7 Key Metrics To Figure Out When To Order Inventory
When am I supposed to order my products? How do I know when it’s time to replenish? Do I just look at how much stock I currently have in inventory?
Too little inventory, and you run the risk of stockouts. Too much can lead to overstock. Here we focus on seven important metrics to help you master the art of replenishment.
If you have not already crated a demand forecast including lead time and days of stock, start there. This will better guide your through these metrics. The replenishment quantity takes into account current stock as well as anything on order or transferring between warehouses.
1. Replenishment Profit/Replenishment Revenue
Replenishment profit comes from the units that must be replenished. Do not confuse this with forecast profit, which is the profit of all units forecast to be sold.
If you don’t have your costs entered into your spreadsheet or planning software (like Inventory Planner), a second option would be using replenishment retail value, which is the retail value of those replenishment units.
Use Replenishment Profit to sort the priority of which variants to replenish. For example, Variant A needs 1000 units replenished, which will result in an estimated $10,000 profit. That will be a higher priority than Variant B which needs 50 units to meet demand resulting in an estimated $500 profit.
2. Replenishment date/Stock Cover in Days/Sells out In
Replenishment date indicates when you need to place your order. This is an ideal key metric for replenishment because it takes into consideration lead time. It ensures no stockouts, and you will keep the steady of flow inventory needed in order to meet demand.
If you don’t exactly know your replenishment dates, you can look at stock cover in days. If you look at what you have on hand right now and consider sales velocity, how long will inventory last? This is your stock cover. If your stock covers 15 days but lead time is 14 days, it is time to order now. But if you have 94 days of stock, that is enough inventory to last for several more months.
Sells out in is an extrapolation of stock cover in days. The number of days until a product will be out of stock is based on the forecast, current stock, and when order quantities will run out. This shows when stock including all deliveries (regardless of timing or shortfalls in the meantime) will sell out.
Sells out in first will show if there is a shortfall before the next PO arrives.
Stock cover in days looks at only stock on hand and will not consider “on order” amounts.
Say you have 10 units on hand, sales velocity of 5 units/month, and 20 on order scheduled to arrive in 3 months:
• Stock cover in days shows when the 10 units will run out.
• Here “sells out in first” will show the date of when 10 units will run out because that is before the next PO shipment will arrive.
• “Sells out in” will show when the 10 + 20 units will run out, so here that’s in 7 months (stock runs out before arrival, arrival is in 3 months, sales velocity shows another 4 months to get through the shipment).
Let’s look at some examples to illustrate the difference between these terms.
‘Sells out in’ and ‘sells out in first’ will be different if there is a stockout forecast before the next purchase order is expected to arrive.
In this example, the current stock is forecast to run out on August 1. The ‘stock cover in days’ will show how many days from now that is, and ‘sells out in first’ will show the date that the stock will be at 0.
‘Sells out in’ will show as October 1 because that is when the last of the stock commitment will run out. Note that ‘sells out in’ does not indicate that there will be a stockout starting August 1. This is where it is helpful to use ‘sells out in first’ and/or ‘stock cover in days’.
In this example, the next purchase order is expected to arrive before the current stock on hand will run out. ‘Stock cover in days’ will show how long the current stock will last. This does not include any ‘on order’ quantities.
In this case, ‘sells out in’ and ‘sells out in first’ will both show October 1. There is no forecasted stockout before that date.
3. Forecast Loss Profit
How much money will you lose if you don’t order today? How much money could you potentially lose during your lead time? Forecast lost profit is calculated as stockouts during the lead time * profit. Forecast loss profit specifically looks at lost potential during lead time so if you ordered tomorrow, you would get that back in stock and stop the clock on lost profit.
The important distinction is that you are not using the full planning period of lead time plus days of stock. Forecast loss profit only looks at losses during the lead time.
4. Sell Through and Stockturn
Sell through is how much of your opening stock levels you sold during a selected period. This is calculated as (Sales for the selected period / opening stock) * 100 to generate a percentage. If you look at turning over your inventory fully in a month, then you want to see 100% for the month for sell through. It’s about optimizing stock levels. Not overstocking, and not missing out on sales.
Stockturn is (sales / average stock for the selected period) * 100 to generate a percentage. It is how well you calibrated how much you need in the hope you will not go through that inventory in a reasonable amount of time, typically one year when calculating stockturn. This is a measure of how quickly you are going through inventory and what is driving revenue. It also helps to show which items are sitting on your shelves for too long, tying up cash that could be used to buy faster moving inventory.
5. Cost Value of Replenishment
When you add this many units to your PO, how much will you owe your vendor? When keeping in mind a purchasing budget or cash flow for the business overall, it can be helpful to look at the replenishment cost. Think about payment terms. Are you going to owe the money immediately after sending your PO? Or do you have net 30 days with time to receive the merchandise and start selling it before you owe it to your vendor?
6. Minimum Order Quantity (MOQ)
Let’s say you have a dress and need to replenish it with 56 units. If your MOQ is 500 units, take a close look at that because you’re going to be ordering 444 units of overstock you don’t need in order to meet demand. Can you justify the extra cost of those overstocked units? You may be able to get a better per unit price, so in some cases it may be worth it. How far away from your MOQ are you with your replenishment recommendation that will allow you to meet customer demand?
7. Replenishment CBM (Cubic Meters)
This is the volume of the unit you are ordering. Say you are ordering TVs from an overseas supplier and want to fill up an entire container. If you have 56 units recommended to purchase, how much space does that take up in your container? The whole thing? A small corner? You can’t afford to send a near-empty container from China to the United States. To figure out replenishment CBM, populate the per unit CBM and multiply by replenishment units to order. Now you can see the cumulative CBM in your PO, and can estimate how much of a container it will take up.
Replenishment profit, replenishment date, forecast loss profit, sell through, cost value replenishment, MOQ, and replenishment CBM are all key metrics to consider when calculating replenishment. By having accurate statistics on hand, you will be able to properly forecast what you need and where, thereby diminishing the chances of stockouts and overstock.
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