If you read the last two Understanding your Magento Data Series posts, you already understand the importance of analyzing abandoned carts and returns. But even if your checkout process and return policy are optimized to maximize conversion rates and customer loyalty, ultimately your business is going to struggle without efficient inventory management.
The cost of poorly managed inventory
A recent study by The Hackett Group of the top 1000 US-based businesses found that nearly $1.1 trillion is attributed to working capital — corresponding to roughly 7% of the nation’s GDP. Looking more specifically at the retail industry, the US Census Bureau published a report in early 2017 which stated that for every $1.00 of retail sales, $1.47 is locked up in inventory. Each dollar tied up in inventory means there is one less dollar for investments into product improvements, marketing, customer success, and all of the other developments that help you maintain healthy profits and happy customers.
At the same time, insufficiently stocked inventory can lead to an increase in abandoned carts. According to a 2015 report conducted by UPS, 42% of customers sighted lack of inventory as being the reason for abandoning their cart.
Managing inventory with Magento BI
Like most things in life, efficient management of inventory comes down to finding that sweet spot of moderation somewhere between out of stock and overstocked. Although you could just decide on some minimum inventory threshold, you can greatly improve your efficiency just by digging into your data.
Most online platforms include some form of inventory logging, allowing you to see how many units are currently in stock for each product. By connecting your current inventory levels to recent sales data, you can more accurately predict your weeks on hand for each product. If you’re a Magento merchant, all of this information is logged in your cataloginventory_stock_item table. And with Magento BI, you can easily set up automated reports to start managing your inventory more efficiently.
More information is available here, but to summarize, your main goal is to connect your inventory data to sales from your sales_order_item table (sales_flat_order_item in Magento 1.x). Once these two datasets are connected, you’ll then be able to calculate high-level metrics such as:
- Sales velocity: quantity shipped over some recent time range. If the product’s popularity varies over time, you may want to calculate the average sales velocity over a few variable time ranges (I.e. last 30 days, last 90 days, etc.)
- Weeks on hand: ratio of the average sales velocity and the current inventory level for each product. Gives you a prediction of when the current inventory will be exhausted
Coupling the above information with knowledge of how long it takes to restock certain products, you’ll know exactly when to reorder more inventory.
Taking inventory management to the next level
If your sales are relatively consistent throughout the year, the method described above may be all you need to keep your products moving. But sprinkle in some seasonality or a dash of explosive growth and the problem quickly becomes complex, requiring a more strategic approach.
A few important variables to consider before deciding on your restocking model include:
- Seasonality: does the popularity of your product vary depending on the season? If so, you may want to identify the distinct seasons during which each product is sold, and calculate the seasonal sales velocity separately (for example, the winter sales velocity of sandals is likely going to be very different from the summer).
- Growth: find yourself constantly playing catchup on order fulfillments? If you’re lucky enough to experience substantial month-over-month growth, factoring in a growth rate when calculating your weeks on hand could help keep the products flowing.
- Holidays: more than ¼ of annual sales are reported during the holiday season. If you typically see a jump in sales during the holidays, you may want to look at previous holiday seasons when predicting the sales velocity, rather than the last 30 days.
Efficient inventory management is crucial for retail businesses. By maintaining healthy inventory levels for your products, you can optimize your business in terms of minimizing your working capital, while also reducing the cart abandonment rate.
Magento BI makes it easy to bring all of your data into one place. If you’re already a Magento BI customer, contact us today for assistance in setting up your inventory reports. If you’re not yet a customer, now is a great time to schedule a demo!