How Can We Calculate Amazon Inventory Turnover?
Amazon inventory turnover is a metric that shows how often customers reorder products. You are selling more if your inventory turnover ratio is higher. Items are turning into cash, which could increase your company’s revenue. Any retail firm is built on an effective inventory management system. With it, maintaining your inventory levels within the ideal range will be easy. You lose money because of rush charges, air deliveries, and holding expenses when you run out of stock or have extra inventory.
How can you ensure you aren’t overordering goods or letting your stock sit in your warehouse collecting dust? Inventory turnover, also known as sell-through or inventory turn, is a financial indicator that can be used to gauge how well you are managing your inventory. In this post, we’ll explain how to calculate Amazon’s inventory turnover and the factors that affect it so you can optimize your inventory management strategies.
What is an ideal Amazon turnover ratio?
The ideal Amazon inventory ratio is calculated by dividing the amount sold during a period by the total number of units sold.
Consider that this calculation doesn’t include any purchase returns or cancellations, so it may not be 100% accurate when trying to determine your actual Amazon average inventory rate. However, it can give you an idea of whether or not you’re meeting your goals at this moment in time and help point out areas where improvements could be made to improve sales and profits.
Sell-through rate vs. inventory turnover ratio
The Sell-through rate is the percentage of inventory that is sold. It’s a better measure of how well you are selling your products because it accounts for any unsold units and their impact on overall sales.
You divide that number by 100 to get the inventory turnover ratio. Your gross sales by the average inventory per month:
- For example, if you sell $100,000 worth of goods in a year and have an annualized gross margin (AGM) of 25%, your monthly AGR will be 2%. If this same company had a 100% sell-through rate during that period, its monthly AGR would only be 1%.
What is the importance of inventory turnover?
Evaluates business performance
Your inventory turnover ratio demonstrates your ability to turn products into sales. You are producing the critical funds required to pay suppliers, employees, logistics partners, etc. The sooner you restock, the sooner that ROI will benefit your company.
Increases the efficiency and liquidity of businesses
By looking at inventory turnover, you can evaluate several aspects of your inventory turnover ratio that have a low or high ITR. You can start acting as soon as you realize this information, though. For example, if your sell-through rate is excessively high, you may be refilling merchandise too frequently and might reduce shipping expenses by placing large orders less often.
Gives details on your Amazon IPI rating
Consider your ITR as a glimpse at your Amazon IPI rating. We examine inventory turnover ratios in a manner that is quite similar to how Amazon’s IPI algorithm evaluates excess inventory and sell-through rates. In other words, if your goods are not selling well, it can show in your IPI score.
Why is inventory turnover crucial?
The inventory turnover ratio measures how fast you sell your inventory. You can use it to determine whether or not you’re making money, not what has to be done to fix it. For example, suppose the company has a high level of inventory turnover. In that case, they are selling their products acceleratedly and making more profit than other companies with lower ratios. This will allow them to increase their sales volumes by lowering prices while remaining profitable in the long run.
You must be wondering how to calculate inventory turnover. In simple words, it is the ratio of the value of your product to its cost.
If you have $10 worth of products sold for $2 each in a period, your inventory turnover would be 2:1 or two times.
How do you calculate inventory turnover?
- Determine your product inventory levels:
- What number of units do you intend to keep? Stock?
- What is the average unit price of the products that are in stock?
- Calculate COGS:
- Gross margin = Product sales revenue – Cost of goods sold – Other expenses(such as warehousing, shipping, etc.) * Fixed cost percentage = Fixed costs divided by Sales Revenue % * Variable cost percentage = Variable costs divided by Sales Revenue % * Total cost percentage= Total Costs / Sales Revenue % 3. Assess your average inventory level: Since we have already calculated our COGs, it’s time now to figure out how much money we could save by reducing our average inventory levels or increasing them depending. So, it would help if you decided whether to buy something instead, more or less, at any particular time when compared with what we currently have in stock.
What is a reasonable turnover rate for inventory?
A corporation should sell and replace inventory every one to two months if its optimal inventory turnover ratio, which varies depending on the industry, is between 5 and 10. The optimal ratio will be higher for businesses that deal in perishable goods, like florists and supermarkets, to reduce inventory losses due to spoiling.
The ideal Amazon inventory turnover ratio
Your business’s size business impacts the ideal Amazon turnover ratio. For example, if you have a small e-commerce store with only one item on sale and few other products in stock, then it is better to set an auto-shipment rate that would result in lower monthly fees than setting a high auto-shipment rate for each product.
However, suppose you have large quantities of inventory and sell many types of items (e.g., fashion accessories). Then, it might make more sense to pay higher monthly fees so that there is enough money left over after paying for shipping costs and other expenses related to running an online store.
Convert inventory into cash frequently.
The second step is to convert inventory into cash. There are numerous methods to this, but the frequency, a company will sell its stock on Amazon, then apply the revenue to settle other debts, and purchase additional items. To do this efficiently, you should first identify which items are selling well and then create an appropriate plan for selling them.
Once your products are ready for Amazon inventory reports sale, you must keep track of how much profit each generates to know when it is time to reorder more stock (or stop selling) based on your sales goals.
Inventory turnover variations by industry
What would be your ideal ITR directly depends on the sort of industry. The nature of the marketplaces and products on offer is mostly to blame. Let’s examine a few scenarios where your sector may impact your optimal stock turnover ratio.
Grocery stores and other retail businesses must shift their goods rapidly to create cash flow and maintain a high turnover rate.
According to a recent CSIMarket analysis, the average inventory turnover for the grocery store sector in 2018 was 13.6 (using the COGS formula). Due to this high ratio, the typical grocery store must replenish its whole inventory more than 13 times a year to make up for lower per-unit profit through increased sales volume. This is how prosperous supermarket stores consistently achieve higher annual sales than inventory costs.
Therefore, a stock turn rate of 13 or above in the grocery store industry can indicate excellent sales and effective operations.
The inventory turnover ratio for Amazon in 2019 was 10.9. So, on average, the online retail behemoth flips its inventory three times every quarter or up to ten times a year. For such a sizable online marketplace for selling, an ITR in this range is noteworthy. Amazon has kept its ideal ITR lower than food businesses because of its effective inventory management practices.
Ending inventory is the amount of stock you have at the end of a period. It is essential to calculate your ending list because it is a reflection of your efficiency and effectiveness in managing your inventory.
For example, let’s say that you have one month’s worth of product on hand and are selling one item per day for five days each week. Your sale rate for this product will be $100 per unit (e.g., if you sold 20 units during this period). In this case, if we assume that all 20 items were sold at full price ($10), then:
- Inventory Turnover = (Sales – Ending Stock)/(Days Sales Outstanding) = ($100 × 20)/(5) = $1000 ($10 per unit)*
Cost of goods sold.
The cost of goods sold is the total cost of your inventory. It includes all your expenses for producing and shipping your products, such as manufacturing, shipping, and transportation.
The COGS calculation is calculated by taking the net selling price of each product sold during a specific period (usually one month). The net selling price is the total revenue less any fixed expenses. Incurred in producing or distributing those goods.*
Average inventory is calculated by dividing the entire list by the number of periods. For example, if you have 100 products and you sell ten products every month, your average inventory is 10.
The formula for calculating the average inventory turnover rate is:
=AVERAGE INVENTORY Turnover Rate/AVERAGE INVENTORY Total (Inventory)
Causes of low Amazon Inventory Turnover ratio
If you are not selling enough products, then it’s likely your inventory turnover ratio will be low.
Poor inventory planning and overestimating consumer demand are frequently the causes of excess inventory. Dealing with it is expensive, and selling through it is more challenging. You must either put them on sale or stop production if the demand for the product falls before you barter all of the units. This not only results in a lower ITR but also uses up money and increases your storage expenses.
High inventory levels.
Suppose your company has too much stock on hand. In that case, this could also cause a low inventory turnover ratio for Amazon sellers because moving products from one warehouse to another (or even within the same warehouse) is expensive.
Low-profit margins and high cost of goods sold (COGS). Some businesses have lower profit margins than others; if this is the case for yours, you may need higher COGS for sufficient sales volumes so as not to lose money!
Inadequate reordering procedures
With an automated restocking system, maximizing productivity and cutting down on order cycle times may be more accessible, making it easier to raise ITR. Furthermore, you can find it challenging to monitor your stock levels without the aid of techniques that can optimize your inventory, much alone choose what and when you ought to be buying next.
Items nearing the conclusion of the maturation phase
As the things in your inventory progress through their life cycles, your inventory turnover ratio will fluctuate. For instance, its demand can be great during the early growth stages, leading to a high ITR. The market, however, will start to decline as it approaches the conclusion of its maturation cycle, and your turnover rate will follow.
To prevent being forced to hold onto the out-of-date stock, the solution is to keep an eye on your product’s life cycle.
Amazon’s inventory turnover ratio is one of the most crucial figures you need to know about your business. It tells you if you have enough supplies or have too many unsold items, one of the most vital figures you are sitting around. The ideal Amazon inventory turnover ratio tells us which size our inventory should be to meet demand without having excess goods in storage rooms for long periods, costing us money and resources. For instance, space, labor costs (management salaries), etc.
With my vast experience in the e-commerce industry, I have successfully helped more than 250 e-commerce businesses worldwide to reduce their operational cost with cutting-edge e-commerce marketing services. My experience includes strategy, addressing daily issues, developing, delivering training, and supervising staff at multiple levels.