Because almost all retail operations are built around their inventory management strategy, the stock turnover rate is one of every merchant's most critical Key Performance Indicators. Excessive inventory involves spending a lot of money to store overstocked products that sell poorly, while keeping too little stock means missing out on sales possibilities.
Inventory turnover, also known as inventory velocity, is the number of times a company has to replenish its inventory.
The inventory turnover ratio determines how quickly you sell and how frequently you replenish your inventory. This indicator is crucial for retailers who sell perishable or time-sensitive goods, such as food, trendy fashion, or consumer electronics. Furthermore, excess inventory may result in dead stock, especially as seasons change and people no longer purchase obsolete things.
Keeping a close eye on your inventory turnover rate can provide valuable information about which products are hot sellers and how you manage your inventory carrying costs. This figure can assist you in making better judgments about many aspects of business operations, including manufacturing, pricing, marketing, and purchasing new inventory.
You can calculate your inventory turnover using the following formula:
The cost of goods sold (COGS) is divided by the average number of items in stock at a given time.
For example, a cheese shop sold $1,600,000 in products in a year and averaged $200,000 in inventory. Their stock turnover ratio is 8 (equals $1,600,000 divided by $200,000), which means that their inventory has to be refilled eight times per year, which is a reasonably profitable rate.
Consider another example: This year, a bicycle retailer sold $300,000 in merchandise and held $750,000 in average inventory, which gives them a 0.4 inventory turnover rate (300,000 divided by $750,000). This number shows that the store has too much stock, and its marketing and sales efforts must be fixed. Their capital is being held hostage by the stock on the shelves.
It could really vary substantially between industries. Therefore, you should examine the benchmarks for your individual business sector.
It is essential to recognize that inventory numbers are only informative in relation to the company's sector or industry. According to CSI Market Research, the average inventory turnover ratio in the retail sector is 10.86. But even this approximation could be more meaningful: primary food products have a lower profit margin than jewelry or expensive clothing. Grocery retailers compensate for their modest profit margins by selling a large number of their products. Yet, no universally accepted value represents a good or bad inventory turnover ratio; optimal percentages differ by industry and even by sub-sectors.
Low inventory turnover may indicate problems with your marketing strategy or a lack of consumer demand for your products. Generally speaking, the higher the stock turnover rate, the greater your likelihood of meeting your financial objectives. After all, a high ratio allows you to lower the cost of storing items, optimizing your company's liquidity and financial health.
Yet, a high inventory turnover rate is not always a good thing. In other circumstances, it is due to a lack of inventory, which may result in missed sales if the product sells out. To optimize your inventory management, you must maintain a balance between your purchase level and your sales performance.
There are several levers available to help you enhance your inventory turnover performance.
If you can predict which merchandise shoppers will want and when they will want them, you may avoid the strain of holding too much stock and having a greater stock turnover rate. Refine your inventory for seasonality and your store's demographics, and fine-tune product assortment in your categories.
The average supermarket carries 35,829 items in its inventory. When you find products that sell quickly, replenish them more frequently with an appropriate average inventory. Don't overload by purchasing massive volumes all at once. This allows you to order a fresh product before the current one sells out, allowing your business to run smoothly and without excess inventory.
Even in small volumes, ordering merchandise more frequently gives you more bargaining power with suppliers. Remember to negotiate with vendors to assist you in increasing demand in your stores by promoting their items with in-store promotion events and store demos. Effective negotiating can cut the cost of products sold and help them sell faster, improving your inventory turnover indicators.
Try several strategies to rapidly transfer old stock for slow-selling products that take up a lot of space or cost a lot of money in your inventory. For example, you might offer customers special discounts and promotions, or you could start special marketing events to move out obsolete stock.
Developing an effective retail marketing strategy to sell more products will aid in improving your inventory turnover ratio. Depending on your goal, you can refocus on activities to increase sales of specific products or reach out to more potential customers. Welcoming your vendors to join you in Market Days activities, themed special events, and continuous in-store sampling events will measurably impact your inventory velocity. These are successful methods for increasing merchandise sales, attracting new customers and keeping them engaged and delighted. The first thing to remember is to understand your shoppers and then be present with them at the correct time and place. Consumers' reactions to products sampled during these promotions in store indicate if the products will sell well, hence reducing inventory risk. As a result, your inventory turnover metrics will improve; all you need to do now is verify that your inventory can satisfy demand.
A retailer's frequent turnover of inventory indicates overall solid business health.