Inventory Turnover Ratio Guide

ShipBob analysed average inventory turnover rates across thousands of ecommerce customers in our Inventory Turnover Benchmarks Report so brands can know “What do other companies like mine look like?”

We found the so-called inventory crisis upon us (where brands have excess product) is quite accurate:

• From 2020 to 2021, the average inventory turnover rate for ecommerce brands fell by 22%.
• In the first half of 2022, inventory turnover rates declined even more significantly by 46.5% from 2021.

Whether you store your products yourself or partner with a 3PL, understanding the data around your inventory and operations can help you increase efficiency, and maximise cash flow.

So, what do you want to learn?

• How to calculate inventory turnover ratio
• How to analyse inventory turnover ratio
• How to interpret inventory turnover ratio
• How to maximise your inventory turnover rate
• Partner with a 3PL to optimise your inventory turnover rate

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What is inventory turnover ratio?

Inventory turnover is measured by a ratio that shows how many times inventory is sold and then replaced in a specific time period. Understanding the average inventory turnover is a critical measure of business performance, cost management, and sales, is inversely proportional to days in sales inventory, and can be benchmarked against other companies in a given industry.

Why is calculating inventory turnover ratio important?

Inventory ratio is one of the most versatile metrics a business can track. If you don’t bother calculating it, you are missing out on valuable data that you could use to optimise many of your existing operations, gain new insights, and improve your overall supply chain performance. 

Constantly managing inventory effectively and efficiently is vital to the success ecommerce brands. across your manufacturing, freight, and fulfilment partners can feel like a 24/7 job, balancing supply, demand, capital, space, lead times, and transit times. At any point in time, do you….

• Increase your order quantity for better unit economics? 
• Speed up PO frequency or decrease your order quantity? 
• Move bulk or slow-moving goods to a long-term storage facility? 
• Retire certain SKUs to focus on your best-selling, most profitable products? 
• Optimise your warehouse for smaller, faster-moving products?

Keeping a close pulse on your inventory turnover rate — one of many health metrics for an ecommerce business — can help you better understand areas of improvement. Here are just some of the important use cases for calculating your inventory turnover ratio.  

Measure business performance

In the most general sense, the more sales your business makes, the more successful your business probably is. Because the inventory turnover ratio speaks to how quickly a business is selling through its inventory, some businesses use it to check the pulse of sales performance. 

While a high inventory turnover ratio is not always indicative of success (for instance, high inventory turnover is not good for businesses losing money on every sale), it is usually a sign that your sales are healthy. 

Evaluate market trends and customer demand

Calculating each product’s turnover ratio reveals which products are selling out the fastest, and which sit on shelves for longer periods. By identifying the most popular products, a merchant can better plan their inventory in the future, and stock up on items that will maximise sales. 

Tracking inventory turnover over the course of several months or years can also reveal seasonal trends or geographical pockets of demand. Knowledge of consumers’ buying habits makes it much easier to forecast demand accurately, and helps you optimise your inventory levels throughout the year and across locations.    

Reduce obsolescence and dead stock

If you’re not tracking inventory turnover, it’s tempting to keep reordering the same SKUs in the same amounts over and over again. 

However, doing so may lead you to invest in products that are very slow to sell — or worse yet, that won’t sell at all anymore. This results in obsolete inventory or dead stock that increases holding costs, and costs time and money to move out. 

Conversely, by calculating inventory turnover ratios for your products, you’ll know exactly which products to discontinue, as well as when and how many units to reorder for low-turnover SKUs.  

Minimise backorders

Just as calculating your inventory turnover ratio helps prevent you from amassing too much inventory, it can also help prevent you from ordering too little. 

When you know how fast items turn over, you can make sure to order popular items well in advance and in sufficient quantities to meet customer demand. This prevents stockouts, which results in fewer backorders and more happy customers.

How to calculate inventory turnover ratio

To calculate inventory turnover, complete the following 3 steps:

1. Identify cost of goods sold (COGS) over the accounting period
2. Find average inventory value [ beginning inventory + ending inventory / 2 ]
3. Divide the cost of goods sold by your average inventory

Here’s the simple inventory turnover formula:

Inventory turnover = COGS / Average inventory value

For example, if your COGS was $200,000 in goods last year, and your average inventory value was $50,000, your inventory turnover ratio would be 4.

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You can also calculate your inventory turnover ratio by looking at units, rather than costs:

Inventory turnover = Number of units sold / Average number of units on-hand 

If you sell 1,000 units over a year while having an average of 200 units on-hand at any given time during that year, your inventory turnover rate would be 5.

How to analyse inventory turnover ratio

Fully understanding inventory turnover can provide invaluable insight into how your ecommerce business manages costs, how sales initiatives are performing, and how you can further optimise inbound and outbound logistics workflows.

Once you know how to calculate inventory turnover ratio, the next step is understanding what a high turnover rate versus a low turnover rate means, and what the ideal inventory ratio is so you can create an action plan on how to improve the higher inventory turnover ratio.

Note: Turnover rate can be calculated monthly, quarterly, annually, etc., and your ideal turnover ratio will vary by industry, the products you’re selling, and much more.

What is an ideal inventory turnover rate?

For most retailers, an inventory turnover ratio of 2 to 4 is ideal; however, this can vary between industries, so make sure to research your specific industry. A ratio between 2 and 4 means that your inventory restocking matches your sale cycle; you receive the new inventory before you need it and are able to move it relatively quickly.

There is no right or wrong turnover rate — but optimising your product line, replenishment strategy, and even warehouse can help your bottom line. Because the more SKUs and units you have that aren’t turning over quickly, the more you’re paying for warehousing and the more capital you have tied up in unsold goods that may lose value over time (when you may need that capital for more pressing things). 

Low inventory turnover

A rate of 1 or less means you have excess inventory. For example, if you sell 20 units over a year, and always have 20 units on-hand (a rate of 1), you invested too much in inventory since it is way more than what’s needed to meet demand. It’s important to maintain inventory levels by calculating how much the company sells and avoid dead stock which cogs your entire cash flow.

High inventory turnover

High inventory turnover can indicate that you are selling your product in a timely manner, which typically means that sales are good in a given period. Ecommerce retailers should strive for a high inventory turnover rate, which means they sell the inventory they have on hand quickly and repurchase fresh inventory often. This also helps save on inventory carrying costs.

While a high turnover rate is generally considered an indication of success, too high of an inventory turnover rate can actually be problematic. An influx of sales can cause you to constantly have to replenish inventory, and if you can’t keep up with demand, you may experience stockouts.

This is especially true if it takes weeks to replenish the stock for a specific SKU; that can mean weeks of lost sales on what is clearly a popular item.

How to interpret inventory turnover ratio (with an example)

Let’s walk through an example of how to calculate and interpret your inventory turnover ratio. 

A small ecommerce t-shirt company wants to calculate its inventory turnover rate for the past quarter. They review their records and find that they sold 500 t-shirts, and had an average of 300 units on-hand at any given time. The company calculates the inventory turnover ratio using this formula: 

Inventory turnover = Number of units sold / Average number of units on-hand 

Inventory turnover = 500 / 300

Inventory turnover = 1.66

In this case, the inventory turnover ratio is a bit low. The company has invested too heavily in inventory, and could meet customer demand with fewer units on hand. Using this information, the company decides to adjust their strategy next quarter. 

The next quarter comes and goes, and the company decides to calculate their inventory turnover ratio again. Once again, they sold 500 t-shirts  — with the cost of goods sold being $200 — but the company invested less in inventory, beginning the new quarter with just $60 worth of inventory, and ending the quarter with $40.

To calculate the inventory turnover ratio for that quarter, the company would use the following formula:

Inventory turnover = COGS / Average inventory value

Inventory turnover = 200 / ([60 + 40] /2)

Inventory turnover = 200 / (100/2)

Inventory turnover = 200 / 50

Inventory turnover = 4

With an inventory ratio of 4, the company knows that its inventory was sold and replaced 4 times in the past quarter. This is a much higher inventory turnover rate, but it is within the range that is considered healthy for an ecommerce business.

How has inventory turnover rates changed over the last few years?

From the most recent ShipBob Inventory Turnover Benchmarks Report, we found:

• The highest inventory turnover rates were in 2020 when the pandemic began, lockdowns were in effect, and ecommerce was surging over in-person shopping.
• 2021 numbers fell slightly as the world started to open back up a bit and supply chain delays plagued the industry.
• In the first half of 2022, we see inventory turnover rates decline significantly, at a time when 1. inventory that was delayed from Q4 2021 finally arrived for some merchants too late to sell during the holiday period, 2. Russia invaded Ukraine and 3. a looming recession threatened the world. 
• Every year, we see mid-market/enterprise merchants (those with a GMV of at least USD $20 million) with significantly better inventory turnover rates when broken out from the average of all merchants together. This could be due to more sophisticated forecasting strategies and tools and/or having access to more capital. 

How to maximise your inventory turnover rate

Whether your inventory turnover is too high or too low, here are some measures you can take to try and combat or regulate the issue.

How to improve low inventory turnover

If your inventory turnover ratio is on the low side and you want to improve it, we’ve compiled some actionable ideas for how to do so depending on your brand’s unique circumstances.

Review your website objectively 

Before you make drastic decisions regarding your inventory, analyse your marketing to ensure that your messaging, visuals, and navigation are on point (on both desktop and mobile). Determine if demand is there — and if you’re capturing it correctly. 

Get an outsider to comb through your online shop, as a different pair of eyes may uncover insights into why certain products are not so popular. At the same time, ask yourself:

• Are these products hidden?
• Are your product descriptions compelling enough? Are they filled with imagery and videos that entice people to buy? 
• Do you have walls of text that can be replaced by bullets or icons? 
• Do you have enough social proof and first-hand accounts of customers using your products? 
• Are you missing any key decision-making aides, such as sizing charts? 
• Are any products too similar to visitors? 
• Are the amount of choices overwhelming? If so, do you need to simplify the number of options, or create a quiz that points customers in the right direction? 
• Can people tell what you sell when they land on your site? Is my website easily navigable? 
• Are products and product categories grouped in a way that makes sense?
• Are all of your sales channels up-to-date with your product catalogue for a consistent experience?

Store excess inventory separately

Separating out long-term and short-term storage can improve a facility’s inventory turnover ratio, and even save some brands money in certain scenarios. 

For lower-velocity items (and in cases of excess inventory that won’t sell out for a while), a longer-term storage option in a less expensive facility may be a more cost-effective solution to low inventory turnover. 

If space is tight, or if you outsource fulfilment, it may be cheaper to keep bulk inventory separate from your 3PL, since fulfilment centres are designed to turn over products quickly (unlike a warehouse designed for pure storage).

Geography can also impact storage costs, depending on the real estate market — so if you have a supplier that requires a high minimum order quantity (MOQ), if you’re getting more inventory upfront at a better price per unit, or if you’re simply ordering more now to avoid potential delays, consider less expensive, rural areas to minimise storage costs.

Distribute select SKUs

If you want to split your inventory among multiple fulfilment centres, analyse your sales data to understand which SKUs make sense. Unless you only sell a few products, you probably won’t need to store 100% of your product range in multiple locations; Instead, look to stock the best-sellers that get shipped most often.

“ShipBob’s Inventory Planner integration allows us to have all of our warehouse forecasting and inventory numbers in one platform. We can create ShipBob WROs directly in Inventory Planner and have the inventory levels be reflected in our local shipping warehouse and ShipBob immediately. It also provides forecasting for each individual ShipBob warehouse, so we know how many units we need to ship each week to cover a certain period and also to not run out of stock.”

– Marc Fontanetta, Director of Operations at BAKblade

Improve your replenishment timing

Reordering SKUs at the right time can be challenging. Restock too early, and you may have too much working capital tied up in inventory, or a surplus of stock that goes obsolete; restock too late, and you risk stocking out of items and disappointing customers with backorders.

To time inventory replenishment correctly, you need to calculate reorder points and safety stock carefully over time. Additionally, you may consider setting automatic reorder notifications when your unit count for any particular SKU hits a certain level. Many tools enable this, and some even help you automate reordering inventory altogether.

Compare inventory value with cubic volume

Not all inventory is created equal. When space is limited or has a price tag associated with it, understanding the average storage space required can help add another layer of evaluation. 

For example, let’s say one pallet can only fit 25 pillows — each of which has a manufacturing value of $5 and a retail value of $50. However, that same pallet can fit 300 units of compact electronics — each of which has a $10 manufacturing value and $90 retail value — in the same amount of space. 

Before even calculating the entire landed cost, each pallet of the same size from this example has the following potential return:

• The total potential revenue of the 25 pillows sold at $50/each is $1,250. The total manufacturing value is $125 (25 * $5), so the total potential profit is $1,125.
• The total potential revenue of the 300 electronics sold at $90/each is $27,000. The total manufacturing value is $3,000 (300 * $10), so the total potential profit is $24,000. 

Since the fixed warehousing cost is the same for both pallets, if you were planning on selling the same amount of pillows as electronics in the same timeframe (let’s say 300 units each), you’re paying 12x the storage costs for the pillows compared to the electronics. One pallet holds all 300 electronics, but you’d need 11 extra pallets to house the 275 remaining units of pillows. 

Let’s also say that it takes you twice as long to sell through the 300 pillows as it does to sell through 300 electronics. In this case, you’re also doubling storage again, for a whopping 24x in warehousing costs and much less potential profit.

The bulkier a product, the higher the storage cost per unit. If the SKU doesn’t have a big profit margin, you may want to consider cheaper warehousing alternatives. 

Optimise the warehouse space

Every warehouse needs each SKU to be stored separately and not mixed to reduce the chance of a mis-pick, and the efficient use of space is very important when it comes to storage. While you have to match a facility to your growth goals (i.e., if you plan on growing, you won’t want to immediately outgrow your space; but if you don’t grow fast enough, you’ll severely under-utilise and likely over-pay for it), there are some steps you can take to make better use of your existing space.

If you lease or own your own warehouse, you can:

• Reorganize the space to increase the total SKU locations, or even re-rack rows to grow higher if you have vertical room above (storing pickable inventory in the bottom of the aisles and excess inventory above, which can be retrieved via forklifts when stock is getting low). 
• Store SKUs that are frequently ordered together closer to one another to reduce the distance travelled within the warehouse to pick each order. 
• Set up batch picking, where certain SKUs are pulled aside in one area so a picker can focus on orders with those inventory items consecutively, eliminating the need to go back and forth between picking aisles. 
• Perform periodic warehouse audits to identify inefficiencies, and move out obsolete inventory.
• Monitor your return rate and  inventory that gets sent back, which can also lead to inefficient storage.

Retire poor-performing SKUs

Many brands assume that having a large product range will equate to better customer retention and a higher lifetime value — but the reality is that many SKUs don’t sell quickly or drive much revenue, and are unprofitable. 

What are the pros and cons of having a high SKU count?

Pros

• There is more variety to please shoppers.
• There are more upsell opportunities for your business.
• You can introduce existing customers to new products and try to reach more customers with new products.

Cons

• Inventory forecasting is more challenging with every additional SKU.
• You have a lot of capital tied up in inventory that’s unsold and risks becoming obsolete or unsellable.
• Storage is more expensive. 
• It’s easy to overestimate the use of new colours and slight variations. Customers can become overwhelmed with too many choices and never skim through your entire catalogue .

For a lot of brands, 3 SKUs make up 50% of sales (or in some cases, the top 2 best-sellers are 90% of revenue). An ideal SKU count can vary for each vertical and business, but pumping out too many SKUs too fast can impact your financials. 

SKU rationalization is the process of identifying whether a product on the SKU level should be discontinued due to declining sales and overall profitability. 

This process is very relative to your brand’s size (a small ecommerce business should not be comparing themselves to public companies). Rationalize SKUs on pace with cash flow, margin, lead time, and MOQ, and be sensible to what a customer really needs. 

You can also sell through a SKU until it’s done without planning on replenishing it at all. 

“We roll out new products and designs on our website 1-3 times a month and send new inventory to ShipBob each week. It’s really easy to create new SKUs and restock existing ones using ShipBob’s technology, which is especially important with high inventory turnover.”

– Carl Protsch, Co-Founder of FLEO

Dispose or donate  excess inventory

Once you identify SKUs that have low inventory turnover rates, or you’ve come to the realization that you need to retire a SKU, you’ll need to find ways to get rid of the remaining inventory, such as:

• Bundle slow-moving SKUs with best-selling items. 
• Offer slow-moving SKUs as mystery items for a very low price (note: if it’s a mystery shirt, for example, be sure to get the size). 
• Include slow-moving SKUs as freebies or gifts for customers that spend a certain amount.
• Run a flash sale to greatly discount the products.
• Email your database about the product you’re ending as a last chance to buy notice.
• Donate the items to a charity in need. If you’re a ShipBob customer, we partner with GiveNkind to match donated items with nonprofits in need. As GiveNkind’s #1 partner, our customers have been able to donate millions of dollars of goods. Learn how to donate here.
• Dispose of your inventory. If you’re a ShipBob customer, learn how to do this here. 
• Write off unsold inventory at the end of year or accounting period (after consulting with your accountant).

Traditional flash sale promotions can be successful but consider getting creative with the messaging. Here’s part of an email I received from a brand after I had been looking at this product:

We decided to retire this design, as we think we can maybe improve it in the future. If you’re a fan of it, go get it now or spend the rest of your days crying about what could have been — like the time I bought a really beautiful ice cream cone at the beach, tripped, and watched as my happiness went flying into the sand, to be washed away by the ocean.

Like tears in the rain, my ice cream and my dreams were diluted in the salt crystals of billions of dead fish.

But yours don’t have to be! Run along and grab yourself a little slice of happiness. I have asked our manufacturers to hang all recent prints in a nearby donut shop so they smell sweet and beautiful for you, but  I can’t  promise that they have taken me up on this.

Ultimately, these steps should make room in your warehouse, reduce the capital you have tied to inventory, simplify your inventory management process, reduce labour associated with inventory tracking, and help you focus on your most profitable SKUs.

Consider product ‘drops’ 

Not to be confused with dropping or removing products from your store, the drop model refers to announcing a new product with a limited number of units to entice people to buy now before they’re sold out — a very common model that both Millenial and Gen Z audiences are familiar with. Drops have also helped mask supply chain delays given their ‘surprise’ nature of timing. 

This is a lower stakes route from the beginning, as it allows you to test a product’s popularity first via a small batch before making it a regular on the store. This exclusivity angle helps create scarcity, build momentum, and ultimately sell through the inventory quicker, essentially getting it out the door immediately.

Some brands go so far as utilising this model for backorders to secure the capital upfront. While the drop model works for certain industries much better than others (e.g., merch, celebrity products, brand collabs, etc.), it’s still worth testing the product until it sells out — even if you don’t sell out in 15 seconds. Maybe it becomes part of a semi-regular rotation — giving people all the more reason to sign up for your email list and pay close attention. 

Review your pricing strategy

If you’re having trouble selling inventory quickly, the problem may be in pricing. Consider lowering the price to make them more accessible to a larger number of consumers. If you can’t do so, consider negotiating discounts with your manufacturer or supplier. If you’ve built a strong rapport with your supplier, you may be able to negotiate shipping discounts for recurring orders, which you can pass onto your customers. 

Increase product demand

Offer promotions to deplete inventory by increasing sales. Beyond clearing inventory, discounts can be an effective way to drive customer loyalty, boost word-of-mouth marketing, and help your business grow.

Encourage pre-orders

Pre-orders can be a beneficial tool for businesses looking to gauge demand, generate excitement, and raise funds. Pre-orders can also help inventory move through the supply chain at a steadier pace, which can improve inventory turnover. 

Use an inventory management software

The right inventory management software gives you real-time visibility into inventory levels across channels, as well as analytics tools and data tracking capabilities. These features make it easier for you to find dead stock, forecast demand, and monitor your inventory turnover over time. 

Buy less stock, more often 

By purchasing inventory to meet a month’s demand, rather than the whole year’s, you take on less risk and invest less capital in products that may not necessarily sell. This can be especially prudent when stocking a new product for which you don’t have prior sales data.

To solve for (very) high inventory turnover

Extremely high inventory turnover is often easier to fix than extremely low inventory turnover. Here are a few strategies that you can use to either order more inventory or make fewer sales.

Improve demand forecasting

Typically, high inventory turnover boils down to needing more stock on average to meet your customer demand. 

By forecasting demand more accurately, you can make sure that you invest in enough inventory and safety stock to satisfy customers without accidentally overstocking. To improve demand forecasting, track sales and inventory metrics like inventory turnover and backorders over time using a reliable inventory management software.

Increase SKU levels  

If you find yourself replenishing a certain SKU over and over again in a certain time period, try increasing the number of units you order to bolster SKU levels. Just be sure to recalculate your reorder point and safety stock levels to make sure that your inventory levels stay optimised.

Use the JIT method

Under the JIT (or “Just in Time”) method of inventory management, a merchant has just enough stock to meet demand, but only just; once demand is met, the merchant will need to replenish their stock levels quickly. This approach to inventory management and replenishment can be risky, but it can help lower your inventory turnover. 

Automate purchase orders

Automating purchase orders can take the stress out of reordering inventory. If you are reordering inventory too often, try using an inventory management software that sends you automatic reorder notifications when your inventory levels reach a certain threshold, or even automates inventory replenishment altogether.

Partner with a 3PL to optimise your inventory turnover rate

ShipBob’s fulfilment solutions include both a warehouse management system (WMS) for in-house fulfilment, as well as hands-off tools and fulfilment services for brands that don’t want to run their own warehouse. For both solutions, ShipBob offers an international fulfilment network and dashboard with a built-in inventory management system.

If you are looking for a 3PL that will help you manage your inventory in real time, check out ShipBob. With ShipBob’s technology combined with global fulfilment, you can gain a holistic view of your operations with just a few clicks. 

ShipBob’s merchant dashboard is equipped with inventory management capabilities to help you monitor and manage your inventory turnover ratio. With inventory reporting, trend-analysis, and real-time visibility into inventory levels, you can improve demand forecasting and get more control over the key metrics that drive business growth.

ShipBob also allows you to set automatic reorder point notifications to remind you when it’s time to replenish each item at each ecommerce fulfilment centre. Choosing the right reorder notification point will ensure that there is time to send and restock more inventory before orders are put on hold for lack of inventory.

“ShipBob’s analytics tool is really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”

– Oded Harth, CEO & Co-Founder of MDacne

With advanced analytics, ShipBob customers can also: 

• Monitor SKU velocity to quickly identify slow-moving products.
• Calculate inventory turnover rate to see how many times inventory is sold and then replaced in a specific time period.
• Gain visibility into inventory activity (what’s coming in and what’s leaving) across fulfilment centres and sales channels in real time through a centralised dashboard.
• See daily average products sold, how much inventory is left, and how long it will last with the ability to simulate different scenarios for changes in demand. 
• Bundle products with ease and update accurate inventory counts for each SKU within the bundle. 
• Utilise integrations to automate placing new purchase orders for timely replenishment. 
• View historical stock levels at any point in time from any warehouse location.
• Compare current and ideal distribution across fulfilment centre locations to optimise product allocation.
• Visualise average storage cost per unit over time.

Conclusion

Inventory management is a vital part of ecommerce operations. You need to track your ecommerce store’s orders closely to ensure that you can manage your inventory in a cost-efficient way that maximises your business’s cash flow while meeting customer demands.

“So many 3PLs have either bad or no front-facing software, making it impossible to keep track of what’s leaving or entering the warehouse.

On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.”

Harley Abrams, Operations Manager of SuperSpeed Golf, LLC

Calculating inventory turnover ratio is a great way to determine if you need to increase or decrease your inventory supply while also helping you understand your company’s inventory for future financial decisions. Gone are the days of using spreadsheets and inventory sheets. You need the right technology to manage it.

“Another ShipBob integration I love is Inventory Planner. It saves me hours every week in Excel spreadsheets, and I can raise a PO in minutes when it used to take me hours. For every order I placed for years, I was ordering too much or not enough. Between inventory forecasting tools and the ability to auto-create WROs, we don’t have stockouts much anymore. I sleep better at night.”

Wes Brown, Head of Operations at Black Claw LLC

Like any metric, it’s not a one-time measurement, but rather a continuous evaluation. Your inventory turnover ratio can fluctuate over time, and you’ll want to make sure you respond accordingly.

Inventory turnover ratio FAQs

Here are answers to common questions about inventory turnover ratios.