Inventory Metrics and Formulas in your Merchandise Planning

Inventory KPIs (Key Performance Indicators) are essential in the merchandise planning process and provide retailers with valuable insight into their inventory productivity and profitability performance. In addition, retailers can make informed decisions about their product assortment, pricing strategies, and inventory investments by tracking stock levels and Turnover.

Why inventory KPIs are essential in Merchandise Planning

1. Sales forecasting: sales patterns and trends help retailers generate sales or forecast demand to plan the optimal inventory levels to support the anticipated sales. It is a crucial first step in assisting retailers in anticipating customer demand and making informed decisions about their product assortment and inventory investments.
2. Inventory optimization: By tracking stock levels and Turnover, retailers can ensure they have the right amount of retail Inventory in the right place at the right time to meet customer demand. Having enough safety stock reduces the risk of stockouts, lost sales, and excess Inventory.
3. Performance tracking: Stock measurements can help retailers track their sales performance and identify areas for improvement. For example, if a product is not selling as quickly as expected, the retailer may need to adjust their strategy to drive sales.

What are the critical inventory KPIs we should use?

First, it’s important to understand that Sales and Inventory performance are interdependent. Each relies on the other to succeed. The trick is finding the right inventory level to maximize your sales before eroding your profits.

The most common Inventory KPIs are Weeks of Supply (WOS), stock-to-sales ratio (SSR), sell-thru percentage, and r Stock Turn. This article will examine them all, their importance, and their different purposes.  Top of Form

I have broken them down between inventory KPIs and sales KPIs

Sales  KPIs

Sell-Through (Sell-Thru) and Stock-to-Sales Ratio are two metrics used in retail inventory management that provide insights into how efficiently a retailer sells its Inventory.

Sell-Through measures the percentage of Inventory a retailer has sold during a particular period, typically expressed as a percentage.

The Sell-Through formula is:

Sell-Thru rate = (Units sold / Beginning inventory) x 100

For example, if a retailer had 100 units of a product at the beginning of the month and sold 80 units by the end of the month, the Sell-Through rate would be 80%. Sell thru helps track individual styles’ performance and identify which products are selling well and which are not.

A high Sell-Through rate indicates that a product is selling quickly and is in high demand, while a low Sell-Through rate may indicate that a product is not selling well and may need to be discounted or removed from the Inventory altogether. By tracking Sell-Through rates, retailers can decide which products to reorder and how much stock they need to carry to meet customer demand.

Another sales KPI is Stock-to-Sales Ratio (SSR). This metric is used in retail Inventory planning to determine how efficiently the retailer manages their Inventory and how quickly it sells its products.

The calculation divides the retailer’s average inventory level by average sales over the same period.

Stock-to-sales ratio = Average inventory level / Average daily sales

Where

• Average inventory level refers to the average amount of Inventory a retailer holds during a specific period, such as a week or a month
• Average daily sales refer to the average amount of sales made per day during that same period.

For example, let’s say a retailer had an average inventory of $10,000 and an average daily sales of $1,000 over a week. The stock-to-sales ratio is as follows:

Stock-to-sales ratio = $10,000 average inventory level / $1,000 average daily sales = 10

A higher stock-to-sales ratio indicates that a retailer carries too much Inventory relative to its sales, leading to excess costs and an increased risk of inventory obsolescence. On the other hand, a lower stock-to-sales ratio indicates that a retailer may be carrying too little Inventory and could miss out on potential sales opportunities due to stockouts.

Retailers can adjust their inventory levels to optimize sales and minimize costs by tracking the stock-to-sales ratio. Now let’s look at some inventory metrics that help you track your stock’s performance more specifically. Here are some inventory productivity metrics.

Inventory KPIs

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Weeks of Supply (WOS). Weeks of Supply measures how long a retailer will take to sell its current Inventory based on its sales rate.

The weeks of supply formula:

Weeks of Supply = Average Inventory / Average Weekly Sales

Where

• Average Inventory = (Beginning Inventory + Ending Inventory) / 2
• Average Weekly Sales = Total Sales / Number of Weeks

For example, if a company has an average inventory of $50,000 and an average weekly sales of $10,000, the weeks of supply would be:

Weeks of Supply = $50,000 / $10,000 = 5 weeks

This metric is essential as it helps retailers plan their inventory levels and timing to reorder products. It is especially important in item planning to avoid running out of stock or overstocking. For example, a high WOS may indicate that a retailer is overstocked and needs to reduce inventory levels to avoid excess costs. In contrast, a low WOS may suggest that a retailer is understocked and may be losing sales. As a result, they need to increase inventory levels to meet demand.

A second Inventory KPI is Stock Turn or Inventory Turnover. It is a financial ratio that measures how often a company’s Inventory is sold and replaced over a specific period, usually a year. It indicates how efficiently a company manages its Inventory and generates sales. Generally, Stock Turn is best measured at a product hierarchy above style. For example, Inventory Turn is used in Merchandise Financial and item planning processes, not Assortment Planning.

The Inventory Turnover formula or  Stock turn:

Inventory Turnover = Cost of goods sold / Average Inventory

Where

• The Cost of Goods Sold (COGS) is the direct cost of producing or purchasing the products sold during the period.
• Average Inventory is calculated by adding the beginning and ending stocks for the period and dividing them by two.

For example, if a company had $1 million in COGS and an average inventory of $200,000 during a year, the inventory turnover would be 5 times.

A higher Stock Turn Rate can lead to higher profitability by reducing the risk of markdowns, clearance sales, and inventory write-offs. However, a very high stock turn rate may also indicate that the retailer is understocked, leading to missed sales opportunities and dissatisfied customers.

What is a good inventory turn? The ideal Inventory Turnover in retail can vary depending on the type of products sold, the business’s seasonality, and the company’s overall sales strategy. Typically, hardline retailers will turn their Inventory much slower than Softline retailers. For example, a sofa takes longer to sell than a fashion blouse.

As a general guideline, a good Inventory Turn Rate for fashion retail is typically between 4 to 6 times yearly. However, a respectable Inventory Turnover Rate in retail Softlines can vary depending on the retailer’s business model, the product mix, and the seasonality of the business. Therefore, companies must regularly monitor their Inventory Turnover Rate and adjust as needed to optimize their inventory management and maximize profitability. Overall, a Stock Turn is an essential metric in retail to help retailers optimize their inventory management, improve profitability, and meet customer demand.

In summary, both Weeks of Supply (WOS) and Stock Turn are essential metrics in retail inventory management. However, WOS focuses more on inventory planning and replenishment style level information, while Stock Turn focuses on the financial overview of total stock ownership. Retailers need to use both metrics to make informed decisions about their inventory levels and ensure that they maximize their sales potential while minimizing excess costs.

In conclusion, inventory KPIs are essential in merchandise planning. These performance metrics give retailers valuable insights into inventory management, sales performance, and profitability. By leveraging stock measurements, retailers can optimize their inventory investments, improve their sales forecasting, and make informed decisions about their product assortment and pricing strategies.

The question is, what KPI should you use? The answer is they all are helpful based on the user’s evaluation.