Having a successful Amazon business means keeping a close eye on your inventory. If you overstock, you can run up huge holding costs and struggle to get rid of items, while too little inventory can lead to disappointed customers and a backlog of orders.
Managing your inventory is particularly prominent right now since Amazon have just released an update on their Inventory Performance Index (IPI) for FBA sellers. The statement says that the IPI minimum threshold requirement is now 500, and sellers with scores below this will get limited storage space as of August 16th.
Accessing more storage space depends on your IPI score, which is determined by how well you manage your inventory. This shows just how crucial it is to keep an eye on your stock and track how much is going in and out.
But knowing how to manage your inventory is difficult.
It’s hard to know what you should be looking for. A sudden surge in sales on a particular item might lead a brand to order way more than they need, only to find that it was a flash-in-the-pan trend that dies off the next month.
To get it right, you have to track key metrics (or Key Performance Indicators, a.k.a. KPIs). Calculating important metrics to do with your business will ensure you stay on top of your inventory and help you determine where there’s room for improvement.
We help Urtasker customers track their key inventory metrics. This has helped them dramatically increase their revenue and reduce holding costs while ensuring their customers remain happy with the purchasing process.
How to Choose the Right Inventory Metrics to Track
The first step in tracking your inventory process is to pinpoint which metrics are the most important to your business. It helps to focus on metrics that:
1. Reflect your overall goals
2. Provide deep insights (no vanity metrics allowed!)
3. Are highly focused
Choosing the right metrics is often a case of trial and error. You’ll soon start to notice which ones mean the most to your business and provide you with the best results to improve your costs and operations.
Once you’ve figured out where to focus your energy, set up a schedule for checking in on your metrics – once a month is usually a good place to start.
These Are The Inventory Metrics You Should Be Tracking
1. Average Days to Sell
This metric is pretty simple in that it measures the time frame between products arriving in your inventory and when a customer buys them.
Of course, it goes without saying that some products will languish a little longer in your inventory than others, particularly seasonal items or higher-ticket products. This is why this metric helps you work out an average.
How this helps you improve your inventory management
Knowing how long it takes to shift a product from your digital shelves helps you plan ahead. If the number is too high, you know that you need to work harder to sell products or simply reduce the number of units you get in stock.
The Formula
Divide the number of days in your chosen time period (e.g. 30 for a month) by your Inventory Turnover (we talk more about this later, but this is essentially CoGs / average inventory).
2. Average Inventory
While Average Days to Sell measures the time it takes to sell a product, Average Inventory works out how much inventory you have during any given time period. For example, it will help you figure out if you tend to have more of one product in stock than others.
How this helps improve your inventory management
Your Average Inventory gives you a broad overview of how much stock you have in play at any one time. It helps you pinpoint key seasons where you can adjust your stock intake accordingly and ensures you’re not ordering in too many units in each new intake.
The Formula
(How much inventory you have at the start of your chosen timeframe + how much inventory you have at the end of your chosen timeframe) / 2.
3. Perfect Order Performance
Shipping and delivery form a huge part of the buying process. Unfortunately, products can and do go missing, and sometimes items can get delivered damaged. Understanding your Perfect Order Performance metric will help you see just how many of your products are arriving as they should.
How this helps improve your inventory management
Measuring your Perfect Order Performance helps you see how effective you are at delivering complete and undamaged orders. Quality plays a huge part in customers coming back for more and leaving positive reviews, while a low number of completed deliveries can indicate a problem with your shipping.
The Formula
(% of orders delivered on time) x (% of completed orders) x (% of damage-free orders) x 100.
4. Inventory Turnover
Calculating your Inventory Turnover helps you see just how many times your stock is sold and replaced during a specific timeframe. This gives you a good idea about what your best-selling products are and provides a roadmap for ensuring you have enough stock in.
How this helps improve your inventory management
Knowing how quickly your inventory is turned over means you can order in the right amount of products every month. This will ensure you have no unnecessary backlogs nor too much inventory at any given time.
The Formula
1. Sales / average inventory
2. CoGs / average inventory
5. Stock to Sales Ratio
Stock to Sales Ratio helps you track the amount of stock you have available for sale against the amount of stock that you’ve already sold in a specific timeframe. This will give you an idea of how quickly certain items sell and can help you identify products that don’t sell at all.
How this helps improve your inventory management
Knowing which products sell quickly means you can focus your effort on those products, increasing your inventory and, therefore, increasing your sales. It also ensures you don’t overorder on products that don’t sell as quickly, reducing holding costs and shortening the lag time between getting products in and selling them.
The Formula
Units available / units sold
6. Sell Through Rate
Calculating your Sell Through Rate shows you how many units are sold during a certain timeframe. It gives you a good idea of how many units you need to order in each week, month, or year.
How this helps improve your inventory management
Knowing how many products you tend to sell during a specific timeframe means you can order in just the right amount of stock. This stops you from over ordering and accruing extra holding costs. It also helps you keep a track of your sales and provides an easy way to predict how many sales you’ll make in future time periods.
The Formula
Units sold / (units sold + on-hand inventory)
7. Back Order Rate
Accruing a backlog of sales isn’t good for business. It means you haven’t ordered in enough products and customers are having to wait. As a result, you could lose out on sales and annoy customers.
How this helps your inventory management
Working out your Back Order Rate can show you how well you stock products that are in demand. If it’s too high, it means you’re not getting enough stock in to keep up with demand. On the flipside, knowing when to order in more units means you’ll get more sales and improve customer satisfaction.
The Formula
(# of customer orders delayed due to backorders / total # of customer orders place) x 100.
Metrics Are the Key to Healthy Inventory Management
Knowing what metrics to track and keeping a close eye on them will identify any problem areas in your inventory process. This means you can iron them out quickly and create a more streamlined workflow that increases sales, reduces holding costs, and ensures your customers are kept happy time and time again.
Schedule your free 30 minute no obligation consultation with Urtasker now.
