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Ecommerce metrics

Inventory ageing — Ecommerce metric refresher

Versha Kamwal
December 16, 2020
5
mins read

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Inventory ageing (also known as average age of inventory) is an ecommerce metric that enables you to determine how long SKUs (Stock Keeping Units) remain in your warehouse before a sale. In simpler terms, it tells us how many days it takes a company to sell its stock.

The following illustration shows the inventory ageing or average age of inventory formula:

Average Age of Inventory Formula
Average Age of Inventory Formula

Let's see how to calculate inventory ageing or average age of inventory with an example,

  1. A company wants to calculate inventory ageing annually
  2. It owns inventory valued at INR 2,00,000
  3. Cost of goods sold (COGS) is INR 8,00,000
  4. The average age of inventory = 2,00,000 / 8,00,000 X 365 =91 days

Note: If the company sells its inventory quickly, the average age of inventory decreases, which means more revenue for your business.

Why should businesses calculate inventory ageing?

By taking inventory ageing into account, businesses can deal with inventory or merchandise piling up in storage and take revenue-oriented decisions.

There are many reasons for businesses to calculate inventory ageing, such as:

  • Understand how fast inventory is selling
  • Identify slow-selling products
  • Analyse the risk of inventory becoming obsolete
  • Formulate an effective sales plan

Benefits of lowering the average age of your inventory

  1. Avoids long-term storage fee
    When you store your inventory for a long duration of time, the storage costs shoot up exponentially. Especially in case of FBA or 3PL warehouses, where units taking up valuable storage space are charged over a certain time period—thus, cost you additional fees.
  2. Helps you have fresh products in front of your customers
    In industries like food and beverage (F&B) and pharmaceuticals, products have expiration dates. If these products sit on the shelves for too long, they would literally go stale. Even in the fashion industry, customers are not likely to shop for clothing from previous seasons.
    You need to invest in the inventory that increases your cash flow and gets you the quickest Return On Inventory Investment (ROII).
    Moreover, to have a positive and creditable brand image, you need to offer fresh products to your customers.

How to lower your inventory ageing?

There are various strategies to lower your ageing inventory, but it is essentially done in one of the two ways:

  1. Encouraging your customers to purchase more products
  2. Incorporating merchandising techniques to clear out stock

Strategies to lower inventory ageing

1. Sell on multiple sales channels

You can expand your reach and improve conversion rates by selling on multiple sales channels with multiple integrations. More channels will significantly boost your sales and increase your sales velocity and ultimately, increase your revenue.

Eshopbox multiple sales channels
Eshopbox's integrations

2. Use First-In, First-Out (FIFO) strategy

You can manage your stock using a first-in, first-out (FIFO) strategy; the items received first will be utilised to fulfil customer orders first. And, to compute the age of a product, you can go through your historical stock backwards, subtract stock intakes from the current stock until you reach zero. It will lower inventory ageing significantly.

First-In, First-Out (FIFO)
FIFO strategy

3. Distribute your inventory

By splitting your inventory across a distributed network of fulfilment centres, you can segregate your products into prime and non-prime locations. Instead of stocking all the units in one place and then sifting through the pile. Reserve prime location for frequently purchased items and shift slow-moving SKUs to non-prime locations. It would also help you serve your customers better.

Eshopbox's distributed fulfilment network
Eshopbox's distributed fulfilment network

4. Use merchandising techniques

You can identify slow and poor selling inventory and bundle them with fast-selling inventory to prevent inventory ageing. Such merchandising techniques like product kitting, upsells, and free shipping over minimum threshold enable you to sell your inventory as quickly as possible and also increase your Average Order Value (AOV).

MAC cosmetics increases AOV by bundling products together

5. Introduce loyalty or rewards programs

To increase your sell-through rate and clear inventory fast, you can drive repeated purchases through a powerful customer retention strategy, i.e. loyalty or rewards programs. Customers can earn points that can be redeemed on future purchases or avail exclusive benefits.

DICK'S Sporting Goods boasts an exciting loyalty program
DICK'S Sporting Goods boasts an exciting loyalty program

6. Run a flash sale

By hosting a flash sale, you can clear out inventory in a matter of few days. A sale attracts online shoppers to impulse buy and boosts sales in a jiffy. It not only helps break-even on overstocked and poor-selling items but also make room for new inventory.

Global desi, a premium ethnic attire brand hosting a flash sale

7. Donate excess inventory

Not all acts are driven by revenue. If you have a cause in mind, and your product is a good fit, then go ahead and donate. What’s more, consumers trust brands that are committed to a cause.

DSW donates its shoes to contribute to community service

Bottom line

Sometimes merchandise is hard to move, warehouse fees pile up, and profit margins shrink. By calculating inventory ageing and applying it, you can make the right inventory liquidation decision. It will give you more insight into your retail business and permit you to adjust your inventory. With action-oriented steps, you can lower inventory ageing and break-even on slow or poor-selling products.

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