2 Metrics Used to Evaluate Inventory Performance
- July 27, 2017
Every retailer has their own preferred metrics they use to evaluate the performance of their inventory. However, many aren’t sure of the difference between two important calculations: ROI and Sell Through. Knowing the purpose of each will allow you to make educated business decisions to improve your store’s inventory performance.
1. Sell Through
This is the percentage of sales to the inventory investment available for sale. The formula measures how much or what percentage of your total available inventory was sold during a given period.
2. Return On Investment (ROI)
For every dollar you invest in a product, how many are you getting in return. ROI analyzes inventory levels, sales, and profitability by comparing the investment in inventory required to generate those gross margin dollars.
How to analyze these data points
You should be cautious when using sell-through to compare for items, categories, or suppliers. Make sure that that the values being evaluated have been available for sale for approximately the same period-of-time.
For instance, if you had two items for which you had received 10 pieces of both and had sold 6 pieces of both, the sell through percent on both items would the same at 60%. But if one of these items had been in your store for 12 months and the other item in the store for 1 month, the second item is much more profitable for your business than the first, even though the sell through is the same.
To analyze your inventory performance further, you can use ROI formulas. A high ROI indicates that you have the right amount of inventory, at the right time, for the right price. A low ROI may indicate that you are missing out on sales opportunities and leaving money on the table in the form of old inventory or excess markdowns.
With RICS, our customers benefit from both of these metrics by using our analysis reporting. These reports provide users with crucial information to make better-merchandising decisions. RICS saves you time by calculating retail industry standard metrics like Sell Through, Turn Rate, ROI, and Gross Margin Return on Investment.
By using these metrics, you can evaluate the performance of individual SKUs and classes.
Want a breakdown of this information and a visual in a RICS report? We can explain the actionable decisions in a relevant way to your business.