12 Inventory KPI To Drive Sales [+Formulas]
A profitable retail business puts products in customers’ hands and maintains customer satisfaction. One way to do this is by having a short lead time, which means selling your inventory faster than you would typically be able to. In today’s article, we will discuss the list of KPIs.
When managing an eCommerce business, it is essential to monitor key performance indicators (KPIs) and compare them with previous periods.
Tracking, targeting, and controlling your sales and inventory KPIs will create opportunities for you to discover valuable insights that can help you make informed business decisions. You’ll also be able to identify the levers of merchandising they have available to drive measurable growth
Inventory management KPIs are a measure of the success and effectiveness of inventory. This article will list 12 essential metrics to help you succeed.
You need to understand what percentage of your sales come from each type of product you carry. These numbers help track your inventory’s well-balanced and determine if certain styles are contributing more than others.
1. Revenue % Contribution ($ Sls %)
The percentage of a company’s total revenue generated by a specific SKU, style, or department.
Formula: Revenue % Contribution = Style Revenue Sales / Total Revenue Sales
2. Unit Sales % Contribution (U Sls%)
Total unit sales are driven by a specific SKU, style, or department.
Formula: Unit Sales % Contribution = Style Unit Sales / Total Unit Sales
It is important to know which products are driving your business, and these formulas should be present in every one of your sales reports.
Let’s say you are running a women’s apparel brand that sells two product categories: Denim and T-Shirts.
Another example: if graphic tees make up 70% of sales but only 50% of inventory, then it is a sign that you need to change your buying strategy.
3. Build or Percent Change
To see how your business changes over a designated period, calculate the percent change in any KPI relative to the previous period. This is known as “Build.”
Formula: Build or Percent Change = (New Figure – Old Figure) / Old Figure
If you see that your sales in denim are down, but the inventory is also declining, that could be the reason why.
Percent Change calculations can be used to determine how many units of a particular product you need to stay on the shelves. If you are not confident with your sales numbers, Percent Change might be just what is required.
4. Sell Thru % (ST%)
The sell-through percentage is the total number of units sold divided by the purchased amount. This helps you understand how many items have been sold out of your available inventory over a certain period.
Formula: Sell Thru % = Units Sold / Total Unit Buy
If you have a seasonal product, you should aim to sell through 100% of the inventory in anticipation that there will be no reorders. This means “running out” on purpose.
Aim to achieve a 70% sell-through rate for seasonless products. This will allow you to fulfill customer orders before requiring replenishment.
Inventory Management & SKU KPIs
In this next section, we’ll be looking at KPIs that can help you make decisions about inventory flow. These metrics are helpful for things like improving your cost efficiency and turning over stock more quickly.
5. Stock to Sales Ratio aka “Inventory to sales Ratio” (Stk: SLS)
The inventory turnover ratio is a calculation that considers the number of units sold and the amount of time it took to sell them. This figure can be expressed as either rate or in terms of ratios.
Stock to Sales Rate = Inventory / Unit Sales
Stock to Sales Ratio = Inventory Contribution% / Unit Sales Contribution%
The goal should be for stock levels of an item to constitute as much of the total inventory as it contributes to sales, with the ideal score being 1 (or 1:1 ratio). This means you own exactly what can sell – not more (which translates to excess inventory), not less (which translates to stock-outs).
If you want to calculate this more specifically, use your $ Sales Contribution because it can help identify high-gross margin products. Then they are in unit sales..
6. Rate of Sale (ROS)
This is the average number of units sold per week for a specific SKU, style, or department over some time. It is a figure that helps you compare how fast products are selling per week and compute the rate of return for each product.
Formula: Rate of Sale = Total Unit Sales / Number of Weeks Selling
7. Weeks of Supply (WOS)
To calculate weeks of supply, divide the number of units on hand for a given period with average unit sales. This helps you determine how many weeks of sales can be sustained before running out of inventory.
Formula: Weeks of Supply = Number of On-Hand Units / Average Unit Sales
8. Open-To-Buy (OTB)
This process will give you insights into inventory, upcoming receipts, and expected sales.
Formula: OTB = (Planned Beginning Inventory – (On Hand Inventory + Upcoming Receipts) – Planned Unit Sales)
Your open-to-buy is an excellent way to avoid overbuying, which can happen when you purchase too much inventory for the future. The OTB should be allocated proportionally according to the recent sales history in each category.
9. Average Inventory (Avg Inv)
The inventory on hand is the average amount of product that a company has in stock during any given period.
Formula: Average Inventory = (On Hand Inventory + Beginning Inventory) / 2
Let’s say you have a beginning inventory of 20,000 units and the current inventory on hand is 50,000. The average inventory would be 35,000 units.
10. Inventory Turnover Rate (ITR or “Turn”)
The inventory turnover rate measures how quickly you sell what you buy. It can be calculated by dividing the annual cost of goods sold (COGS) by the average inventory for that year. It shows how many times you purchased and sold your items in a year.
Formula: Inventory Turnover Rate = Cost of Goods Sold / Average Inventory Value
For example, if you have a COGS of $500k and an average inventory value of $120k, your inventory turnover rate would be 4.1. This means you replenished inventory about four times per year.
Knowing your inventory turnover rate is crucial to forecasting demand. For most businesses, a reasonable turn rate is between 4 and 10.
The key to inventory control is balancing your unit buys and buying frequency. Acknowledging the number of units forecasted for a certain period will quickly satisfy demand ease, without worrying about running out.
Product Return KPIs
Returns are more than a lost sale. Returns impact your final sales figures and your inventory balance sheet, mainly if the product has been used or damaged. We’ve added two bonus KPIs to help you better understand how many items come back with each order.
11. Returns by Price
Formula: Return Rate by Price = Price Return / Price Paid
12. Returns by Unit
Formula: Return Rate by Units = Units Ordered / Units Returned.
How to Use Inventory KPIs To Make Decisions
Ultimately, these KPIs show the relationship between sales and inventory management and help you make decisions about how to move merchandise.
As a business owner, you should be aware of the 4P’s:
Merchants need to decide the products they will sell, their price, how best to promote them, and where.
You have to consider how your decisions will affect other areas of the store. For example, you can use it to drive sales by putting in more or less merchandise and seeing what works best.
Final Thoughts on Inventory KPI
These inventory KPIs can help you meet customer demand and increase profitability. Regular analysis of these data will help you see what is (and isn’t) driving the success of your business.