Understanding Amazon inventory turnover and how to optimize it

This is a guest post from Matthew Rickerby. Matthew is the Director of Marketing at Skubana, a leading solution for multi-channel, multi-warehouse DTC brands. For the past 10 years, he’s covered eCommerce topics ranging from SEO to supply chain management.

Measuring and understanding your eCommerce inventory turnover is critical to manage your inventory effectively and profitably. When you sell on Amazon, diving into your specific Amazon inventory turnover rate is key to optimize that channel.

In this guide, we’ll dive into what Amazon inventory turnover is, why it’s important to measure and track, and a step-by-step guide to calculate your Amazon inventory turnover. Finally, we’ll discuss what your ideal inventory turnover rate should be when selling on this eCommerce platform.

What is an ideal Amazon inventory turnover ratio?

Inventory turnover is the rate at which a retailer’s inventory is bought and sold over a given period of time. The ratio is generally expressed as a cost of goods sold to inventory held.

Similarly, Amazon inventory turnover refers to the rate at which your Amazon inventory is bought and sold. This measurement can determine whether or not you have the right amount of inventory on hand at any given time in relation to your sales performance.

Each time you replenish your inventory over a given period of time, you experience inventory turnover. This number will show you how your Amazon sales channel is operating and where you might have room for improvement in your inventory management.

You can visualize your Amazon inventory turnover using the following formula:

Amazon Inventory Turnover Ratio (ITR) = Total Cost of Goods Sold (COGS) ÷ Average Inventory During Period of Time

Sell-through rate vs. inventory turnover ratio

If you sell on Amazon, you’re likely familiar with the platform’s own version of an inventory turnover metric — your Amazon sell-through rate.

While these two may seem similar, Amazon’s sell-through rate is based on a rolling 90 days. Looking at the previous rolling 90 days, your sell-through rate is calculated based on the number of units you sold and shipped divided by the average number of units available across fulfillment centers at that time.

It’s important to note this calculation cannot replace your Amazon inventory turnover ratio.

Just getting started with Amazon? Read more about the key differences between fulfillment options when selling on this platform: Everything you ever wanted to know about Amazon FBM.

Why is inventory turnover important?

Calculating your inventory turnover ratio on Amazon is a key inventory KPI. This number allows you to analyze your inventory management and can determine if you’re falling prey to either of the following inventory issues:

  • Not having enough inventory on hand: If you restock inventory too often in a given time period, you might not have adequate inventory on hand. This can cause you to lose out on potential sales and waste money on rush fees as you scramble to keep items in stock. If your inventory turnover rate on Amazon is too high, this may indicate you need to rethink the number of units you stock at any given time.
  • Having too much inventory on hand: If your inventory turnover occurs too infrequently, you may be wasting cash flow on storing low-demand goods. This increases holding and warehouse costs while also preventing you from restocking high-demand items.

Your Amazon inventory turnover ratio can help you improve your restocking process and points to areas where you need to forecast better. Additionally, this ratio can inform your marketing decisions and determine what products you need to move.

How do you calculate inventory turnover?

Simply put, your Amazon inventory turnover ratio is the number of times your inventory is sold and replaced during a set period of time. Generally speaking, you should use a year-long period to calculate this ratio.

Use the following steps to calculate your eCommerce business’s Amazon inventory turnover:

Step 1: Determine your product inventory levels

A key part of your inventory turnover equation is determining your product inventory levels. This number will help you calculate your Cost of Goods Sold (COGS). Depending on your Amazon inventory management setup, you’ll either need to determine inventory levels manually or use an automated system to pull real-time numbers.

Step 2: Calculate your COGS

Once you know your product inventory levels, you can move on to calculating your Cost of Goods Sold, or COGS. This number reveals how much you spend turning inventory into a finalized sale.

Use the following formula to calculate your COGs:

Beginning Amazon Inventory + Purchases During Period of Time – Ending Amazon Inventory = COGS

As a bonus, once you have calculated your COGs, you can also use this number when determining your gross profits.

Step 3: Assess your average inventory

The next metric you will need to pinpoint is your average inventory. To calculate this number, use the following formula:

Beginning Amazon Inventory + Ending Amazon Inventory During a Single Month ÷ 2 = Average Amazon Inventory

Step 4: Reveal inventory turnover ratio (ITR)

Now that you have these baseline numbers, you can calculate your Amazon inventory turnover ratio with the following equation:

Amazon Inventory Turnover Ratio (ITR) = Total Cost of Goods Sold (COGS) ÷ Average Inventory During Period of Time

Deciphering your ITR numbers

For most businesses, a good Amazon inventory turnover ratio should be between 5-10. This implies you turn over your Amazon inventory approximately every one to two months. But if you have an unusually low or high ITR, it could point to a few situations:

  • You might be overstocking products that are in low demand. This can lead to a low inventory turnover and may even necessitate dead stock disposal.
  • You might be understocking products that are in high demand. This can cause a higher inventory turnover.
  • You might have pricing issues. Too high or too low of an ITR can indicate you’re pricing your products incorrectly based on demand and the current supply chain.
  • Your marketing is not in sync with your product levels. An off-balance ITR might be due to marketing the wrong products at the wrong time.

Step 5: Days’ sales of inventory (DSI): Another way to calculate ITR

In addition to the traditional method of calculating your Amazon ITR, you can also gauge your inventory management through an alternative ratio called Days Sales of Inventory (DSI). This calculation measures the total number of days it takes for your inventory to convert into a final sale.

You can calculate it with the following formula:

(Average Amazon Inventory ÷ COGS) x 365 = Days Sales of Inventory

Meaning of DSI numbers

Similar to your ITR, a low or high DSI could be due to a variety of reasons: When this number gets too high, it could indicate your inventory is being poorly managed or that you have supply chain issues.

A low DSI generally means you hold on to stock for too long. This might be due to stocking products that are in low demand, missing out on marketing opportunities, or poor forecasting around inventory seasonality.

The ideal Amazon inventory turnover ratio

As you measure your Amazon turnover ratio, you should decide what a good inventory turnover ratio is for your business. While a good rule of thumb is 5-10, the ideal Amazon turnover ratio for your business might be different depending on your niche.

For example, lower ITRs are common in luxury markets, while higher ITRs are the norm in perishable markets.

Ideally, you’ll want to benchmark your business against others in your industry. Tools like Ready Ratios are a good place to start, but you should also analyze your own data. The more consistently you track your inventory details, the better you can understand what ratios result in your most profitable periods. This can help you pinpoint the ideal Amazon inventory turnover ratio for your business.

How to improve inventory turnover ratio

Once you have calculated and analyzed your inventory turnover ratio, there are a number of ways to improve your inventory turnover ratio.

First and foremost, it’s important to review your forecasting techniques. If your business can better forecast its customer’s demands, this will reduce your inventory levels and, in turn, increase your inventory turnover ratio. In addition, this improved forecasting will allow you to focus on your business’s top-selling products. Eliminating the products that have a lower turnover ratio, will help to improve the overall inventory turnover for the business.

However, forecasting can be easier said than done. In the instance that you have an excess of slow-moving stock, you can use product bundling to get them off the shelves and out the door.

Finally, you can improve your inventory turnover ratio by increasing sales. Revisit and formulate your marketing strategies to reach a wider audience, increase demand and push sales.

How to optimize your Amazon inventory turnover

When using Amazon as a selling channel, the first thing to do is choose an Amazon inventory management system. This system should provide you with real-time insights into inventory levels so you can calculate your inventory turnover ratio more accurately.

From there, you can optimize your turnover using a few methods:

  • Sync your sales and marketing data with your inventory data: If your marketing and sales teams  operate in their own silos apart from your inventory management system, you’ll inevitably suffer from inventory issues. Make sure your marketing teams plan their campaigns around real-time inventory data and work with sales to better understand inventory turnover ratios. This can help keep everyone working toward the same ITR ratio goals.
  • Use smarter automation: When you use a sophisticated inventory management platform, you can rely on automation to forecast your inventory needs intelligently. This, in turn, helps you avoid inventory mistakes, such as over or understocking.
  • Use product bundling to move inventory: An effective method for moving stale inventory is to provide product bundling suggestions. This allows you to pair low-demand items with high-demand ones and thus move inventory that’s eating away at profits due to holding fees.

Want to learn more about moving stale inventory? Check out this guide: How to boost eCommerce conversions with giveaways and contests.

Integrate Skubana

Inventory management is complex, and it becomes even harder to navigate when you open up new sales channels. If you’re looking to utilize Amazon as your next selling platform, or are concerned about how well you’re managing your existing Amazon inventory levels, consider implementing Skubana.

Skubana’s inventory management system allows you to track inventory in real time. Using this data, you can identify which inventory is moving slowly and which is being depleted too quickly. You can swiftly understand your inventory turnover and use that data to achieve a better ratio. If you’re interested in learning more, schedule a demo of Skubana today.