5 Inventory Metrics that Every Retailer Should Track
If you are running a retail business, exercising inventory control and efficientlymanaging inventory is of utmost importance to maintain the stability of your business. By knowing and looking after right inventory metrics, you can avoid both surplus and deficit in your warehouse which is cost effective.
In this post, we are going to discuss top inventory metrics that you need to track as a retailer. Let’s get started:
Gross margin return on investment or GMROI helps retailers to know what they are getting back in return in return for what they have spent. You measure the profit return you are getting the funds that you have put in your inventory. The formula of GMROI: gross returns/average cost of inventory. While there are many other inventory ratios and functions, GMROI is one of the most crucial metric that retail owners track to optimize their inventory process.
By calculating GMROI, retailers can find the proportion of profit made against the scarce resources that take up your warehouse or storage space.
If you have limited space, you can calculate profit generated per square foot of your storage space that the inventory occupies. In case you have limited monetary resources, you can streamline your inventory by focusing on profit generated per average stock held. Thus, you can make better decisions under various circumstances.
Inventory turnover or stock turn is a metric that calculates sell through against the stock held. This metric gives a clear picture of sales versus items stocked. As a retailer, high inventory turnover ratio is favorable for your business because it is an indicator that you are selling more than you are stocking.
The stock turn is calculated using a formula: the cost of goods sold/ average inventory
You can track your efficiency by using this formula. Higher inventory turnover ratio means that you are investing less in inventory for generating the profitable level of sale. This ratio can be calculated for both shorter and longer time periods (if the periods are consistent).
If your business is a highly seasonal one, you can look into shorter time periods to track inventory in high vs. low seasons.
For a retail owner, knowing top performing products and least performing products is crucial. Using product performance metric, you will be able to make informed decisions on many issues, including:
· What product should be stocked up?
· What items need a promotional push to perform better?
Many crucial actions such as stock orders,merchandising, advertising and promoting, etc. depend on product performancemetric.
If you apply the 80/20 rule to maintain your inventory stock, product performance is the first metric and at times the only metric you must look at. By comparing stock orders and sale reports, you can find top performing and slow performing products.
Shrinkage refers to the difference between the amount of stock appearing of the paper or records and the actual stock available physically. This reduction in sales is not caused by sales rather it is caused by reasons including, shoplifting, supplier fraud, administrative errors and employee theft.
Shrinkage is the value of physically verified inventory deducted from closing inventory valuein the books. The shrinkage in value is divided by sales and then multiplied by100 to get a percentage.
According to many national and international standards, favorable shrinkage is 1.38%. Measuring shrinkage not only allows you to find out all the risk factors but also helps you in finding solutions that promote inventory accuracy.
Tips to reduce shrinkage:
· You must regularly count your inventory to spot, prevent and address shrinkage
· Physical verification of stock helps in reducing shrinkage to a great extent
· Use technology or hire special staff to physically count your inventory
When you put the percentage of units sold against the stock available to be sold is known as sell-through rate. It is calculated by dividing the number of units sold by opening stock multiplied by 100. This metric allows retailers to make informed decisions about slow performing products such as announcing discount. You need to focus on improving your sell-through rate.
The mentioned 5 inventory metrics allow retailers to enhance the accuracy of their inventory and magnify the profits. Retailers can improve inventory management and inventory control by calculating these five inventory metrics.