Mapping the state of a post-pandemic market, global fulfillment company ShipBob released its yearly Inventory Turnover Benchmarks Report.
For any e-commerce brand, inventory turnover can be seen as a health indicator for particular products and for its stock-keeping units (SKUs) as a whole. FreightWaves spoke with ShipBob Director of Content Marketing Kristina Lopienski about industrywide trends and why turnover rates are so important in the wake of the company’s report.
This question-and-answer interview was edited for clarity and length.
FREIGHTWAVES: What does a low inventory turnover rate mean for a company — and vice versa?
LOPIENSKI: “Having a higher rate means you’re selling through the inventory you have on hand efficiently. Having a lower rate is typically due to products not selling quickly enough, though it could be because you’ve raised venture capital or had the funds to acquire more inventory. It’s not necessarily a bad thing but improving it is often a good idea.”
FREIGHTWAVES: How has inventory turnover tracked through the onset of the pandemic and beyond?
LOPIENSKI: “We saw the highest inventory turnover rates in 2020 when the pandemic began, lockdowns were in effect and e-commerce was surging over in-person shopping. In 2020, our customers’ average inventory turnover rate was 2.04 overall and 3.02 for midmarket/enterprise brands. 2021 numbers fell slightly during the year the world started to open back up a bit, and supply chain delays plagued the industry. The average overall was 1.59 and 2.05 for our midmarket/enterprise brands.
In the first half of 2022, we see inventory turnover rates decline significantly, at a time when inventory that was delayed from Q4 2021 finally arrived for some merchants too late to sell during the holiday period, Russia invaded Ukraine and a recession threatened the world. The first six months of 2022 had an average inventory turnover rate of only 0.85 and 1.01 for our midmarket/enterprise brands.
Every year, we see midmarket/enterprise merchants, those with a GMV [gross merchandise volume] of at least $20 million, with significantly better inventory turnover rates when broken out than the average of all merchants together. This could be due to more sophisticated forecasting strategies and tools and/or having access to more capital.”
FREIGHTWAVES: What are the biggest mistakes companies can make when viewing their own rates?
LOPIENSKI: “The easiest way to think about annual inventory turn is how many times per year you sell the inventory you are holding. If you’re calculating your own inventory turnover rate [total units shipped over a time period divided by average units on hand during that time period], I’d recommend using a year time frame, since month to month and even quarter over quarter can be volatile, as these numbers can be thrown off from getting a big shipment of inventory delivered from your manufacturer to depleting a lot of inventory during a big sale or holiday season.
Remember that inventory turnover does not tell the full story of a business’ health. For example, a business may be stockpiling to get ahead of demand for a major celebrity-backed campaign, causing your inventory turnover rate to drop over a time period when things are going well, or about to go very well, on the revenue side.”
FREIGHTWAVES: What actions can companies take to adjust its rates accordingly?
LOPIENSKI: [Here’s a list of five:]
- Examine why certain products might not be selling well. Review your website objectively and your promotional efforts.
- If you want to split your inventory among multiple fulfillment centers, analyze your sales data to understand which SKUs make sense to store in only one location because they’re not ordered often. Bestsellers and items that are regularly ordered together are great for multiple locations.
- Improve your replenishment timing by calculating reorder points at the SKU level and setting automatic notifications when your stock levels hit a certain threshold.
- Retire poor-performing SKUs. While many brands assume that having a large product range will equate to better customer retention and a higher lifetime value, the reality is that many SKUs are unprofitable. Then you can determine how to physically get rid of excess inventory in any of the following ways:
- Bundle slow-moving SKUs with bestselling items.
- Offer slow-moving SKUs as mystery items for a low price (Note: If it’s a mystery shirt, for example, be sure to get the size).
- Include slow-moving SKUs as freebies or gifts for customers that spend a certain amount.
- Run a flash sale to greatly discount the products.
- Email your database about the product you’re ending as a last-chance-to-buy notice.
- Donate the items to a charity in need. If you’re a ShipBob customer, we partner with GiveNKind to match donated items with nonprofits in need. As GiveNKind’s No. 1 partner, our customers have been able to donate millions of dollars of goods.
- Dispose of your inventory.
- Consider product “drops,” where you announce a new product with a limited number of units to entice consumers to buy quickly before they’re sold out. This model allows you to test a product’s popularity first via a small batch before making it a regular in the store. This exclusivity angle also helps create scarcity, build momentum and ultimately push inventory out the door quicker to recoup your costs.
FREIGHTWAVES: What does ShipBob do that others don’t?
LOPIENSKI: ShipBob provides two solutions — outsourced fulfillment and a WMS [warehouse management system] for e-commerce brands with their own warehouse, or a combination of both — that provide advanced analytics allowing you to:
- Monitor SKU velocity to quickly identify slow-moving products.
- Set reorder point notifications at the SKU level to be automatically alerted once inventory levels hit a certain threshold.
- Calculate inventory turnover rate to see how many times inventory is sold and then replaced in a specific time period.
- Gain visibility into inventory activity — what’s coming in and what’s leaving — across fulfillment centers and sales channels in real time through a centralized dashboard.
- See daily average products sold, how much inventory is left and how long it will last with the ability to simulate different scenarios for changes in demand.
- Bundle products with ease and update accurate inventory counts for each SKU within the bundle.
- Utilize integrations to automate placing new purchase orders for timely replenishment.
- View historical stock levels at any point in time from any warehouse location.
- Compare your current and ideal distribution across fulfillment center locations to optimize product allocation.
- Visualize average storage cost per unit over time.