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Shopify Inventory Management

Critical KPIs to improve your Shopify Inventory Management

by Divesh Dutta |

Shopify inventory management involves optimizing the process of receiving, holding, and selling inventory to avoid understocking or overstocking products. Having the right amount of inventory in Shopify retailers' stores and warehouses is critical for maximizing revenue and improving customer satisfaction. With poor inventory management, Shopify retailers may face inventory variances, fulfillment delays, missed sales, increased costs, and experience customer dissatisfaction. 

A recent study shows that about 60% of retailers’ inventory records are inaccurate. To improve Shopify inventory management, retailers need to track their inventory performance based on the following types of Key Performance Indicators (KPIs):

  • Inventory Selling 
  • Inventory Operations 
  • Inventory Receiving 

These KPIs can help Shopify retailers manage and monitor their inventory performance and make improvements. By analyzing inventory KPIs, retailers will gain valuable insights regarding their store and warehouse efficiency. Retailers can then optimize these KPIs to increase sales and revenue.

 

Inventory Selling 

Inventory Selling metrics help Shopify retailers analyze their sales performance and plan their future strategies. Shopify retailers need to track their inventory selling metrics to ensure their inventory is moving fast and they are receiving the maximum return on their inventory investments.

1. Sell-Through Rate

Sell-Through Rate is used to measure how much inventory is received and how much inventory is sold within the same period. In Shopify inventory management analysis, the Sell-Through Rate is an important KPI. Shopify retailers use products' Sell-Through Rates across their stores to identify best-selling products and the total amount of inventory sold.

Shopify retailers often manage underutilized inventory by transferring products from stores with lower Sell-Through Rates to stores with higher Sell-Through Rates. Unfortunately, this increases inventory transfer costs and minimizes their profit margins. 

Sell-Through Rate is calculated by the following formula:

Sell-Through Rate = Number of units sold / Number of units received x 100

2. Inventory Turnover Rate

Inventory Turnover Rate is used to determine the business's selling efficiency and inventory replenishment over a period of time. 

Inventory Turnover Rate is calculated by the following formula:

Inventory Turnover Rate = Cost of Goods Sold/ Average Inventory

A high Inventory Turnover Rate indicates the company likely experiences strong demand. While a low inventory turnover indicates that there is poor demand in the market, possibly resulting in excess inventory.

Shopify retailers can compare their Inventory Turnover Rate with historical or planned ratios to accurately gauge their business performance over time. 

3. Demand Forecast Accuracy

Estimating future demand for products is known as demand forecasting. It is crucial for the implementation and planning of a retailer's strategic plan. Shopify retailers try to predict their products’ demand in the market to plan their procurement accordingly.  

With inaccurate demand forecasting, Shopify retailers risk overstocking or understocking inventory, leading to minimized revenue or lost sales.

Forecast accuracy can be calculated by the following formula:

Accuracy of Forecast Demand = {(Actual Inventory Demand – Forecasted Inventory Demand)/ Actual Inventory Demand} x 100

4. Weeks on Hand (WOH)

Retailers need to plan their purchase order arrival to avoid out-of-stock products. To plan, retailers use Weeks on Hand to determine on average how long it takes to sell through their inventory. Low Weeks on Hand inventory indicates that the inventory is moving fast and inventory turnaround time is higher. 

If Shopify retailers do not measure their Weeks on Hand, they may risk losing potential sales due to out-of-stock inventory. To create their procurement plan, Shopify retailers will use the Weeks on Hand rate. 

Weeks on Hand can be calculated by the following formula

Weeks on Hand = (Average Inventory for period/Cost of Sales for period) x 52

5. Return on Investment (ROI)

ROI is used to measure the profitability of the inventory stored. Shopify retailers with excess inventory have to either put markdowns or face deadstock to clear excess inventory, in turn, reducing their profit margins and revenues.

Calculating the ROI on the average inventory cost and identifying the profits compared to the actual inventory cost is important.

ROI can be calculated by the following formula:

Return on Investment = {(Final Value – Initial Value) / Initial Value} x 100

ROI is calculated as a percentage that shows inventory investment over a period of time. Through analysis, a retailer can identify any challenges that may minimize revenue. Shopify retailers can then plan strategies to tackle these challenges to ensure maximum ROI.

6. Product Sales

Product Sales, often known as sales revenue, refers to revenue generated from selling items that are not returned or canceled. Shopify retailers use Product Sales to assess the effectiveness of their business processes.

Product Sales are usually calculated over a fixed period and then compared to historical sales or planned product sales to track the performance of online and physical stores. Without a proper order management process, Shopify retailers may experience decreased sales and increased order cancellations or returns. 

Product Sales can be calculated by the following formula:

Product Sales = Gross Sales Revenue – Sales Returns – Discounts – Allowances

By offering fast delivery options like same-day Buy Online Pick-up In Store and Next-day delivery, Shopify retailers can increase their Product Sales, improve the Sell-Through Rate, and improve Store Inventory Turnover. By capturing Pre-Orders, Shopify retailers can accurately forecast demand and sell products at full price. These strategies increase overall product sales and maximize revenue.

Inventory Operations 

Inventory Operation metrics help retailers track their inventory management operations inside their store or warehouse for efficient processes, in order to maximize their revenue. Shopify retailers need to optimize their inventory operations for both their physical store and eCommerce to provide a best-in-class customer experience with faster fulfillment and fewer stockout situations.

1. Lost Sales Ratio

When a product is in demand but is out of stock, the retailer experiences lost sales. Lost Sales Ratio is defined as the number of days a certain product is out of stock compared to the expected sales that could have been made if the product was in-stock. It can also be defined as the difference in demand and actual sales.

The Lost Sales Ratio can be calculated by the following formula:

Lost Sales Ratio = (No. of days Product is out of stock/ No. of days in a season) X 100

Tracking the Lost Sales Ratio identifies the expected sales growth. It is important to identify inventory issues that resulted in out-of-stock products to ensure proper inventory levels for the future. In an ideal scenario, the lost sales ratio should be 0, but the industry standard shows a 2-3% ratio is acceptable to avoid overstocking issues. 

2. Perfect Order Rate

Perfect Orders are orders that are fulfilled without any issues such as order delays, inaccurate orders, damaged goods delivery, item returns, or incomplete documentation. Retailers want their Perfect Order Rate to be as high as possible, ideally 100%. According to the American Productivity and Quality Center (APQC), the Perfect Order Rate for the top performers is 95%

The Perfect Order Rate is very important to measure operational performance and ensure customer satisfaction. Analyzing Perfect Order Rates highlights any operational inefficiencies and roadblocks so that Shopify retailers can work towards minimizing them.

Perfect Order Rate can be calculated by the following formula:

Perfect Order Rate = {(Orders delivered on time + Completed Orders + Damage-free Orders) / Number of Orders} X 100

3. Inventory Shrinkage

Inventory Shrinkage is the difference between recorded and physical inventory. Inventory variances can be caused by issues such as theft, misplacement, damage, and inventory count errors. In 2022, Inventory Shrinkage resulted in a loss of $94.5 billion which amounts to an average of 1.4% of sales. Shopify retailers work hard to minimize the causes of Inventory Shrinkage to reduce their inventory losses and increase their profit margins.

Inventory Shrinkage can significantly impact customer satisfaction when fulfillment delays or order cancellations occur. It is essential to track this metric to identify strategies to minimize shrinkage problems. 

Inventory Shrinkage can be calculated by:

Inventory Shrinkage = Number of Recorded Inventory - Number of Physical Inventory

4. Fill Rate

The Fill Rate or Order Fulfillment Rate is the percentage of orders that are placed and shipped without any stockout situation from inventory variances. The Fill Rate highlights the business capabilities and any shortcomings within operations and inventory management.

Shopify retailers aspire to get higher Fill Rate percentages to ensure they are meeting their customers’ demands and achieving customer satisfaction. 

Shopify retailers can calculate the Fill Rate by the following formula:

Fill Rate = (Total Completed Orders / Total Orders) x 100

5. Order Cycle Time

The total period between a customer placing an online order till the product is ready for fulfillment is known as the Order Cycle Time. Order capturing, processing, and fulfillment time are measured to accurately calculate the Order Cycle Time.

Longer Order Cycle Times can negatively impact customer satisfaction and brand loyalty. Shopify retailers need to track the Order Cycle Time to improve the productivity of their staff and ultimately increase their fulfillment rates. 

Order Cycle Time = (Time customer received the order – Time customer placed the order) / No. of  Total Shipped Orders

6. Dead or Spoiled Stock

Any stock available on a retailer’s shelf has an Inventory Carrying Cost attached to it. If a retailer fails to sell the inventory within a certain time frame, the stock would be considered dead stock or spoiled. Shopify retailers determine when an inventory is considered Dead Stock or Spoiled Stock and after that period, the stock is deemed unsellable and counted as a lost sale. 

Dead stock is a critical KPI because unsold stock takes up the inventory space and is not profitable for the company. Shopify retailers must work towards minimizing their Dead Stock to increase revenue and profit margins.

To sell Dead Stocks, Shopify retailers will implement discounts or offer the products as bundled items, which negatively affects their profit margin. 

Dead/Spoiled Stock = (Amount of Unsellable Stock in period/Amount of Available Stock in period) x 100

7. Pick and Pack Cycle Time

Primary tasks of warehouse and store fulfillment teams include locating the products, picking them from the shelves, and packing them to prepare for shipment. Therefore, keeping track of the Pick and Pack Time and its accuracy can improve the process's efficiency to drive faster order fulfillment.

Pick and Pack Cycle Time can be measured by summing the total time involved in the process:

Pick and Pack Cycle Time = Time to Pick + Time to Pack

Shopify retailers can save sales and improve their inventory operations KPIs by implementing omnichannel strategies like:

  • Fulfilling online orders from stores when the item is out of stock in the warehouse.
  • Capturing Pre-Orders and Backorders on future inventory
  • Reducing Dead Stocks in stores by routing orders based on inventory availability. 
  • Log inventory variance so that Shopify retailers can track inventory shrinkage and improve fill rates
  • Offering Same-Day BOPIS to reduce the order cycle time while improving the perfect order rate.

Inventory Receiving 

Inventory receiving metrics focus on how Shopify retailers receive and stock inventory. Tracking these KPIs helps Shopify retailers identify any blockages and improve the inventory receiving process to ensure efficient operations and fast fulfillment.

1. Time to Receive

Stock associates receive the inventory through inter-store transfers, purchase orders, or returns. Stock associates then need to verify the inventory received, record the inventory, and make it ready for fulfillment. The complete process takes a considerable amount of time, which can impact an associate's productivity. Tracking the Time to Receive helps Shopify retailers identify any challenges around the receiving process to reduce their receiving time and increase staff productivity. 

Time to Receive is calculated with the following formula:

Time to Receive = Time for stock validation + Time to add stock to database + Time to pack for storage

2. Put Away Time

Put Away Time is the process of keeping the received inventory at the designated location of the product. Tracking and reducing Put Away Time helps to reduce the lead time of an order.  

Put-Away time can be calculated as:

Put Away Time = Total time to make received stock ready for picking

Shopify retailers can improve their inventory receiving KPIs by using software to track and reconcile received items against the Purchase Orders. The receiving software should provide the Put-Away slip so that stock associates can put the items in the designated locations.

Analyzing inventory KPIs is essential for Shopify retailers to track and improve their business performance. Omnichannel strategies such as Same-Day Buy Online Pick-Up In Store, Ship From Store, and capturing Pre-Orders can help Shopify retailers improve their Inventory selling, Inventory Operations, and Inventory Receiving KPIs to ensure faster fulfillment and automation of business operations.

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HotWax Commerce is an Omnichannel Order Management System that enables Shopify retailers to offer Same-Day Buy Online Pick-Up In Store and Ship From Store to ensure fast fulfillment. This allows retailers to increase their conversion rates, increase sales, and move inventory faster. With the ability to capture and release Pre-Orders with ease, retailers are able to accurately forecast products’ demand to help increase their return on investment.

HotWax Commerce’s Store Inventory Management solution offers mobile apps to receive inventory, pick & pack items from stores, generate shipping labels, and ship items from stores, to simplify store operations and increase productivity. These apps aid in reducing the order processing time by minimizing manual operations for Shopify retailers and stock associates.

Talk with the HotWax Commerce team today to learn how you can track and improve your Shopify inventory management KPIs.