As a retailer, you depend upon a wide-range of metrics to understand the health of your business. Inventory management has a lot of them, but only a handful can quickly identify potential risks to profits and improve productivity within your operations.
Data Is Required
If you struggle with stock control, you’re not alone. And, to manage it better, you’re going to need to locate those problems and fix them. This is where your retail management system matters.
Your system needs to account for more than just products and sales. It needs to account for dates, employees, and vendors. By gathering data on your inventory, you’ll be able to spot trends that examine how your sales and product availability are performing.
6 Essential Retail Inventory Metrics
It may not seem like it, but metrics can save you money. One of the things you can do now is incorporate the following six retail inventory metrics that are essential for every business owner. Once you do, you’ll have a much better forecast for your future.
1. Shrinkage
The loss of inventory due to theft, breakage, recording errors, and obsolescence causes shrinkage. Inventory shrink is found after physical counts are made. You can assess shrink across your entire inventory using this basic formula:
Shrinkage = Cost of Listed Inventory – Cost of Physical Inventory
If you have any problems due to inventory shrinkage, follow these 4 ways to prevent them.
2. Carrying Costs
Carrying costs are the following:
- Depreciation
- Insurance
- Warehouse Space
- Replacement Costs
- Handling
- Taxes
- Delivery Charges (vendor)
- Interest on Loans
Typically, these costs can be added together every month or at the end of the year. Once you have a number, you can calculate the percentage of carrying costs against your total inventory. Twenty percent is a retail industry standard and used as a rule of thumb when estimating.
3. GMROI – Gross Margin on Investment
This determines the profitability of your inventory and your store’s ability to turn inventory into cash. Simply calculate GMROI by dividing your gross margin by the average inventory cost.
Gross margin comes from your revenue minus the cost of goods sold. This does not include carrying costs. Average inventory is calculated by adding your current inventory with your previous inventory, then dividing that by 2. For example, your inventory at the start of the month added to your inventory at the end of the month, then divide by 2.
4. Inventory Turnover Rate
Higher turnover rates indicate efficiency and high demand. Take your cost of goods sold and divide it by your average inventory. Here, we use average inventory to see how often the stock is sold. Carrying costs are not included within this calculation.
5. Average Days to Sell
Use this formula to calculate your average days to sell inventory:
Average Days to Sell Inventory = (Average Inventory / Cost of Goods Sold) x 365
Another measure of efficiency and product demand. You can check your average against the industry standards to get a better idea of where your sales are relative to your competition.
6. Vendor Quality Index
Your inventory management strategies count on great vendor relationships. Vendors want your business, but they also want to partner with you to get the best service possible. So, how do you know they are following through on their promises? A vendor quality index will do that for you.
The index is something that you’ll need to create. Below is a list of important issues that you can track on a spreadsheet:
- Returns
- Shipping errors
- On time
- Product availability
- Product categories
- Pricing
- Credit terms
Quality of service is more than just pricing alone. All of these categories provide data points for you to use as a system of grading for each one. This will measure the quality of each of your vendors.
Diligence and Frequency
Automated reporting and analytics will avoid errors and provide timely insight into the ebb and flow of your inventory. Not all of these reports can be automated, so you’ll have to set aside time to do the research and calculations to get the right information.
These retail inventory metrics are essential to understand the health and well-being of your business. So, you’ll need to be diligent and schedule frequent times to perform your calculations. Metrics affect how you handle your flow of cash. Understanding your inventory obstacles and opportunities will increase efficiencies, raise employee productivity, and reduce costs to build more cash.