Good inventory management allows you to carefully control your inventory count, spend, and purchase decisions to ensure that your inventory levels best meet your business needs. While minimizing inventory can save you money, decrease taxes, and decrease the risk of dead stock and over-date inventory, it is crucial that you be able to calculate your inventory needs for each period to prevent stock-out events.
How Much Inventory Should You Have on December 31?
Planning inventory means deciding how much inventory you need. End-of-year inventory is crucial because it affects your profits and loss for the next year, as well as your inventory storage and turnover costs.
So, how much should you have? The answer is no more than one turn’s worth.
What is one turn for your store? Whether you’re running e-commerce, retail, or multi-channel, the answer is simple, free, and easy to find.
- Visit the Retail Owner’s Institute and go to the Benchmarks page (or use your own trade industry benchmarks)
- Find your retail segment and click through to that page
- Find the Inventory Turnover benchmark for your segment
- Find “One Turn’s Worth”. To get this number, divide twelve months by that Inventory Turnover rate – the answer is months of supply, or “one turn’s worth” of inventory. For example, in electronic online shopping, the answer is 2.1, which you can average at 2 months of supply on hand. This is a simple way to see how many months of inventory supply you should have on hand.
- Determine one turn’s worth for your stores. Check your sales plan and calculate the realistic sales for “one turn’s worth” for the next month based on the previous year’s sales and your sales plan. For end-of-year, you can calculate your estimated sales for January and February combined if your ‘turn’ is 2 months. Your total planned sales for that period is the maximum inventory you should have on hand on December 31.
Reaching Turn Values
Holiday sales allow you to strategically reduce prices to meet your max year-end inventory. If you have too much of one item, it’s easy to discount it to reduce inventory volume to meet targets. Sales and discounts allow you to strategically reduce your inventory to meet target levels so that you don’t have a loss at the end of the year.
Taking Inventory Count Further
It’s important to recognize that you can apply the turn’s worth methodology to any point in time, not just end of year. This allows you to strategically manage your inventory throughout the year based on expected sales for the period so that you maintain the minimum and maximum stock levels to achieve the best profit.
Determine Par-Level – Par level is the minimum quantity of inventory you need to prevent a stock-out event. This is important because stock-outs can cost you money, lose long-term customers, and in the case of platforms like Amazon, will decrease your search ranking. Importantly, par levels will change for each product throughout the year. Some products increase sales in hot or cold weather, others around holidays, and others as sales trends change. Use your sales plan plus previous year’s sales to calculate your par levels. Knowing your par levels per month allows you to naturally use turn cycles to reduce inventory as you get closer to sales drop offs and increase it as you near a sales peak.
Shorter Turns – If you prefer shorter turns, these rates are very easy to calculate. Just divide your benchmark by 12 for months of supply, 52 for weeks, 360 for days.
Beyond Benchmarks – If you know your existing targeted turnover rate, you can use those numbers instead of the Benchmark for your segment. This will allow you to calculate more precise inventory rates, because benchmarks are largely for comparison and perspective, and may not accurately reflect your own sales.
Multichannel Inventory Calculation
The more channels you sell through, the more complex your turnover becomes. It is a good idea to calculate your inventory count as a whole and then repeat the process per channel and department, so that you understand exactly where inventory is needed.
Your inventory turns will vary a great deal depending on the products that you sell. For example, an electronics retailer must move small volumes of inventory quickly to keep up with sales trends and new devices. A year’s worth of circuit board supplies may become worthless from one year to the next. On the other hand, food retailers must often move inventory in a matter of days. Calculating your max inventory per item allows you to make strategic decisions to cut stock that is nearing the end of its life cycle, minimize your own warehousing costs, and simplify physical cycle counts for taxes.
This is a post from the Skubana team. Skubana is an all-in-one ERP system and operations platform designed for high volume sellers to run and automate their business. By unifying point solutions in one place, sellers can now diagnose what used to take weeks in seconds. It integrates with most e-commerce marketplaces, 3PLs, and warehouses, provides profitability and multi-channel inventory management, and compiles all your marketplaces on a single convenient dashboard. Reach them at [email protected] with any questions, or sign up for a 14-day free trial.