy that results in more sales, and increases your turnover rate.

In simple terms, the inventory turnover ratio is the number of times a company has sold and replenished its inventory over a specific amount of time. The formula can also be used to calculate the number of days it will take to sell the inventory on hand. The turnover ratio comes from an equation, where the cost of goods sold is divided by the average inventory for the same period.

You should avoid such situations at all costs, but if you get stuck in such a situation, offer special discounts and promotions to help move out the old stock quickly. Launching a special marketing campaign aimed at moving outdated stock is also seriously worth considering. In most typical cases, slow turnover ratios indicate weak sales (and possible excess inventory), while faster turnover ratios indicate strong sales (and a possible inventory shortage). Along with inventory turnover, there are other key data points you should be actively monitoring to maximize the efficiency of your e-commerce business.

Consider adding short product videos (this is particularly beneficial for clothing, so shoppers can see how an article of clothing moves). Take the value of your inventory at the beginning of your defined time period, add it to the value of your inventory at the end of that time, and then divide that number by two. The “cost” part of COGS includes any cost you incur as a business to acquire, manufacture, or assemble your goods. For a graphic tee business, these costs might include the purchase price for fabric, manhours for sewing/assembling shirts, and ink for printing graphics onto each tee. Product businesses are required to report their COGS each year on their income statement, so you should already be tracking these expenses. Secondly, average value of inventory is used to offset seasonality effects.

Optimizing a company’s inventory turnover is one of the most critical parts of inventory control. You’ll want to look a bit deeper into inventory turnover differences based on industry, the size of the business, and other factors. At James and James, we can help you fix a low turnover rate by giving you back the time you need to do just that. We are an industry leader in the 3PL space, offering lightning-fast and 99.9% accurate fulfillment services.

Too high or too low of an inventory turnover ratio isn’t good for business. While low turnover can lead to a stockpile of goods at your warehouse, high turnover can lead to frequent stockouts and angry customers. Translated into days (365 ÷ 1.71), you sell out every 214 days (about every seven months).

Kontakt Home now has a convenient, high-performance online semi-marketplace with a custom design and complex integration. Our services helped the client significantly improve its e-commerce business and online security. We can offer you customized solutions to help you improve your inventory turnover ratio.If you are interested in any of these services, then please do not hesitate to contact us. This service will help you to understand what your inventory turnover ratio is and how it can be improved. Your inventory-to-sales ratio shows how much money you are investing in inventory to generate your sales over a period of time, usually a year.

To find your ITR for the year, divide your total cost of goods sold by your average inventory value. You can determine the average inventory value by adding together the beginning inventory and ending inventory balances for a single month, and dividing by two. Also, a company might have an ultra-high ITR while going bankrupt because the company isn’t making enough profit on each sale. Although it’s usually not a good idea to sacrifice profit for turnover, it’s sometimes necessary—for example, when it’s more costly to store “dead stock” in your warehouse than sell it off quickly. Contrary to some inventory management myths, extremely high turnover rate can be a bad thing and hurt your balance sheet and affect business performance. Some organizations, such as ReadyRatios, track the median ITR in various industries.