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Inventory Analytics & How They Fuel Business Growth
Inventory analytics fall under the umbrella of key performance indicators (KPIs). AKA, quantifiable measures of a business’ performance that are used to reach a specified objective.
In other words, the daily evaluation of your inventory (via inventory analytics) provides all the insights you need to perfect stock availability while keeping costs to a minimum.
Whether you’re a veteran DTC brand or getting ready to launch your ecommerce store, tracking your inventory analytics is one of the best ways to fuel your business growth in the short- and long-term.
Here are the numbers you should absolutely track.
Inventory analytics measure how well your products sell and your brand makes money. More specifically, these metrics monitor your current stock levels and seek ways to improve your overall business performance.
By prioritizing just a few analytics metrics, companies can optimize inventory, reduce expenses, and improve operational efficiency in one fell swoop.
Among the most effective (and most important) inventory analytics metrics for DTC brands are: backorder rate, inventory turnover, holding costs, gross margin, days inventory outstanding, and stockout rate.
Backorder rate is the percentage of orders that can’t be fulfilled immediately but will be delivered to the customer at a later, promised date.
To calculate backorder rate, use the following formula:
backorder rate = (number of undeliverable orders ÷ total number of orders ) x 100
This metric indicates how well a brand stocks its products according to customer demand.
A high backorder rate — one that’s over 10% higher than your order fill rate — can signal room for improvement in your demand forecasting accuracy. Or, it might result from launching a new product and not being fully prepared for the volume of orders you receive.
Inventory turnover measures the rate your inventory sells through and replaces its inventory within a designated time frame (typically a year).
To calculate inventory turnover, use the following formula:
inventory turnover = (cost of goods sold ÷ average daily inventory)
By tracking your turnover ratio is important, you gauge how well your brand is able to meet customer demand.
Generally speaking, brands want their turnover ratio to sit between 2-4. A turnover ratio above 4 typically means you’re understocked. In this case, you should consider increasing your order quantities on your next purchase order.
Conversely, a turnover ratio below 2 means you’re overstocked or sales have stalled out. In that case, you’ll definitely want to offer a discount, create product bundles, or leverage other marketing strategies to increase customer demand.
Holding costs (or carrying costs) are part of the total inventory costs within a single supply chain. Simply put, holding costs are what you pay to store inventory that hasn’t sold.
Calculating holding costs is simple, but you’ll need to determine your brand’s storage costs, employee costs, opportunity costs, and depreciation costs first.
When you know all of these individual costs, you can use the following formula:
holding costs = (storage costs + employee costs + opportunity costs + depreciation costs) ÷ total value of annual inventory
Ideally, you want to keep your holding costs as low as possible. That way, you’re not overstocking your warehouse and wasting money on products that don’t sell (which lowers your margins).
That said, your holding costs should never be zero (since $0 in holding costs likely represents a stockout). And when you encounter a stockout situation, you’ll spend more on missed revenue opportunities than would have on carrying costs.
Gross margin describes your company’s net sales minus the cost of goods sold (COGS). And it’s the amount of money you retain after the cost of manufacturing for your inventory.
To calculate gross margin, use the following formula:
gross margin = (net sales – cost of goods sold)
In this calculation, net sales are your gross revenue minus applicable returns, discounts, or deductions. And cost of goods sold is the direct costs (like product costs and handling) associated with producing a company’s product.
Calculating your gross margin gives you insights into whether your sales are sufficient to cover your overhead costs. Plus, the higher your margins, the more working capital your company has to work with.
Days inventory outstanding (DIO) — or days in inventory — is the average number of days a company holds stock before it’s sold.
To calculate days inventory outstanding, use the following formula:
days inventory outstanding = (average inventory ÷ cost of goods sold) x 365 days
Because DIO reveals how quickly your company sells through its inventory, it’s a good indicator of operational efficiency and can help you to establish accurate reorder points to avoid stockouts.
Stockout rate is the percentage of inventory items that are unavailable when they’re needed for sale — such as when the customer is looking to purchase them.
To calculate stockout rate, use the following formula:
stockout rate = (frequency of stockouts x annual sales volume) x 100
This metric looks at your company’s ability (or inability) to deliver products within the agreed-upon time frame.
A high stockout rate can point to inaccurate forecasting or ineffective inventory replenishment within your distribution networks. In any case, recurring stockouts will cost you big in lost sales. That is unless you can pivot to selling on backorder and keep those sales flowing.
Analyzing your inventory metrics is critical to the health and wealth of your DTC brand.
When analyzed on a routine basis, inventory analytics help you to maintain healthy inventory levels, reduce inventory costs, create accurate forecasts, and cut down on inventory waste.
A core component of running a successful DTC brand is ensuring you always have the right amount of inventory on hand. This means not overstocking slow-moving items while still having enough stock available to meet demand.
When you incorporate analytics into your strategy for inventory management, maintaining healthy stock levels gets a whole lot easier.
That’s because metrics like inventory turnover and stockout rate give you a clear picture of what’s going on with your products — how fast they’re selling, how often they’re selling out, and so on. And with this knowledge, you can make better decisions regarding what, how much, and when to reorder.
Plus, you don’t accumulate expensive excess inventory by holding just enough stock to meet demand. That way, you scale back your costs while freeing up working capital to scale up your brand’s growth.
Not only do inventory costs tend to be high, but ShipBob estimates that anywhere from 30-50% of a company’s assets are tied up in its inventory levels at all times.
This explains why most DTC brands would jump at the chance to reduce inventory costs whenever and wherever possible. A great way to do this is with the help of inventory analytics, specifically your brand’s holding costs.
Since inventory holding costs consider warehousing, labor, and depreciation, they can reveal where you’re overspending.
For instance, you might find that your warehousing fees are quietly increasing annually and cutting your margins more every year. In that case, your brand should explore other storage options or locations to decrease storage costs.
Accurate forecasts are the foundation for meeting consumer demand and keeping your customers happy. Say you miss the mark when you forecast demand. Then, you could wind up understocking on popular products and having to turn people away.
On the flip side, your forecasts might be overzealous — causing you to overstock on products that nobody wants to buy. This situation is a recipe for dead stock and one of the quickest ways to wreck your profit margins.
The good news is that inventory analytics can help you create accurate, reliable demand forecasts.
Knowing your current inventory turnover ratio gives you a better idea of how your products will perform in the future. That’s because you can rely on historical data to guide those predictions.
Similarly, understanding your days inventory outstanding can tell you how long your current stock will last until you need to dip onto your safety stock. That way, you know when you absolutely need to replenish.
Both these metrics — inventory turnover and DIO — directly support your brand’s forecasting and replenishment process.
With the insights you gain from these analytics, you’ll know how much inventory you need to meet demand and exactly when it’s time to restock (by factoring in your lead times).
This improved forecasting accuracy means more consistent sales, increased customer satisfaction, and ultimately, more cash flow for your business.
If you really want to grow your DTC brand, you will have to cut down on unnecessary inventory waste. More specifically, you’ll need to address the waste associated with warehousing and capital tied up in unsold inventory items.
Typically, inventory waste occurs in 1 of 2 ways:
Regardless of the cause, this waste harms your bottom line.
Using inventory analytics like inventory turnover, your brand can reclaim control over its stock levels and create a plan for slow-moving SKUs (like marking down those goods before they become obsolete).
As a result of having less waste, your company can take advantage of better profit margins and rake in more revenue overall.
As is true for all aspects of inventory management, inventory analytics has a handful of best practices to follow. These include centralizing your inventory data, using real-time inventory dashboards, and incorporating ABC analysis.
When your data analytics are contained within a central location (rather than split into silos), your whole team can communicate and collaborate much, much easier.
That’s because centralized inventory data exists where everyone can see it and use this information in their decision-making process. In other words, centralized data takes the guesswork out of making important, inventory-related decisions.
The best way to organize your data all in one place is with the help of a comprehensive operations platform (like Cogsy).
With this system at your disposal, your brand can access its data anytime, from anywhere.
Inventory dashboards provide a visual component for your numerical inventory analytics. Essentially, these dashboards gather all your inventory data and metrics and display this information in an easy-to-understand format.
For example, you may have a dashboard that tracks all your out-of-stock items or another one that shows your backorder rate for your latest release.
This dashboard gives you a bird’s eye view of what’s going on with your stock for more streamlined inventory planning.
Plus, real-time dashboards provide the most current insights into your inventory levels, which you can use to create more accurate demand forecasts.
Just like centralizing your data, analytics dashboards are best used in conjunction with an operations platform or inventory management software that’s got your back around the clock.
Another best practice for your inventory analytics is to incorporate ABC analysis. This inventory classification system allows for easy monitoring of your product movement.
ABC stands for always better control because it supports improved inventory control for costly items where a large amount of capital is invested.
More simply, ABC analysis allows you to classify products based on their inventory value and impact on your annual inventory costs.
In an ABC-style inventory ranking:
Once you’ve separated your products into 1 of these 3 categories, you can drill down into the granular details like whether they’re classified as apparel, electronics, and so on.
The benefit of ABC analysis is that it gives your most important inventory (those in the A category) more of your time and focus. In doing so, your company can boost its revenue while helping to control costs and stick within your budget.
On top of that, ABC analysis can reduce dead stock, optimize your inventory turnover ratio, and guide your demand forecasting by tracking your SKUs individually.
Making data-driven decisions is the key to unlocking sustainable growth for your DTC brand. But how do you logically organize your data and make it readily accessible? By partnering with a proficient operations platform like Cogsy.
When your team relies on Cogsy, they can monitor your inventory data 24/7. Analyzing it in real-time to avoid human errors and generate more accurate forecasting predictions.
Most operations tools and inventory management systems display your data in a wall of text (which can be exhausting to work with).
But Cogsy uses visual aids to highlight your most important talking points and inventory metrics. More specifically, Cogsy’s actionable dashboard turns this static data into prescribed, actionable insights (like when to replenish and how much working capital you’ll need to maintain optimal levels).
Cogsy even integrates with all the operating systems you already use (like Shopify, Amazon, and Google Analytics). This way, all your operational data is in one place. And you can dive deeper into your inventory metrics, sales trends, and future forecasting needs.
Inventory metrics use specific formulas and calculations to analyze how:
The best way to oversee all these inventory metrics is with the help of a real-time tracking tool like Cogsy.
Yes – many different metrics are used for inventory analysis, each with its unique purpose and use case. Among the most effective (and most important) inventory analytics metrics for DTC brands are: backorder rate, inventory turnover, holding costs, gross margin, days inventory outstanding, and stockout rate.
Analyzing your inventory metrics is critical to the health and wealth of your DTC brand. When audited regularly, inventory analytics help you maintain healthy inventory levels, reduce inventory costs, create accurate forecasts, and cut down on inventory waste. These advantages add up to a more efficient and profitable business model.
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