Inventory turnover is a number used by businesses to determine how many times they have sold through and then replenished inventory. It can be found by dividing the number of sales during a given period by the average inventory during that same period. Average inventory is found by simply adding the beginning inventory and the ending inventory, then dividing by 2.
Inventory turnover is a major driving force for any eCommerce organization because it can tell them a lot about what areas they need to focus on to improve and show how efficiently their business is running.
Investopedia lists the many ways a business can find value in measuring inventory turnover. They include:
- Tracking how many times the company has sold and replenished inventory
- Help analyze pricing and marketing strategies
- Find and close gaps within the manufacturing and supply chain
- Strategize purchasing inventory and setting discounts
- Move through slow-selling items
- Determine trends in the market and their industry
What is a Good Number for Inventory Turnover?
The short answer for what a good inventory turnover is between 2 and 4 for eCommerce companies. However, having a low versus a high inventory turnover number can determine many things, but it depends on the company itself.
For example, a low inventory turnover of 0.5, for example, likely means low sales and little profit. Plus, the company is spending too much on keeping inventory stocked on shelves that are just sitting there all year. Low inventory turnover is not what you want, but that doesn’t necessarily mean a high inventory turnover is any better.
The inventory turnover number indicates how many times inventory has been sold through and replenished. So, if a company is showing a turnover inventory ratio of 20, that means they are going through their entire inventory almost twice a month, which could indicate poor efficiency on their part.
A high inventory turnover could mean many things. It could mean the business is selling at too low of a price, so inventory is being depleted too quickly compared to other companies in the industry. It could also mean they are purchasing too little inventory, which is why it sells out so quickly. That number does not necessarily mean they are selling enough to make a profit. It may indicate more significant issues at hand.
Amazon’s inventory turnover for the entire year of 2019 was 10.92. The average is around 3 per quarter, though, which is a more accurate estimate of how their inventory operations day-to-day run. Based on Amazon’s size and amount of outgoing inventory, these numbers are incredibly good.
The fact that they are only going through and replenishing their inventory ten times a year, at that size, is pretty impressive. They’ve nailed down their processes to be airtight and can manage their stock along with the ever-changing market and consumer buying trends.
How Can Your eCommerce Business Have a Turnover Inventory Ratio like Amazon?
We’ve come up with five tips that can help your business improve your inventory turnover. Small businesses can learn a lot from these big businesses like Amazon and Home Depot that have figured out how to maintain a proper inventory turnover.
Automating Inventory Management Processes
Turning to automation can help improve all aspects of your business, thus improving your inventory turnover ratio. By automating everything from customer profiles to inventory tracking, you can find it much easier to measure trends and adjust accordingly quickly and easily.
For example, if you automate your customer profiles, and it tracks their order history, whether they received their packages on time, how often they place orders. Any feedback they give—that is a direct line to how your inventory management is affecting customers. Tools like topShelf can help automate much of your inventory management process.
Boost Demand for Inventory
If your inventory is only turning over one or fewer times a year, then you are not selling enough inventory. This is where the marketing team comes in. A company can’t sell more if there’s no demand for it. So, this means ramping up marketing efforts.
Set discounts on slow-moving inventory, invest in your business’ reputation in order to boost sales, which in turn moves more inventory. This is why the inventory turnover ratio is a good indicator of how well your company’s marketing efforts are as well.
Shift More Focus to Forecasting
Forecasting trends and consumer demand is critical for inventory planning and management. Not knowing what is coming up in the next year, quarter, or even month makes you unable to accurately predict how much inventory to purchase, what to buy, and when to purchase it.
Poor forecasting can lead to over or under stocking your warehouse and pricing things at a less-than-competitive price. Forecasting tools can help businesses more accurately track those things and help streamline inventory processes.
Regularly Review Purchase Pricing with Suppliers
Improving your inventory turnover ratio needs to be a joint effort across many departments. One such department that can have a lot of control in how products are sold is the purchasing department. If they aren’t already, they should be in constant close contact with suppliers and manufacturers to get the best possible price on products.
If your business is spending too much money on ordering products, but those products end up just sitting on the shelf due to poor sales, which is negatively impacting profitability in a significant way. By having your purchasing team regularly working towards lowering purchasing costs, and sorting out bulk buy deals can bleed into all other aspects of the business. Your business can’t price competitively if there is no wiggle room based on how much the suppliers are charging you for the product.
Integrate topShelf Within your Inventory Management Processes
topShelf with Scout integrates across multiple platforms, and can quickly implement within your existing systems without hassle. Using topShelf to automate inventory counting, purchase orders, pick/pack/ship, and customer feedback can alleviate a lot of the pain of trying to boost your inventory turnover on your own. Let topShelf do the work for you, so you can more easily analyze and adjust the proper areas.
We want to help you say goodbye to your outdated, mundane inventory management systems, and say hello to the #1 cloud-based inventory management system out there. Get started with a free demo here. We look forward to talking with you and helping you improve your inventory turnover ratio ten-fold.