Inventory to Sales Ratio as a Key Performance Indicator

Posted by:  Fred Lizza 

As retailers increasingly deal with the challenges and opportunities inherent in selling across multiple sales channels, the inventory to sales ratio is becoming the most important determinant of industry merchandize margins.  Inventory to sales ratio is the ratio of the inventory available for sale versus the actual quantity sold.

The inventory to sales ratio is a key statistic when measuring whether or not you’re overstocked.  If you manage a single warehouse, you can visibly see when you have too much inventory.  But are you keeping track of every unit sold?  How many units are on hand? For every sale of a particular item, how many were in stock at the time of sale and how many remain? For example, if you sell jeans and you had 50 jeans of a particular style and size in stock and then sold 20 of them online and another 20 in your store, would you know that you have 10 remaining? Knowing the actual inventory for each item keeps your inventory at the right level, not too high and not too low.

The task becomes complex when you need to fulfill orders that are coming through different channels, and you need to have the right amount of products on hand to fulfill orders coming in through each sales channel.  This becomes increasingly important if you’re selling through Amazon, since they require you to reserve specific inventory volumes for their channel.

In the poll taken by Software Advice, 35% of the prospective retail software buyers they surveyed said they were looking for a more modern solution for their inventory management requirements.  Essentially, they are looking for a software solution expressly designed to handle their inventory processes rather than using spreadsheets to keep simple counts. The other reasons cited involved the inability to support company growth and lacking the ability to automate business processes.

Efficiencies through the use of technology take the guesswork out of what’s ‘available to sell.’  The need may seem simple but the solution is not. The challenge is in getting real time updates of orders received, and bring it all into a unified workflow. The entire process from collection of orders to picking, packing, shipping, processing payment, and centralized tracking of inventory levels are essential in keeping customer service people up to date.

Managing inventory in one place helps avoid stock-outs [or double-selling] and lends to better analysis of products in terms of performance, peak selling periods, etc.  And, centralizing the management of sales channels allows for more accurate inventory calculations.  More importantly, streamlining essential back-office processes supports current and future growth, eliminating the bottlenecks that occur with manual processes.

To learn more about the importance of the inventory to sales ratio and how the manage these margins effectively, read:  Innovative Order Management Systems for Apparel Retail

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