Inventory management is a difficult task and many businesses often struggle with stock control, and problems like shrinkage, excess inventory, and stock-outs. All of these problems end up directly costing the business money plus there is the indirect cost that arises from the significant amount of time being consumed by employees trying to resolve these problems. However, by tracking inventory KPI’s on a continual basis, businesses can spot trends and gain insights that can minimise these stock control issues. Most modern POS or retail software systems will track these KPI’s which allows
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“By tracking your inventory metrics on a continuous basis, you’ll be able to spot trends and gain insights to help you make better decisions around stock control.
1. GMROI
This stands for Gross Margin Return on Investment, and it tells you the amount of money you got back (i.e. ROI) for every dollar you spent on inventory.
GMROI measures your profit return on the funds invested in your stock. It answers questions such as, “How many gross margin dollars did I make from my inventory investment?” or “For every dollar invested in inventory, how many dollars did I get back?”
The formula for figuring out your GMROI is: Gross Margin / Average Inventory Cost
So let’s say a retail store has a gross margin of $55,000 and an average inventory cost of $30,000. Its GMROI is 1.83, and that means the store earns $1.83 for every dollar in inventory.
Once you’ve determined the GMROI of your products, go a step further and “work out how much profit you make as a proportion of your scarce resources.” That’s the advice of Damon Shinnie, the Finance Manager at Find Me a Gift.
“For example, if you have limited space in your warehouse what was the profit generated per square foot of storage space occupied? If you are short on cash, what was the profit generated per average value of stock held?”
Knowing the answers to such questions will enable you to make better decisions when it comes to what products to stock up on or which items to discontinue.
2. Shrinkage
This refers to the difference between the amount of stock that you have on paper and the actual stock you have available. It’s a reduction in inventory that isn’t caused by legit sales. The common causes of shrinkage include employee theft, shoplifting, administrative errors, and supplier fraud.
The formula for shrinkage is: Ending Inventory Value – Physically Counted Inventory Value
Shrinkage can also be expressed as a percentage — i.e. Shrinkage % = Shrinkage / Sales x 100
According to a survey by the National Retail Federation, the average inventory shrink as a percentage of sales was 1.38% in 2015. It’s important to note that data varies from one retail sector to the next.
Specifically:
Grocery – 3.6%
Specialty men’s and women’s apparel – 1.2%
Discount, mass merchandise or supercenter retailers – 1.1%
Measure shrinkage in your own store and see how you stack up against other retailers. This should give you an indication of how well your store is doing when it comes to inventory accuracy.
3. Sell-through rate
Sell through is the percentage of units sold versus the number of units that were available to be sold.
To calculate for this metric, use the formula: Number of Units Sold / Beginning Inventory x 100
Let’s say a bookstore received 500 copies of a thriller novel from the publisher and sold 95 books after a month. The book’s sell-through percentage is 19%. In some cases, the unsold merchandise will be returned to the manufacturer (or in the bookstore’s case, the publisher). Some stores can also tack on a discount on the items to improve the sell-through percentage.
4. Stock turn
Also known as inventory turnover, stock turn is the number of times stock is sold through or used in a given time period. In most cases, the higher the stock turn, the better it is for your store because it means you’re selling a lot of merchandise without stocking too much inventory.
The stock turn formula is: Cost of Goods Sold / Average Inventory
Let’s say an apparel store’s average inventory is $25,000 and the cost of goods it sold in a 12-month period is $100,000. Its inventory turnover is 4.0, and this means that the store sold out of its inventory four times that year.
Having a high stock turn means you’re being efficient. As Bruce Clark, an associate professor at Northeastern University puts it, “We like big numbers here because that means we are efficient: we carry very little inventory to support a certain level of sales.”
How often should you look at stock turn? According to Clark, “conventionally this is always calculated annually: if we sell $1 million dollars in goods annually on an average inventory of $100K, our inventory turns = 10. This can be calculated for shorter time periods as well as long as the periods are consistent (monthly sales divided by monthly average). Businesses that are highly seasonal may want to look at shorter periods in particular, since inventory needs are very different in high seasons vs. low.”
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