How to Measure & Optimize Inventory Health For Ecommerce Success

The success of any ecommerce business depends greatly on how it manages its inventory health. Now, for some, inventory health may not be an immediate concern. You might say, “I’ll just order plenty of inventory and wait until it sells out.”

However, with this mindset, you run the risk of several issues including overstocking, accumulating dead stock, and additional storage fees.

Now, on the other hand, let’s say you’re understocked on several of your most popular SKUs. In this scenario, you face the risk of stockouts, which can be just as detrimental to your business as overstocking.

Maintaining a balanced level of ecommerce inventory so that you can achieve maximum profitability is what optimizing inventory health is all about.

By the end of this article, you’ll gain insights into which inventory health indicators you should be monitoring, how to overcome common inventory management hurdles, and see how a third-party logistics provider like ShipBob can help.

What is inventory health?

Inventory health is the balance of maintaining stock levels that meet customer demand without leading to overstocking or understocking. It reflects a business’s efficiency in managing the right products in the right quantities at the right time, impacting all aspects of ecommerce operations.

A few characteristics of healthy inventory include:

• Efficient capital utilization: Avoids tying up capital in excess stock, improving cash flow.
• Optimized storage space: Prevents overstocking, maximizing warehouse utilization.
• Reduced spoilage and obsolescence: Critical for perishable or trend-sensitive products.
• Balanced supply and demand: Ensures stock levels meet customer demand without surplus.

When discussing inventory health it’s important to recognize the distinction between inventory vs stock. “Inventory” can refer to finished goods as well as the materials used to make those goods, whereas “stock” refers solely to finished goods. Although many ecommerce businesses don’t manage the goods creation process (suppliers take care of that for them), businesses that do create their own products must also properly manage their raw materials inventory health.

Doing so directly affects customer satisfaction through consistent stock availability and on-time fulfillment.

The strongest inventory health indicators (& how to monitor them)

Monitoring key inventory KPIs is essential if you want to keep your inventory’s health in good shape. These metrics provide valuable insights into how well your inventory is managed. Let’s explore the top indicators of inventory health and see how they can be effectively monitored.

Inventory turnover ratio

The inventory turnover ratio measures how many times inventory is sold and replaced over a specific period. A higher turnover indicates efficient inventory management and sales performance.

How to monitor inventory turnover ratio:

• Calculation: Divide the cost of goods sold (COGS) by the average inventory value.
• Using ShipBob: ShipBob’s analytics tools provide real-time data on sales and inventory levels, allowing for accurate calculation of the turnover ratio. This helps in making informed decisions about stock replenishment and management.

Days sales of inventory

DSI indicates the average number of days it takes to sell the entire inventory. Lower DSI is often preferred as it implies faster turnover.

How to monitor days sales of inventory:

• Calculation: Divide the number of days in the time period by the inventory turnover ratio.
• Using ShipBob: Utilize ShipBob’s inventory management dashboard to track inventory levels and sales data, simplifying the calculation of DSI.

Stockouts

Stockouts refer to the situation where an item is out of stock and unavailable for sale, leading to lost sales opportunities.

How to monitor stockouts:

• Tracking: Keep a record of instances where customer demands cannot be met due to the unavailability of products.
• Using ShipBob: ShipBob’s platform can alert you when stock levels for specific SKUs are low, helping prevent stockouts.

Holding costs

Holding costs are the expenses related to storing unsold inventory, including warehousing, insurance, and depreciation.

How to monitor holding costs:

• Calculation: Sum up the costs of storage, handling, insurance, and taxes related to inventory.
• Using ShipBob: Gain access to analytics featuring comprehensive breakdowns, including your average cost per unit stored, the average number of units on hand, and other metrics pertinent to warehousing costs.

Lead time

Lead time is the time taken from placing an order with a supplier to receiving the inventory or the time taken from when a customer purchases something to when it gets delivered. Shorter lead times can enhance inventory agility.

How to monitor lead times:

• Tracking: Monitor the time duration from order placement to receipt.
• Using ShipBob: ShipBob’s platform can track and report on lead times, assisting in identifying optimal fulfillment centers, and forecasting inventory needs more accurately.

Common threats to inventory health

There are several common threats that can undermine inventory health. The good news is that these can oftentimes be mitigated with proactive solutions such as the right tools, partners, and 

strategies.

Overstocking

Overstocking occurs when a business holds more inventory than what is demanded by the market. This not only ties up capital but also increases holding costs and risks inventory either going bad or out of style.

Poor demand forecasting

Inaccurate demand forecasting can lead to either overstocking or stockouts. Both scenarios are harmful: overstocking ties up resources, while stockouts lead to missed sales and customer dissatisfaction.

Supply chain inefficiencies

Inefficiencies in the supply chain, such as delays in procurement, transportation, or manufacturing, can disrupt inventory flow and lead to stock issues.

Neglecting seasonal trends

Failing to account for seasonal demand fluctuations can result in either excess inventory post-season or inadequate stock during peak demand.

Regulatory non-compliance

Non-compliance with industry regulations can result in fines, legal issues, and operational disruptions, impacting inventory management.

Cybersecurity weak spots

Vulnerabilities in cybersecurity can lead to data breaches, compromising inventory management systems and disrupting operations.

Strategies for optimizing inventory health

Now that we’ve outlined a few of the most common inventory health threats. It makes sense to discuss actionable strategies for optimizing inventory health so that you can proactively get ahead of these challenges. Here are 7 ways you can optimize the health of your inventory.

1. Implement data-driven demand forecasting

Utilizing data analytics for demand forecasting involves analyzing sales history, market trends, planned promotions, and external factors to accurately predict future product demand. Employing forecasting tools to process this data helps identify demand patterns, enabling businesses to adjust their inventory levels proactively.

2. Automate reorder points

Setting automated reorder points is a key strategy in maintaining healthy inventory levels. This involves calculating reorder points based on demand during lead time and safety stock. An effective inventory management system can automate reorder notifications, ensuring timely restocking and minimizing the risk of stockouts.

3. Set up real-time inventory counts & alerts

Implementing a real-time inventory tracking system allows for up-to-date stock information, crucial for any modern-day ecommerce business. These types of systems enable instant stock level updates and low-stock alerts. This real-time visibility and alerting system helps businesses react swiftly to inventory changes.

4. Distribute inventory & leverage multiple fulfillment centers

Utilizing a distributed inventory across multiple fulfillment centers is a strategic move that further improves inventory health. This approach not only reduces shipping times but also acts as an inventory fallback plan. For example, if one warehouse runs low on a product, another can compensate, ensuring continuous product availability.

5. Perform regular inventory management audits

Conducting regular inventory audits is essential for ensuring inventory accuracy and identifying potential issues. Regular physical counts should be scheduled and reconciled with inventory records and an ABC analysis should be carried out to categorize inventory based on its importance and value. Regular auditing helps in maintaining accurate inventory records—crucial for effective inventory management.

6. Utilize AI & machine learning experimentation

Exploring AI and machine learning solutions offers advanced inventory insights, beyond traditional methods. Implementing AI tools can help in predictive analytics and trend identification, while machine learning algorithms can automate aspects of inventory optimization, ensuring a more precise approach to maintaining proper stock levels.

7. Adopt inventory management software

Adopting comprehensive inventory management software is crucial for streamlined inventory operations. Businesses should choose a system that integrates well with their ecommerce platform and provides real-time inventory data. This type of software is critical in making informed decisions that directly impact inventory health, such as determining when to reorder, identifying slow-moving items, and preventing overstocking or stockouts. 

8. Strengthen cybersecurity measures

Cybersecurity weak spots pose a significant risk to inventory health in today’s digitally driven landscape. Vulnerabilities such as outdated software, weak passwords, and lack of encryption can expose inventory management systems to data breaches and cyberattacks. To prevent such threats, prioritize measures like using strong passwords, employing password managers, and updating software regularly. Training employees in cybersecurity best practices further enhances overall security posture and attack surface management, ensuring vigilance against potential threats.

Profitable inventory health starts and flourishes with ShipBob

The journey to maintaining healthy and profitable inventory is complex, yet achievable with the right tools and strategies. ShipBob stands at the forefront of this journey, offering cutting-edge inventory management solutions tailored to the unique needs of ecommerce businesses. 

Eliminate stockouts with real-time inventory tracking

Stockouts can significantly impact customer satisfaction and sales. ShipBob’s real-time inventory tracking system offers an effective solution to this challenge. By providing up-to-the-minute inventory levels, businesses can react swiftly to changes in demand, ensuring they never miss a sales opportunity due to stock unavailability.

Optimize cash flow by leaving overstocking in the dirt

Overstocking ties up valuable capital and increases storage costs, hindering a business’s cash flow. ShipBob’s inventory management tools help businesses maintain the perfect balance in their inventory levels, ensuring capital is not unnecessarily tied up in excess stock. This optimization is crucial for maintaining overall financial stability.

“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

Accelerate order fulfillment with distributed inventory

Quick and efficient order fulfillment is key to customer satisfaction. ShipBob’s approach to distributed inventory, utilizing multiple fulfillment centers, streamlines the order fulfillment process. By strategically placing inventory closer to customers, ShipBob ensures quicker delivery times, reducing shipping costs and enhancing customer experience.

Automate reordering to save time and reduce errors

Manual reordering processes can be time-consuming and prone to errors. ShipBob automates the reordering process, ensuring inventory is replenished at the optimal time. This automation saves time, reduces the likelihood of human error, and helps maintain consistent stock levels.

“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

Maximize profit with data-driven inventory decisions

Making informed inventory decisions is crucial for maximizing profits. ShipBob provides comprehensive inventory visibility, offering valuable insights and analytics. These data-driven decisions ensure businesses are not just reacting to market changes but are proactively managing their inventory for maximum profitability.

“ShipBob’s Inventory Placement Program provides visibility into inventory movement that’s absolutely key for anyone running a business. The data is easily accessible, and it shows exactly how inventory is being split across ShipBob’s network of warehouses. It’s also really great for our product reconciliation, because you can see what’s received at the hub locations and individual fulfillment centers. There’s a lot more clarity, and it’s so much simpler to check that our shipped inventory was received.”

Mithu Kuna, Founder and CEO of Baby Doppler

Get started with ShipBOb

Interested in leveraging ShipBob’s best-in-class technology and reporting to manage the health of your inventory? Connect with our team to discuss outsourced and in-house (WMS) fulfillment options.

Inventory health FAQs

Below are answers to common questions about inventory health.