Data-Driven Retail: 5 Inventory Management KPIs for Scalable Growth

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Data-Driven Retail: 5 Inventory Management KPIs for Scalable Growth

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Take a quick look at the latest business strategies, and you’ll quickly come across the term growth hacking. What started out as a tech community buzzword is quickly earning its place in business playbooks across all industries. Because let’s face it — growth hacking is just another word for data-driven growth.

In retail, the fastest growing brands are leveraging data to power their most successful and creative initiatives. And when it comes to operations, innovative brands are embracing this idea of data-driven retail to deliver superior customer experiences, uncover new opportunities, and adapt quickly to the ever-changing retail landscape.

Below, Chris Guillot, instructional designer of Merchant Math and founder of Merchant Method chats about her top five inventory management-related metrics to track for your growth hacking strategies.

1. Stock-to-sales ratio

“The first thing I look at is the comparison of sales vs. inventory contribution,” Guillot says. This includes stock-to-sales ratio and sell through rate (more on that next).

Stock-to-sales ratio is how much stock you have on hand compared to how many you sold. In other words, it tells you how many products you have in stock for every product sold. It’s a high level look at purchasing behaviors, which can help you identify trends or opportunities that you need to respond to, Guillot points out. “It’s always the first thing I look at for data-driven decision-making.”

Stock-to-sales ratio  = beginning of month (BOM) stock / month’s sales

Growth hacking retailers want to decrease the stock-to-sales ratio as much as possible, without losing out on sales. If you have less stock on hand than customers want to buy, then you’re hurting the customer experience and pushing shoppers to look elsewhere.

But it’s not as straightforward as looking for a 1:1 ratio, Guillot says. In her inventory management training, she challenges her students to see it through the customer perspective. “I have them think about the number of choices they need to offer in order to convert a sale,” she explains. “The example I always use is, if they’re forecasting to sell one T-shirt, how many choices, really good choices, do they need to offer their customer in order to convert and sell one T-shirt?”

Rather than thinking about quantity of inventory, it helps you examine the quality as well. Plus, Guillot says that this can tell you a lot about your customers and their shopping preferences. Rather than looking at the number holistically, apply to categories or specific products. Dig deep into the data to uncover the why behind the numbers.

2. Sell through rate

Sell through rate or percent, the inverse of stock-to-sales, compares the amount of stock you receive from supplier(s) compared to how much is actually sold to customers.

Sell through rate = sales / BOM stock on hand x 100

Sell through rate is particularly valuable to brands that sell seasonal goods, such as fashion and apparel. Guillot recommends using sell through rate to help you understand the freshness of your inventory. “From a customer perspective, is the sell-through healthy enough to say, ‘You want to buy it now,’ without overselling and disappointing customers and stocking out or without holding onto it for so long that a customer’s going to wait for it to go to market down?”

That’s the challenge in striking the perfect balance, especially when forecasting for seasonality: You either sell out too quickly, buy way too deep, or strike the perfect number. In examining these numbers over time, brands can better understand customer demands for seasonal products.

But seasonality isn’t the only time this metric comes into play. You can use it to compare products against each other or against themselves (looking at different time periods). Sell through is a healthy way to assess if your investment is returning well for you. A high sell through percentage could indicate inventory opportunity while lower numbers might mean you’ve over-invested.

3. Forward weeks of supply

Guillot considers both forward weeks of supply and weeks on hand important. Weeks on hand (WOH) tells you how long it will take for you to sell all of your current inventory. Forward weeks of supply (FWOS), on the other hand, takes planned sales into account. It’s an approach to inventory planning that is based on time instead of stock levels. But FW

“Thinking through the reorder point based on your lead time and not on your minimums or pars is the most important piece of looking at FWOS,” Guillot says. Both methods help you look at data on a week-by-week basis to aid in forecasting. The latter, though, is the more data-driven approach.

“If the buyer is truly forecasting sales we will always look at forward weeks of supply,” Guillot says. Because FWOS is more mathematically complex, there is no straightforward calculation. Every retailer should use a calculation that accounts for the number of weeks of planned sales, the next forward that the current inventory represents, and

This metric is more effective when looking it for specific products or product categories. Holistically, it won’t give you the insights you need for growth hacking. Some questions you can ask yourself (and answer) as it relates to FWOS:

  • How long will this be around?
  • Will this become a liability and need to be repriced?
  • When do I need to reorder so I don’t stock out?

“If you have strong sales momentum and you stock out, it’s very difficult to pick that momentum back up,” Guillot says. “It is tried and true that you fall off on your sales velocity once you stock out.”

4. Shrinkage

“The last metric that people don’t often think of is inventory shrink,” Guillot says. And shrinkage is one of the most straightforward data points to understand: It refers to inventory that has accounted for in your inventory tracking, but doesn’t physically exist in your possession.

Shrinkage is caused by a number of things:

  • Theft (both employees and “customers”)
  • Human error
  • Mislabeling
  • Tracking discrepancies

 

And while many may not consider this an element to growth hacking through inventory management, Guillot says it can reveal lots of insights about your business. “Even though shrink represents a small portion of the overall transactions, it’s still meaningful,” she says. “It mostly points to the level of operational process and control.”

Lots of shrinkage means you might need to look at your internal processes. “When you have strong loss prevention technique, you have strong technique almost everywhere else: customer care, customer service, employee training, etc.” It’s indicative of how smoothly your business is running, which is crucial for nimble, data-driven retail growth.

Read more: 5 reasons your stock levels are inaccurate and how to solve it >

5. Average inventory

Average inventory, the fifth data point that Guillot recommends keeping an eye on, tells you how much merchandise you typically have in stock over specific time periods. For example, you may calculate average inventory for the fiscal year or for a quarter.

Average inventory = (current inventory + previous inventory) / 2

“All valuable inventory KPIs require you to know how much inventory you’ve carried at any given time,” Guillot says. “A retailer’s ability to quickly ascertain their average inventory is the missing link between those that can create open-to-buy budgets and buy plans, and those that are being reactionary or guided more by their gut than by the data.”

Growth hacking inventory management in your business

While looking at these metrics individually is helpful, it’s essential to consider the big picture. What is the relationship between your data points? Are they all pointing to the same thing, or are you drawing conclusions from isolated events or changes in the numbers?

And while manual data entry and inventory, accounting, merchandising and other practices may be helpful for smaller businesses, retailers who want to scale quickly need tools to help automate data management. “Tracking your inventory is really high level if you’re doing it manually,” Guillot says. “It doesn’t really reflect the things that we care about, which is classification or attribute-driven buying and selling.”

Inventory Tracking Management

Up next: Mastering retail math for increased inventory control >

Ellie Kulick

Ellie is an experienced Marketing Communications and Content Specialist based out of San Francisco, CA. Passionate about technology and health, she is constantly looking for new challenges in effective communication and creative content development to help businesses grow and engage with current and prospective customers.

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