As a buyer at a webshop, you know how difficult it is to get a grip on your stock. For example, you have to match purchasing to the buyer’s behaviour, and predicting that behaviour is not always straightforward. Then you have to store and manage your stock at the lowest possible cost. That is why buyers spend much time working with calculations and predictions.
It is a complicated process, in which a mistake is quickly made. Ask Nike, for example…
At the beginning of this century, a stock calculation blunder at the sportswear giant led to the overproduction of products that sold poorly. As a result, Nike had to manage a jam-packed warehouse, and the event led to a loss of $100 million and a 20% fall in share price.
So a (human) error in your stock management can have enormous consequences. Do you want to get your stock management in order? Then your stock value is an essential first step, but what exactly is stock value? How can you measure and optimise the stock value so that you minimise costs? In this blog, we will offer two calculation methods and practical tips on how to achieve a healthy stock value for your webshop.
Inventory value, what is it exactly?
Your stock value is a snapshot of the value of your entire stock. It increases when you buy stock and decreases when you sell products. Stock value is placed on the asset side of your balance sheet.
Why do you want to know this? First of all, the tax authorities want you to calculate this. However, that is not the most important thing. A strong correlation between turnover on the one hand and stock value on the other says a lot about whether your company applies efficient stock management. If you have too much money stuck in your inventory, this can harm your cash flow.
By calculating the average stock value over a more extended period, say 3 months, and comparing it with your turnover, a more accurate picture can be attained.
The average stock value can be calculated with a simple sum:
Month 1 + Month 2 + Month 3
So suppose: the stock value of your webshop was € 120.000 in January, € 100.000 in February and € 140.000 in March. Then the average stock value in that period was: € 120.000 (120.000+100.000+140.000/3).
Inventory costs, what does that include?
Stock costs are the expenses you incur for storing goods for a specified period. This includes the following expenses:
- Interest (cost of capital)
- Space (rental, transport & handling)
- Risk (ageing, theft, insurance & security)
As you may know, it is not always easy to find a healthy balance between your product availability and your stock value. Therefore, determining how many additional products to keep in stock is challenging. If products are stored too much, stock costs can be high, causing you to spend too much and end up with diminished profits.
By making smart calculations and analyses, purchasing can be adjusted, and inventory costs can be reduced to obtain a healthy inventory value.
Calculation method: calculating inventory turnover
An essential part of a healthy stock value is an acceptable turnover rate of your products. Calculating the turnover rate gives you more insight into how long your items are stored before you sell them. Inventory turnover can be calculated with the following formula:
Turnover at sales prices / Average stock sales prices = Stock turnover rate
So suppose the turnover at sales prices (IWO) in one year is € 120,000 and the average stock at sales prices is € 60,000, then your turnover rate is 2 (120,000/60,000 = 2).
The higher the figure, the less time stocks are stored, with the result that the capital invested in stocks is released which provides more liquidity.
Note: different product prices cause variable outcomes. For comparison: Apple’s average turnover rate in 2019 was 40.4 and at Amazon 10. If you have a webshop with beads, the number will be lower than if you sell expensive watches. It makes sense to primarily look at how you can improve the turnover rate compared to an earlier period.
This formula can be applied to a specific product, then mapped out over the average order period and compared with the turnover rate. The order period is the period between two purchase orders, i.e. the number of days you have the product on the shelf.
As a benchmark, you are doing well if your throughput is 2x your order period + delivery time.
Tip: clean up your dead stock
Imagine you have calculated your turnover rate figure, and it is a lot lower than you hoped. What is this about? Your deadstock could be the culprit; in other words, the stock you cannot sell. Deadstock harms your interest and cash flow on the one hand and takes up valuable space on the other hand. As a result, a product can end up costing much more than you paid for it.
You need to consider how you can better market this product. By reviving the marketing of the products, you might still be able to sell them. If this does not work or is there no budget for it, then consider bundling them with other products, offering them for free as part of a subscription, or as a gift for customer loyalty.
Conclusion: in addition to your best-performing article, your worst-selling product is as essential when it comes to reducing costs.
Calculation method: calculate optimal order quantity
When you order a product, there are always ‘everywhere’ purchase costs involved. The more often you order, the higher the total order costs. However, if you buy a product more regularly, you pay less stock costs. So the trick is to find the right balance.
That is why Camp’s formula – a classic mathematical calculation from the 20th century – was devised to calculate the optimal order quantity per year. The following values are required to perform this calculation:
- Optimal order quantity (Q)
- Product annual demand (D)
- Ordering costs (F)
- Cost of stock as a percentage of the price (h)
- Product price (P)
Use of the formula:
Example: suppose the annual demand for your product is € 15.000 (D), the order costs € 65,- (F). The stock cost as a percentage of the price is 2% (h), and the price of the product is € 2.50 (P). Then you get the formula √(2*17.500*70/2*2,5). This number represents an optimal order quantity (Q) of 624.
Disclaimer: in some situations, the Camp formula is incomplete or unusable. For example, when:
- the order costs differ
- the stock costs vary
- you are stuck to specific order quantities
you sell seasonal products
- you cannot collect the necessary information
Tip: bypass minimum order quantities
Minimum order quantities are common among suppliers. For example, offers at a furniture retailer such as ‘with 25 chairs you get 5 for free’, reduce the stock costs for the supplier, but increases them for you. Also, they may be products that you cannot sell. However, there are ways to avoid this situation.
Try to negotiate the minimum order quantities. Often suppliers are quite willing to make alternative agreements. If necessary, negotiate a slightly higher price to save money in the longer term. Alternatively, buy the items together with a friendly competitor and share the additional products.
Optiply, data-driven stock management
Calculating your turnover rate and optimal order quantity can be done on the back of a cigar box or using Excel. However, entering and maintaining these data takes a long time and incorrectly entered information leads to misleading advice and conclusions.
Optiply automates this process. Our web-based software analyses your data with unique algorithms and provides the most efficient purchasing advice. This dynamic advice is always available and works like a purchase agenda, which on average results in 26% stock savings and 7% more turnover.