As an E-Commerce entrepreneur, finding the right balance of inventory is crucial. You don't want to tie up your resources and incur unnecessary costs with excess stock, nor do you want to fall short on meeting customer demand. It's a delicate balancing act, but understanding how to manage it is not as complicated as it may seem.

The Formula

One helpful formula can assist businesses in determining their optimal inventory level based on their sales and delivery patterns. By dividing the average number of units sold per month by the number of inventory deliveries received monthly, you can calculate the average number of units sold per delivery. This information can then be used to adjust your inventory levels accordingly.

To calculate the optimal inventory number, use the following formula:

Optimal Inventory Number =

(Average number of monthly units sold per SKU / Number of deliveries per SKU) + Safety Stock

Let's break down each component of the formula:

1. Average monthly units sold per SKU: This represents the average number of units sold for a specific Stock Keeping Unit (SKU) in a given month.

2. Number of deliveries per SKU: This indicates how often a new order of a specific SKU is delivered in a month.

3. Safety stock: This refers to the amount of inventory held in excess of the average monthly demand. It serves as a buffer to protect against unexpected demand or delays in delivery.

An Example

Let's illustrate the formula with an example:

• Average monthly units sold per SKU: 100 units

• Number of deliveries per SKU: 2 deliveries per month

• Safety stock: 10 units

• Optimal inventory number: (100 units / 2 deliveries per month) + 10 units = 55 units

In this example, the optimal inventory level for this particular SKU is 55 units. This means that you should maintain a minimum inventory of 55 units at all times. This ensures that you have enough units to meet customer demand while avoiding stock outs.

It's important to note that this example is just a starting point, and the optimal inventory number will vary by SKU. Therefore, use this formula as a foundation and adjust it as necessary to meet the unique needs of your business. For instance, if your company sells seasonal products, you may need to hold a higher inventory level to meet the demand during peak seasons.

Other Factors to Consider

Additionally, consider the following factors when calculating the optimal inventory number:

1. Demand for the SKU: Analyze the sales history and market trends to estimate the demand for a particular SKU accurately.

2. Lead time for the SKU: Determine the time it takes from placing an order to receiving the inventory. Consider supplier lead times and shipping durations.

3. Cost of carrying inventory: Assess the expenses associated with storing inventory, such as warehousing, insurance, and depreciation.

4. Risk of stockouts: Evaluate the potential consequences of running out of stock, such as lost sales, dissatisfied customers, and damage to your brand reputation.

The Takeaway

By taking all these factors into account, you can calculate the optimal inventory number for your business. Maintaining the right level of stock ensures you have enough units to meet customer demand without overstocking and allows for effective inventory management.

*****

The Bookkeeper Online

We are Certified E-Commerce Bookkeepers dedicated to the success of our clients.
We provide accurate financial reporting so you may gain a clear and comprehensive view of your business's performance, progress, and potential