3 Trends Affecting Inventory Velocity: What Retailers Need to Know
Think of inventory velocity as the magical engine that turns stocks into cash. Hold onto inventory too long, and it becomes a drag on profitability, between carrying costs and dead stock. It’s an evergreen issue in retail, and a top metric for determining the health of the business. In the past, getting inventory velocity right, improving the turn rate, has been more art than science, relying on experienced industry hands. Fortunately, innovative technology is tilting the balance a bit the other way.
There are many facets to inventory velocity, but we’ll look at how three trends are impacting a company’s ability to get to an acceptable turn rate:
- The increased volatility in consumer preferences and spending habits.
- How using technology is optimizing inventory prioritization and SKU proliferation.
- How true visibility is table stakes for driving dynamic inventory decisions.
Inventory Velocity: A Vital Metric in a Dynamic Marketplace
The standard inventory velocity formula is the cost of goods sold (COGS) divided by the average inventory. The resulting figure is the number of times an entire inventory is held during a fiscal year and how much is left over.
In fashion, apparel and accessories, inventory turn ratios typically range between 4-6 per year, but can go as high as 12 or more, especially in fast fashion. The average for the industry in Q1 of 2024 was 4.62, according to CSI Market.
A higher inventory turnover ratio means faster stock-to-cash conversion. Sometimes, it can mean that high-demand inventory is not being replenished fast enough. Either way, inventory velocity is a key indicator of business performance and fiscal health.
3 Inventory Velocity Trends to Watch
While retailers always need to monitor inventory velocity and its performance against forecasts, current market trends are having an outsized impact on the dynamic of stock flows.
1. Consumer Demand Remains Volatile
According to a closely watched University of Michigan index, consumer sentiment was at a six-month low as of mid-May 2024. Current economic concerns are making people less likely to make discretionary purchases, perhaps even dialing back on essential goods or making trade-offs.
At the same time, consumers expect retailers to provide them with a wide assortment of low-cost products that will magically appear when, where, and how they want them. This has been dubbed the “Amazon effect,” as the e-commerce giant’s ability to offer low-priced goods served up super fast has set the bar high for everyone else.
As a result it is crucial for retailers to develop agile inventory management strategies that can adapt to fluctuating demand patterns and high consumer expectations. The challenge lies in the fact that most retailers have a limited view of their inventory. Advancing inventory management requires a comprehensive perspective that encompasses both physical and online channels.
2. Technology Impacts Inventory Prioritization, SKU Proliferatione
This naturally leads to the next issue: inventory prioritization. While the challenge of deciding which items to stock based on demand, profitability, and shelf space is longstanding, advancements in technology have transformed the process. Traditional models and tech stacks often fall short of providing a complete view of inventory dynamics.
Algorithm-based inventory management software, complemented by additive technology and machine learning, now offers a comprehensive solution. This approach integrates data from various systems and adjusts SKU levels dynamically, ensuring inventory velocity remains within an acceptable range. It represents a significant advancement over conventional inventory management methods by providing a more accurate and adaptive system.
SKU proliferation, i.e., adding new items and expanding lines in response to customer demand, is a great way to generate sales. But broadening your assortment also adds complexity to inventory management and logistics, as older, slower-moving stocks need to be cleared out to make room. Innovative software can dynamically adjust pricing and promotion to accelerate the sale of current stock while segmenting SKUs based on velocity and recommending ways to deal with each appropriately.
3. Inventory Visibility More Crucial Than Ever
Like the above discussion on inventory prioritization, inventory visibility has always been a key capability, but never more so than in this period of high volatility and complexity.
Inventory visibility, however, has proved to be an elusive goal for most retailers. This is especially true in an unified commerce world where orders come in from everywhere, and data silos prevent a dynamic view of what’s on hand and available to promise. As a result, you get channel conflict, cannibalization, and stockouts that disappoint customers and partners.
This is changing, however, with the introduction of systems that provide dynamic inventory visibility across channels and physical locations (stores, warehouses, drop-ship partners, etc.). Inventory fluctuations and demand changes can be monitored dynamically, resulting in greater agility in allocation based on shifting market dynamics and customer preferences.
Faster Inventory Velocity In Disruptive Times Is Now Possible
Getting inventory velocity right, a high priority for the retail balance sheet becomes more difficult during a period of market volatility and high customer expectations. While the industry has done a great job bringing down bloated stock levels from two years ago, siloed, channel-based data continues to be a headwind against true inventory optimization.
Dropit is an innovative technology company that breaks down silos and explodes the “black box” problem in unified commerce data. Dropit serves as a transformative layer that sits atop a retailer’s technology stack, amplifying their ability to manage commerce efficiently and streamline supply chain processes. This highly advanced platform blends seamlessly with existing technology, enabling swift decision-making and Implementation & Integration
To see the power of Dropit in action, contact us today.
