How to build a quick Inventory turnover rate for a profitable ecommerce business
What is Inventory Management? Probably, this term is a blind spot for a lot of inexperienced sellers.
It has a lot of underlying complexities and does not earn many mentions as other topics in ecommerce does.
Nonetheless, it is important for you to understand the workings behind your inventory management cycle.
While you might have explored ways to save money on inventory management, but did you ever take a look at your inventory turnover rate? If not, then you must!
Inventory turnover directly reflects the underlying health of your ecommerce business.
A slow inventory turnover does not mean bad inventory management practices alone. It may suggest that you online business may have multiple issues such as lack of understanding of the business, bad relationship management with suppliers, poor sales and marketing and many more.
Before we go deep into it, let’s quickly understand inventory turnover rate and its implications.
What is Inventory turnover rate?
Inventory turnover rate is defined as the number of times the inventory is sold for a given period of time.
Inventory turnover is calculated annually, bi-annually or monthly. It grossly depends on the sales cycle that takes place in your company.
The seller who turns it faster is most likely to be doing better than others. He is selling more, making more profits, using fresh and the best raw materials available to him–which in turn is helping him sell even further.
Indeed, inventory turnover rate is one of the many dominoes within your online business.
What happens when you have a slow inventory turnover rate?
- A slow moving/selling inventory means the inventory spends more time in the warehouse leading to costs. This cost is called the inventory carrying cost — the cost incurred in order to store the inventory in the best possible form.
- Slow moving inventory means you may be selling old stock to people. This may earn you a bad reputation in the market. If you are selling on marketplaces such as Amazon or Etsy, you may end up with a low seller rating.
- Power to negotiate/bargain with your suppliers goes down as you apparently buy less and giving them less business.
Since you are selling less, your purchase order will be slimmer and you lose on price breaks. Hence, either you would be selling at a higher price than the competition. If you want to sell at a competitive price you would make less profits.
Businesses selling their inventory faster are always successful within their domains or industry.
A common example of quick inventory turnover can be seen with food trucks that stay in high demand. While people primarily go for tasty food, a part of that great taste is derived from the fresh ingredients itself. Selling fast makes you stock fresh raw materials that in turn helps in making tasty food.
On the other hand, restaurants and food trucks who make bad food, sell slow, turn their inventory slower than others have to stock frozen raw materials unwantedly.
This further deteriorates the taste. Remember Gordon Ramsay complaining about the frozen food in kitchen nightmares?
This is what a fast inventory turnover rate for your business means. Irrespective of the fact, you are selling food or something else, your inventory turnover rate will always depict the state of your business.
For new e-commerce entrepreneurs however, it is often difficult to see the obscure challenges of inventory management.
In this post, we will look into ways to have quick inventory turnover cycles and a healthy online selling experience. These fundamentally include business knowledge, general precautions sales and Marketing and a bit of common sense.
Let’s begin with the count-
1-Arrive at a Product-Market fit-
Since inventory turnover rate directly depends on how fast your item sells, it is mandatory that you arrive at a product- market fit. Before anything else, it is essential to ascertain that your items sell at the first place.
A product – market fit generates substantial demand, gives more volumes to your shipping provider and supplier which greatly helps in reducing shipping delays.
Often, Shipping companies show up more frequently at your warehouse if you give them high volumes.
On the other hand, fewer volumes will have your shipper come to you less frequently. This way, shipping is delayed.
Apart from that, a high demand will always have you stocking the best and the freshest batch of goods. Your brand becomes more dependable in the long run.
There are some key factors that assure, if not guarantees a product market fit for the product you are planning to sell. These can be-
Select items that are non-perishable-
It might sound like an irony because the fastest inventory turnovers are always associated with businesses related to food.
However, many online sellers naturally avoid that path as perishable items take a lot of equipments for storage and transport that increases the inventory carrying costs.
On the other hand, If your item is exclusive and non-perishable, you will have an easy inventory to store. The product-market fit will be better and you can still achieve a healthy turnover rate.
Products that create recurring demand-
It is essential to go for a product with an ability to create recurring demand. Frequent orders mean a fast moving inventory. This is why, products that generate monthly demand or lead to a subscription based model are great options.
Pet food, nootropics, coconut oil, e-cigarette vapes, detox tea etc. are some examples.
If you have decided to go for Amazon FBA, recurring demand becomes extremely important. Your stock lying in Amazon warehouse will incur inventory holding costs. Thus, quicker the goods move, lesser holding costs you pay.
Size of the Product-
This is an important factor that directly affects the sales volume and inventory turnover rate as a result.
Anything that you cannot accommodate within the USPS Small Box is relatively big and it is going to cost you shipping charges. This hinders the selling frequency, leading to slow inventory turnover.
Since many buyers feel entitled to get a free shipping, anything bigger will have your buyer paying the shipping charges.
This is why it is good to come up with something that is relatively small in size and can be easily shipped while driving the turnover rate.
Selling a product that has some form of exclusivity can earn you buyers straight away. If you look at the hot selling products at this moment such as matcha powder, Paleo bars or pocket squares, every seller is providing something unique with their offering.
Exclusive products have higher chances of success, meaning more sales and inventory turns.
The price range sweet spot-
There is a strong correlation between price range and sales when it comes to online selling. There is a sweet spot with respect to the price that affects the sales volume.
At Orderhive, we are continuously monitoring our back-end data and we deduced that products priced between 10-20 dollars sell the most.
In fact, if you run a brief search to find out the trending items on marketplaces, the price range of 10-20 dollar manifests all the time.
So, while creating your product portfolio, keep this in mind. If the price range is optimal, you would sell more and turn the inventory faster.
Please understand that a higher price does not mean low sales volume. You may sell in high numbers even if you are selling something between $40-$50. However, the price range of $10-$20 attracts most of the orders.
2-Buy from reputed Suppliers/Wholesalers-
Always buy from reputed suppliers with proven track record of reliable supply chain management practices. Consistency in physical distribution is the key when it comes to procurement.
Inventory replenishment should fall as close as possible to your Reorder Point every time you order.
You cannot sit without an excess of inventory or have it shipped long before your shelves have any space to accommodate the new stock. Overstocking means bad inventory upkeep and more inventory holding costs.
How to verify the credibility of the supplier?
- Run a search with the supplier name and see if consumer court complaints or lawsuits show up. One or two lawsuits may still be overlooked. However, if you find a lot of them spread out across a sizable timeline, then it is definitely worrisome
- You can hire professional companies to run a background check for the supplier
- Ask for a factory visit, documentations and other details. If they deny, that is a bad signal
- Ask for references for other retailers they have served
The supplier is suspicious if he/she only deals in cash and denies digital payment
If you directly buy from a manufacturer, or partially manufacture the product yourself, make sure that the production speed is high. This way, whenever you receive the order, you can quickly manufacture the product and get it delivered without any slack, turning the inventory faster as a result.
3- Go for local procurement-
It is always advisable to sell something that is readily available within your immediate locality. With local procurement, not only you can save a lot on price but most likely have quick shipping to your warehouse too.
If you’re are operating a private label business model selling garments or Fandom T-shirts, local procurement will help you log way to manage your inventory efficiently and have a quick turn around cycle.
Nearby place of procurement is also beneficial for products that require some level of finishing touches before delivery. It may be repackaging or any form of product bundling.
Local suppliers and wholesalers may also allow you to buy the inventory on credit.
Your ability to forecast gets a lot better while spending a lot less on inventory holding costs. Overall, all these leads to quick selling and a faster turnaround cycle.
4-Ability to Forecast-
The ability to forecast your demand is crucial. It gives you the intel to go for the right amount of inventory for your warehouse.
Only when you ascertain the demand with accuracy, you save on price breaks and inventory holding costs. There are certain ways you can go about forecasting-
- Go back to your historical sales data and look for the demand pattern with respect to SKUs
- Use an inventory management software to estimate your monthly forecast
- Use market information to understand trends. Some products or variants may create more demand, hence quick turnover as a result.
5-Use an Inventory and Order Management Software-
Almost half of the SMBs do not track their inventory as yet . Most likely, a lot of them will go for online selling in future. And when that happens, the entropic mechanisms of ecommerce will compel them to go for inventory automation.
Presently, E-commerce and mobile commerce has made the process a lot complicated that created the need for inventory management automation.
Inventory listed across marketplaces needs to be automatically synced and updated to avoid underselling or overselling of products.
One also has to ensure that they can automate the purchase orders and optimize their SKUs according to specific demand patterns that vary across marketplaces and platforms. During holiday seasons, inventory automation really comes as a boon to businesses selling in high numbers.
According to a report, it is estimated that ecommerce entrepreneurs can increase their profitability by 50% if they employ an inventory and order management software.
Apart from automating inventory and order, the software should also provide easy forecasting for reorder point every month/sales cycle. Using automation will help you optimize the entire inventory management process and pace up the turnover rate.
6-Limit your Product Variants-
It is often beneficial and exciting for customers to be presented with a large number of product options.
While for digital products that’s easy to accomplish. Physical goods, on the other hand, can create a lot of complexities and may lead to a dead stock overload.
For example, a shirt with 10 different colors might require you to stock more than 40 units in inventory if you chose to stock at least 4 pieces each. Few variants would fly off quick but some of them may lay in your warehouse and increase your bill at the end of the month.
If you want to have a quick inventory turnover, figure out the variants that sell more than others. Buy more stock of those and have your inventory move more quickly.
7-Categorize your inventory-
Categorizing your inventory with respect to fast moving and slow moving products can be useful. Employ an inventory management software to track average turnover with respect to products and then segregate them.
You can employ ABC analysis to categorize your inventory. ABC analysis is nothing but categorizing your inventory into three separate groups which are A, B and C.
- Group A items are the ones that make up 20% of the total items but leads to more than 70% of annual consumption
- Group B makes 30% of the items but accounts for 25% of annual consumption
- Group C makes 50% of the items but accounts for 5% of annual consumption
Apart from ABC analysis, you can also go for FSN or VED analysis if it’s a better fit for your business.
After you are done with the grouping, arrange your warehouse accordingly.
Allow easy access to fast moving products as compared to the slow moving ones. Give more man-hours for the upkeep of ‘A’ category items.
Categorization will also help you follow a strict FIFO methodology to manage the inventory efficiently and reduce turnover time.
Ability to take advanced orders can become a game changer for an online business.
Advanced orders can give a mathematical estimate of your market size and help you sell off your inventory in no time.
Online businesses can provide discounts and incentives for pre-booking the product. They can also go for incentives via referrals. This will trigger large volume sales and the inventory will fly off instantaneously.
Go for a pre booking or advanced order plug-in for your ecommerce site.
This works best for businesses that enjoy some form of visibility with a sizable e-mail user-base to break the news.
9-Avoid Selling Outdated Stuff-
At times, Sellers have an insufficient market knowledge or a bad timing to the market. This is particularly applicable to apparels.
If you are selling an outdated style, most likely, you won’t sell as fast as you’ve anticipated. The result is likely to be a slow moving inventory and turnover.
Keep yourself updated with market information and trends. Pay attention to the trending section on leading marketplaces such as amazon. Whatever appears there is most likely to be trending.
Keep a watch on relevant hashtags on Instagram. In case of B2B products, online forums can help.
10-Website Design and Navigation-
A great website design is essential to bring out the best of your product. Have all the plugins at your disposal. The Shopify App Store is a great place to hunt for everything you need.
A few tips-
- Have the zoom tool in place
- Create menus and mega-menu that highlights your best selling products
- Allow buyers to create wishlists within the site
- Create an effective search bar. Employ filters for quick navigation
- If you are selling apparels, try to have video previews too
- You can also look into heatmaps and run some A/B tests to optimize your traffic and maximize sales
- You can also integrate product recommendation plug-ins to upsell products.
All these steps would ultimately lead to more sales and a quick inventory turnover.
11-Packaging, Photography, and Visual Merchandising-
Differentiation is the key to attract customer attention and get them buying. Successful niche products that sell online, often become successful due to differentiation. One of the prime differentiating factors is eye-catching packaging.
Many entrepreneurs making their mark in e-commerce business often come up with a new brand altogether.
This is where product packaging can help them create a unique identity and a strong recall. In other words, better packaging means more sales and a high inventory turnover.
Businesses should also focus on product photography. Even if you are not into businesses such as fashion and apparel, your business might still need good photography skills.
Entrepreneurs who have their brick and mortar store may also focus on effective visual merchandising to increase sales.
Avoid placing slow moving products on upper shelves; use proper lighting, signage, product grouping and various other tactics to reduce turn the inventory as quickly as possible.
When thinking about a fast inventory turnover rate, not only you need to take the precautionary measures, but also think continually to boost your overall business which ultimately leads to more sales and a quick turnover cycle of your inventory.
Automation goes a long way to help you out with your inventory management needs.
An effective system will help you with forecasting, purchase order management, reorder point estimation and a host of other things that constitutes to efficient inventory management practices and reduced inventory turnover time.
Hope you find the suggestions valuable. Wish you luck with your venture.
Arup works as Content Marketing Manager for Orderhive. Apart from running Orderhive's digital strategy, Arup likes to write deep and incisive articles on topics across a wide spectrum.
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