5 useful KPIs to track the success of your inventory
When we do anything in life, most of us measure our performance against a predefined set of metrics. Measuring your progress against these metrics is the only way to know whether you’re improving or not, and where you need to focus your attention. Key performance indicators (KPIs) are absolutely necessary for retailers looking to learn more about their own performance over time and monitor progress.
There are many aspects of a retail store that need to be measured and monitored over time. Let’s go over five KPIs that measure how your merchandise is performing and how it is affecting your business.
1. Sales by category
This KPI answers the question: what categories are customers responding to the most or the least?
Breaking down sales by category provides more detail on total sales and answers the following questions: Which categories are performing better than others? Did certain brands fail to live up to expectation?
According to retail expert Paul Erickson, Senior Vice-president of Client Services at RMSA Retail Solutions, you want to use the rule of ten when creating a hierarchy for your merchandise: no more than ten departments, ten classes or ten subclasses.
Keep in mind:
- Take the time to properly set up your merchandise hierarchy. Without the right merchandise categories in place, it will be difficult to identify actionable information.
- As with Total Sales, look at the entire year of sales to gain real insight.
2. Stock turn
This KPI answers the question: is my inventory selling fast enough over the year?
While margins are important to your business, there is another metric that is equally as important: stock turn.
Why is it so important to measure stock turn for your retail store? Because as long as your stock is turning, you have cash flow. Stock that sits on your shelf for too long ties up your cash. It also increases cost and bores your customers. Stock that moves quickly off your shelf lets you bring in more, freeing up cash and enticing customers to keep coming back.
Keep in mind:
- Stock Turn rates vary depending on the type of store you are operating. Large discount retailers turnover inventory at a rate of 7 to 8.75 times a year whereas luxury retailers might turn inventory only 1.5 times a year.
- Seasonal retailers, such as apparel and shoes, should aim for a turn rate of once per season ( four times a year).
To calculate stock turn:
First, determine Average Monthly Inventory, by adding up all the beginning inventories for the year (at retail price), plus your ending inventory (at retail price), and divide it by 13. Use an average inventory so that you don’t make calculations based on a month when inventories are particularly high or low.
Stock Turn = total sales for the year ÷ avg. monthly inventory
avg monthly inventory = (beginning inventories + ending month inventory) ÷ 13
3. Gross margin return on investment (GMROI)
This KPI answers the question: how effective is my inventory at generating cash flow and profits?
GMROI is a bit intimidating, but it is one of the most important metrics you can use in your store. It tells you how hard your inventory is working for you, helping earn you profits. GMROI is a key metric for protecting your cash flow. Many retailers protect their margins, which is important, but remember that you can live for a while without profits. You can’t live without cash flow.
Some of your inventory will turn slowly but produce high margins. Some will produce low margins but turn quickly. Both of these situations will produce a good to high GMROI, says Erickson.
A low GMROI tells you if a product is either moving too slowly, has insufficient margin, or both.
Keep in mind:
- GMROI is best used for assessing performance on products or product categories.
- GMROI is typically measured on an annual basis, and you should aim to increase it every year.
- A good GMROI is over 2 or 200%.
GMROI = (total sales – cost of goods) ÷ Avg.
Cost of good (to determine Average cost of goods, add up the beginning monthly inventories for the year at cost, and divide by 12)
This KPI answers the question: how much stock has sold?
Sell-through tells you how fast your inventory is moving. 100% sell-through means that you have completely sold out, while 0% means that you have not sold any. Similar to Stock Turn, sell-through can be useful throughout the year. Use Stock Turn when planning for the year and season, and sell-through to keep core products stocked up throughout the year.
Keep in mind:
- Seasonal retailers should look at sell-through at least every four weeks. Faster turning retailers, like dollar stores, look at sell-through daily.
- According to retail expert Karim Kanji, most retailers are looking at an 80 percent sell-through rate by the time their markdown period begins.
Sell-through percentage = units sold ÷ (units sold + units on-hand)
5. Weeks of Supply
This KPI answers the question: how much do I need to buy or markdown?
Weeks of Supply measures inventory levels in terms of time. It tells you how long you’ll have inventory on-hand if the item continues to sell at the current rate, and it is important for keeping your shelves stocked. One Harvard study found that retailers lost nearly half of intended purchases because the item the customer wanted wasn’t in the store.
Keep in mind:
- For most seasonal retailers, the “sweet spot” for Weeks of Supply is 10-12 weeks.
- Setting automated reminders when Weeks of Supply fall below a set level is extremely helpful for making sure you don’t run out of stock. Set triggers in your POS to remind you when you fall below a certain threshold.
Weeks of Supply = Total inventory on hand ÷ Average weekly sales in units
In order to measure how your merchandise is performing, you need to calculate the Weeks of Supply, sell-through, gross margin return on investment, sales by category and Stock Turn. By identifying and tracking these KPIs, you’re adding a new level of insight into your management, setting yourself up to succeed and see better numbers, year after year.
How do you track your progress?
Download our free guide to discover more useful retail KPIs