Inventory Efficiency
Efficiency in inventory reflects how productively a retailer uses their inventory asset to maximize profit. It is a key metric and a simple and convenient way to measure your inventory performance over a period of time.
Inventory efficiency is answering the question, how efficient were my sales against the total available inventory to be sold over a given period? The math is easy:
Revenue /(Beginning Inventory at Retail + Receiving at Retail*)
over a specific period of time
*To be precise, you should use net inflow at retail, which is receiving less returns to vendor plus transfers in less transfers out.
Why it matters
Retail success is measured by how effectively and efficiently you turn inventory into profitable cash. This metric measures inventory performance. Some might say I get this by looking at my turn. That may or may not be true. For example, if turnover is high and the cause is markdowns, then you have a good turnover but potentially without profitability. GMROI is another example where it can be high, but misleading. Unsold inventory will show as profit. That profit will artificially inflate a GMROI number. I have had many retailers share that they have a high GMROI but no cash, because all the profit is sitting on the shelves and hanging on the walls.
Here is an example of how to calculate Inventory Efficiency:
Inventory at retail on August 1, 2022 = $500,000
Inflow or net receipts at retail from August 1,2022 through July 31st, 2023 = $900,000
Revenue from August 1, 2022 through July 31st, 2023 = $1,000,000
$1,000,000 / ($500,000+900,000)
Efficiency is 71.4%
Efficiency is a great metric to measure buyer performance and a terrific metric for paying buyers bonuses.
The higher the efficiency the better the performance.
Inventory Efficiency can be thought about together with IMU, a topic of the last 2 Indie Insights.
The higher the IMU the less pressure on a high efficiency %
The lower the IMU the greater the need for a higher efficiency %
A good overall target is to be in the 66-75% range.
Inventory Efficiency measures how effective you are at turning inventory into cash.
Management One reports IE as a rolling 12-month comparison, by class, by category, by location and by client and then compares it from the previous period. 12 months is a good period as it smooths out seasonal variances and markdowns from beginning inventory that could influence performance.
You can find the efficiency metric on the Management One Merchandise Plan and Plan on Demand in the metrics at the bottom of each page.
Efficiency % displays the last rolling 12 months and the prior year. It is also accessible on the Inventory Performance report.
If you would like to discuss Inventory efficiency and how to use it effectively and as a bonus pay metric, schedule a meeting with me, here is a link to my calendar.
Onwards, and Upwards,
Marc Weiss - Co-founder, Management One