Inventory Analytics: How It Can Help Your Business
September 16, 2021
How well is your online business performing?
You may think to look to areas like site speed, conversion rate, and sales.
But to find more answers, you might want to take a closer look at inventory performance.
Ecommerce inventory is an online brand’s most important asset.
Whether you are an established direct-to-consumer (DTC) brand, or you’re preparing to launch an online store, having a system in place to track and record inventory analytics can help you ensure your business is profitable.
In this article, we will discuss why inventory analytics is important, what metrics to track, and how a 3PL partner like ShipBob can help you streamline your inventory management process.
What are inventory analytics?
Inventory analytics refers to tracking metrics that gauge the movement and performance of your physical products. The ongoing assessment and evaluation of inventory provides the insights needed to optimize stock availability to meet demand while keeping storage costs to a minimum.
Inventory analysis also helps reduce risks and common challenges related to inventory, such as stockouts or accumulating dead stock, and uses technology and processes to ensure inventory accuracy. It is a critical component of managing logistics operations and can help can improve inventory control, supply chain efficiency, and profitability.
Which inventory metrics are important to track and analyze?
Ecommerce is an intensely competitive industry. To create a resilient supply chain and meet customer expectations, keeping track of inventory flow and performance throughout your supply chain is a critical part of inventory planning.
But what, exactly, do you track? There are several ways to approach inventory analytics, and the metrics you choose to track and measure depends on your brand’s unique needs and goals. However, there are a few that are essential. Below is an overview of key inventory metrics that are important to track and analyze.
Carrying costs include all expenses associated with holding or storing purchased and unsold finished goods. Common carrying costs include warehousing, labor, and insurance, but it can also include opportunity and inventory depreciation costs.
Carrying costs make up around 30% of total inventory costs, and the actual costs vary since it depends on a variety of factors, from the number of total SKUs being stored to your average inventory turnover rate (i.e., how long inventory sits on the shelves before it’s sold).
To give you an idea of how carrying cost is calculated, add up all the expenses associated with inventory and divide the amount by your current inventory value to get a percentage of how much you’re really paying to hold inventory.
(Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory
Inventory shrinkage is when actual inventory levels don’t match inventory records. There are several factors of why this is the case, including theft, shipping damages, or inventory accounting errors.
Shrinkage can be an unavoidable problem, but knowing the extent of the issue can help retailers gain more control over their inventory. By choosing an inventory valuation method and sticking with it can help create consistency and accuracy, which will save a lot of headaches during tax season.
Here is a formula to calculate inventory shrinkage rate:
((Recorded Inventory – Actual Inventory) / Recorded) x 100
Inventory turnover rate is a measure of the number of times inventory is sold and replaced within a specific period. This metric is extremely valuable since it provides a lot of insight into how your inventory is performing and is influenced by sales.
To calculate the turnover ratio, divide COGS with average inventory value (beginning inventory + ending inventory / 2 ).
COGS for the accounting period / Average Inventory Value
You can also calculate your inventory turnover ratio by looking at units, rather than costs:
Inventory Turnover = Number of Units Sold / Average Number of Units On-Hand
To help you analyze the results, an inventory turnover ratio benchmark of 2 to 4 is ideal, but keep in mind that it can vary based on your industry.
A ratio within this range tells you that
- Your inbound and outbound logistics are optimized.
- You are restocking inventory that matches your sales cycle.
- You’re receiving new inventory on time based on production and warehousing receiving lead times.
Since the item isn’t in stock, it’s delivered to the customer at a later date. Though backorders can occur due to high-demand products, regular backordering can lead to poor customer satisfaction.
A company’s backorder rate shows the percentage of orders placed that will be delivered at a later date due to the lack of available inventory. And here is how you calculate it:
(Number of Undeliverable Orders/ Total Number of Orders) x 100
A high backorder rate can indicate an unusual shift in demand, a lack of safety stock, or manufacturing delays.
A process for inventory reconciliation helps reduce stock discrepancies and helps you better understand why there are discrepancies in the first place.
Accurate and timely inventory reconciliations should happen often to ensure that you’re tracking and recording shifts in value based on obsolete inventory or shifts in product demand.
Here is a brief overview of the steps to take to properly reconcile inventory:
- Check your physical inventory count.
- Compare physical count with inventory records.
- Look at recent inventory deliveries and shipments.
- Identify discrepancies.
Scheduling inventory reconciliations at regular, predetermined intervals is key to consistency and accuracy, but it can be time-consuming, especially if you lack inventory management software.
However, a 3PL partner that offers fulfillment services and inventory analytics can help make the process easier. For instance, ShipBob’s Inventory Reconciliation tool helps you track the movement and ongoing balance of inventory levels and pull custom reports.
“ShipBob’s analytics tool has been great to have. We can see inventory reconciliations and easily view SKU velocity, transit times, and inventory distribution recommendations.”
Pablo Gabatto, Business Operations Manager at Ample Foods
Total units in storage
Real-time monitoring of inventory counts for all your products, across all fulfillment centers, can help you arrive at the total units in storage or total inventory.
This metric constantly fluctuates as you sell and reorder units, add new products, and process ecommerce returns.
The more SKUs you have, the more you need to be cautious about storage costs, overstocking, and capital tied up in inventory. Many businesses overpay for storage they don’t need, unnecessarily inflating their inventory holding costs.
If you manage your own warehouse, consider the following:
- You will likely over-pay for holding costs at the beginning as it will take time to grow into the warehouse and it’s a fixed cost, rather than a variable pay-as-you-go cost.
- Once you outgrow that space and need to expand into a larger warehouse, you’ll need to pay more for a larger storage space but also get new racks, equipment, and other infrastructure to utilize the bigger space.
Average fulfillment cost per order helps you identify how much you’re spending to pick, pack, and ship an order.
There are severals costs to consider when you look at the entire retail fulfillment process. To calculate total fulfillment costs, look at the following expenses:
- Receiving, storing, and managing inventory
- Standard or custom packaging
- Picking and packing labor
- Shipping labels and postage
- Shipping supplies and shipping costs
- Kitting and assembly (if applicable)
- Return management process
Fulfillment costs vary depending on whether you fulfill in-house or partner with a 3PL (and their pricing model).
If you partner with a 3PL like ShipBob, the standard pick and pack fees are built into the overall fulfillment cost, which also includes shipping. And since they take care of everything, from warehouse receiving to automated shipping, you save both time and money by focusing your attention on revenue-generating initiatives.
“Last July, Prymal reached $40,000 in revenue. After switching to ShipBob just four months later in November, we are reaching $160,000 a month in revenue — that’s 300% growth. We’re also saving $8,000 per month in fulfillment costs.”
Courtney Lee, founder of Prymal
Gross margin return on investment (GMROI)
How profitable is your inventory in a particular time period? The GMROI ratio can help you answer this question and get your product pricing right based on your profit goals.
Since it’s very common for businesses to have a lot of capital tied up in inventory, this is a crucial metric to keep an eye on.
Here’s a simple formula to calculate:
Gross Margin / Average Inventory Value
Gross margin can be found by subtracting COGS from net sales, and the average inventory is calculated by summing the ending inventory over a specified period and then dividing the sum by the number of periods.
You want to avoid a GMROI that is less than 1, because it means that your business is losing money. On the other hand, achieve a GMROI greater than 1, and you can rest easy knowing that you are selling inventory at a higher selling price than what it cost to acquire it. Of course, you’ll want to make sure acquisition costs and returns, among others, aren’t cutting into this.
How tracking and analyzing key inventory metrics can benefit your business
Undoubtedly, regularly monitoring and analyzing key inventory metrics is a critical aspect of effective inventory management. In this section, we discuss why inventory analytics is important and how it helps optimize your online store operations.
Maintain healthy stock levels
When you conduct regular inventory audits and track metrics like total units in storage and shrinkage, it improves stock visibility. A clear overview of inventory levels at all times is what will help you decide on how much stock to order and when to reorder.
By holding just enough inventory to meet customer demand while avoiding excess or stale stock, you gain more control over your business.
“We have a Shopify store but do not use Shopify to track inventory. In terms of tracking inventory, we use ShipBob for everything — to be able to track each bottle of perfume, what we have left, and what we’ve shipped, while getting a lot more information on each order. The analytics are super helpful.
We download Excel files from the ShipBob dashboard all the time and use them to analyze everything from cancelations, to examining order weights, to checking on whether ShipBob is shipping orders on time. Even the way their warehouse receiving orders (WROs) work for sending inventory is very straightforward.”
Ines Guien, Head of Logistics at Dossier
Avoid inventory waste
If you want to run a tight ship and build a sustainable supply chain, every item purchased must be accounted for. You can increase the value of a company’s inventory, and in turn the revenue, by reducing inventory write-offs and write-downs.
To make better inventory optimization decisions, consider implementing tools and systems that help you track important inventory metrics using automation.
Since inventory is constantly moving throughout the supply chain, inventory automation tools and other systems can help you ensure you’re not leaving any money on the able.
“We also have easy ways to manage subscription orders as well as expiration dates and lot numbers, so inventory goes in First In, First Out (FIFO).”
Leonie Lynch, Founder & CEO of Juspy
Reduce inventory costs
30-50% of your assets are likely to be tied up in inventory. Naturally, the cost of inventory also tends to be high.
The right analytics can help you identify the causes for higher inventory holding costs, capital costs, inventory service costs, and inventory risk costs. Based on the data, you can take steps to remedy these issues to positively impact the bottom line.
For instance, ShipBob makes it easy to track storage, fulfillment, and other costs by tracking inventory activity (what’s incoming and what’s leaving) in real time.
“ShipBob’s technology provides cost savings. Other 3PLs pass fees onto the client for work they do related to manual processes because they lack the fulfillment technology needed to meet customer expectations.”
Carl Protsch, Co-Founder of FLEO
Limit the number of backorders
It reflects poorly on your business if you have too many backorders. To improve stock availability, you will need data and real-time inventory insights, so you can make make intelligent, data-backed stocking decisions.
For instance, analyzing insights such as historical order data can help you project future sales and stock accordingly. This will reduce stockout costs and minimize backorders.
“For inventory planning, I love the SKU velocity report, daily average products sold, and knowing how much inventory we have left and how long it will last. The enhanced visibility is great.
With my old 3PL, I could never just open a page and get the info I wanted. I had to click several times, then export it, and try to make sense of it. ShipBob lets you manage your inventory while providing important data in a very digestible way.”
Wes Brown, Head of Operations at Black Claw LLC
Know when to order more inventory
Inventory replenishment can be a tricky process to get right, especially since demand can constantly fluctuate.
Reorder Point (ROP) = Demand During Lead Time + Safety Stock
To make this process easier, ShipBob provides the insights you need to check in on inventory activity, view historical data, and set automatic reorder points based on your findings.
When inventory levels reach a minimum threshold, you are notified when stock is running low.
“ShipBob’s analytics tool is also really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”
Oded Harth, CEO & Co-Founder of MDacne
Automatically analyze your inventory with ShipBob
At ShipBob, we understand that transparency and visibility is an essential component of building an agile supply chain.
Technology plays a major role in how ShipBob operates as a fulfillment company. In fact, our entire global fulfillment infrastructure is powered by premium fulfillment technology with built-in real-time inventory tracking tools.
ShipBob customers have the opportunity to split inventory across our logistics network and easily track, measure, and analyze supply chain performance from one dashboard using the free data and analytics reporting tool.
From the ShipBob dashboard, you can track important supply chain analytics related to:
- Fulfillment performance and SLAs
- Current inventory distribution vs ideal distribution
- Transit times, shipping methods, and destinations
- Historical stock levels
- Logistics costs associated with storage, fulfillment, and shipping
From improving inventory allocation to providing insights to help you forecast demand and reduce costs, ShipBob can help supercharge your supply chain, so you can continue to expand and grow your business with ease.
“We are very impressed by ShipBob’s transparency, simplicity, and intuitive dashboard. So many 3PLs have either bad or no front-facing software, making it impossible to keep track of what’s leaving or entering the warehouse.
On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.”
Harley Abrams, Operations Manager of SuperSpeed Golf, LLC
To learn more about ShipBob’s fulfillment capabilities and inventory analytics, click the button below for custom pricing and more information.
Inventory analytics FAQs
Below are answers to the top questions asked about inventory analytics.
Are there different methods of inventory analysis?
Yes, and it all depends on what you’re looking to learn. For instance, calculating carrying costs can give you insight into how much it costs to store inventory before it’s sold. While finding the average inventory turnover rate offers insights into sales and inventory performance at the SKU level. Finally, the GMROI formula can give you deeper insights into inventory performance and how to improve.
What are inventory metrics?
Inventory metrics involve calculations and formulas that help you analyze how well inventory is performing, how much stock to have on hand to meet demand, how much it costs to receive and store inventory, how often inventory sits on the shelves before it’s sold, and more. These metrics are best tracked using technology and real-time tracking tools to provide accuracy and reduce human error.
What inventory metrics does ShipBob provide?
ShipBob’s built-in inventory management tools collect and record inventory flow throughout the supply chain in real time. This way, you can analyze different stages of inventory, including warehouse receiving performance, inventory turnover rate, ideal inventory distribution, average fulfillment cost per order, storage costs, and much more.