Inventory turnover is a measure of how fast a business sells through its existing inventory. If inventory sits on the shelves, sales of a particular product may be lagging, and inventory that moves quickly suggests that larger restocks may be needed to meet different seasons of demand. Tracking inventory turnover helps to prevent stockouts and manage reorder times. Optimising inventory turnover reduces warehouse costs and ensures a fast response to changes in customer demand. 

Why is inventory turnover important in e-commerce CPG?

Inventory turnover is a critical part of running just about any business, but it is especially important for consumer packaged goods (CPG) brands. CPG items are everyday items that consumers use up and repurchase. Unlike clothing or accessory brands, CPG goods frequently have an expiry date and must be sold quickly. You might be able to sell last year’s fashions at this year’s Black Friday sale, but you can’t sell last year’s milk! 

How can you measure inventory turnover?

Inventory turnover ratio (ITR) measures how efficiently your business turns over the goods you have ready for sale. Inventory turnover is calculated using the formula:

Inventory turnover ratio = Cost of Goods Sold (COGS)/Average Inventory 

Cost of goods sold represents the cost of your merchandise, including raw materials from suppliers, manufacturing costs, and labour. It represents the cost of getting the finish item into stock for your e-commerce store. COGS does not include costs generated later on in the supply chain, such as marketing or logistics. 

For measuring internal metrics as a founder or management team, you can choose a turnover period that makes sense for your brand. Remember to calculate the total amount of COGS you spent during this time — for example, 90 days. Average inventory levels also need to be calculated for the same 90 day time period. Average inventory level uses the formula:

Beginning Inventory + Ending Inventory / 2

Using the beginning and ending inventory levels gives you some idea of the average inventory stock sitting in your warehouse.  The Inventory Turnover Ratio works out how much you spent on this stock, and how much you moved in a given time. If you want to get especially granular, you can use the Day Sales of Inventory (DSI) formula:

DSI = Average Inventory/COGS x 365

DSI tells you how many days, on average, inventory sits before being sold. 

How often should ecommerce CPG brands measure inventory turnover? 

The time period your management team uses to measure turnover for practical purposes might differ from official financial reporting timelines, like the ones required under US GAAP. Accounting standards will also dictate how the inventory is measured (like FIFO, LIFO, or weighted average cost). 

Accounting standards are also where you’ll bump up against expanded formulas for inventory turnover that take into account your supplies (raw materials), work in progress (WIP), and finished goods, as well as purchases made from your supplier and manufacturing costs. For internal purposes (say, a founder or management team wanting a better understanding of costs and sales), you could choose to track quarterly, monthly, 60 day, weekly, or even daily turnover times — so long as the period you choose is consistent over time. 

Consistently checking in on inventory turnover can also help:

• Optimize logistics: reorder supplies based on changes in daily or weekly inventory levels
• Recognize goods that are nearing expiry and price them to sell
• Forecast demand peaks and spot high performing product lines. 

Inventory turnover is a relatively simple workflow that can be enormously helpful for ecommerce CPG brands. Knowing how much each product costs, as well as how long it takes to sell, will give any founder a clearer picture of their business’ financial health.