How Does an Inventory-Based Business Truly Measure Success?

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For any business, there are several critical metrics to take into consideration. As an inventory-based business, you may assume that your bottom line is one of the most critical measures of success. While that is certainly a metric to consider, there are other measurements of success to focus on as you determine how your business is performing. 

Here are other measurements to keep at the front of your mind.

1. Number of Inventory Turns

Inventory turns offer a look at how much your stock actually moves: how much time it spends sitting in storage versus how much time it moves through your business. You want to know the value of the stock you have purchased over a specific period (for example, one month) versus the value of the stock you currently have on hand. By dividing your purchased stock’s value by the current inventory’s value, you can know how well inventory is moving through your business. 

Ideally, you want an inventory turn ratio that hovers close to 1. You want to move stock freely through your business so that you can more effectively keep up with overall sales performance. 

When inventory sits in a warehouse or store for a long time, it costs your business more in storage. On the other hand, when it moves freely through your business, you may have a better overall sales rate, and you can maximize profits.

2. Carrying Cost

Take a look at how much of your net worth or working capital is tied up by the inventory. There are often a lot of costs associated with handling items: bringing them in, purchasing them, and moving them within your network. Your carrying cost is a percentage of the total value of your inventory. 

You need to know:

  • How much your inventory is worth
  • The value of inventory cost components, including your investor risk cost, capital cost, and storage costs

Add up your investor risk, capital, and storage costs to get your inventory holding sum, then divide that number by the total value of your inventory. Multiply it by 100 to determine what percent of your inventory value ties to your carrying cost. 

If you have a high carrying cost, your business may end up with lower profits. In some cases, you may even miss much-needed profits because your carrying cost is too high based on the value of your inventory.

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3. Inactive Stock

You want your business to be successful. That means you want to see a steady inventory movement through your business. Holding items that aren’t selling can increase your business’s costs and decrease overall profits. 

With supply chain disruptions making it more challenging to acquire new inventory when needed, it may be critical to maintain some storage of inactive stock, particularly when you know that the stock will prove valuable later. On the other hand, if you have large quantities of inactive stock or excess inventory, you may find that your costs will increase without a corresponding sale in the future. 

Your inventory management solution can offer analytics that helps you keep up with unmoving stock. Sometimes, you should hold that stock until the proper season. 

In other cases, you should look at past performance analytics to determine how to move that inventory more effectively, including moving it to another location or offering a sale or promotion. Paying attention to those key inventory management analytics can also give you a better idea of how new products are likely to perform, which can help you avoid unnecessary inventory and costs. 

4. Backorders

Backorders occur when a customer orders a product you do not have in stock currently but will have soon. Typically, customers do not choose to backorder items when they have the opportunity to purchase them somewhere else. 

 Look at how many backorders you have had over the month or year. Then, take a look at fulfillment times. If you had a long wait for fulfillment, it could cause customers to start looking elsewhere for those critical needs, which could decrease the overall success of your business. 

5. Lost Sales Opportunities 

Considering your business’s overall success, determine what sales opportunities you may have missed out on due to missing inventory. That may include inventory that you did not have due to:

  • Shortages
  • Poor ordering practices
  • Failing to carry items that customers are looking for

Sometimes, it can be difficult to establish what sales opportunities you missed because you did not stock the items customers were looking for. However, by tracking what brands customers are actually looking for, how they interact with the brands and items you have in stock, and what customer requests you have to turn down, you can keep up with lost sales opportunities.

Keep an eye on lost sales due to customers purchasing from your competitors. Customers may choose to go with your competitors for several reasons. 

Sometimes, your competitor offers a better deal than you do. In other cases, however, your competitor can provide products or services you do not have. Remember that you need to differentiate between lost sales opportunities because customers did not fit your niche versus lost opportunities with customers who would otherwise have chosen your business.

Inventory Management Solutions Can Help You Measure Your Business’s Success

Keeping up with your business’s overall success can be a challenge. However, your inventory management system can help you track the data you need to ensure that you provide customers with the items they’re looking for. 

At Stock IQ, we offer comprehensive inventory management solutions that help you keep up with many key details. Contact us today to learn more.

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