Boost Your DTC Business with Inventory Velocity: A Comprehensive Guide

In the dynamic ecosystem of Direct-to-Consumer (DTC) businesses, inventory management isn’t just a logistical concern; it’s a strategic powerhouse: once tapped, it can propel your business forward with unprecedented….velocity.

One of the most potent metrics at a DTC company’s disposal is Inventory Velocity: put simply, this is a measure of how quickly inventory is moving through your production process so you can identify issues and bottlenecks and take immediate actions.

Understanding and harnessing inventory velocity can truly be the difference between stagnation and startling growth for your e-commerce enterprise.

Here, we’ll dive deep into the waters of Inventory Velocity, ensuring you’re well-armed to navigate these integral analytics for your DTC business. Let’s begin!

Understanding Inventory Velocity

Inventory Velocity is not merely about the speed at which inventory moves; it’s a key indicator of sales productivity and the health of your supply chain.

Inventory velocity, also known in some circles as “inventory turnover”, is a crucial metric that assesses how many times a company sells and replenishes its inventory within a specific period, typically a year.

By calculating inventory turnover, brands can gauge whether they hold an optimal amount of stock to meet market demand effectively.

Benefits of Calculating Inventory Velocity

Before we get into the nuts and bolts of calculating inventory velocity, let’s take a quick look at why you should be calculating and understanding this metric:

Improved Forecasting Accuracy: By measuring inventory velocity, e-commerce entrepreneurs get a clearer picture of which products are moving quickly and which are slower to sell. This data is invaluable for predicting future product demand and optimizing your supply chain accordingly.

Better Inventory Management and Cash Flow: A high inventory turnover means efficient stock management. This not only reduces the risk of stockpiling but also ensures your cash is not tied up in unnecessary inventory, potentially empowering other areas of your business that require investment.

Enhanced Customer Satisfaction and Retention: Customers are generally unforgiving towards out-of-stock situations. With inventory velocity, you can restock your fast-moving items proactively, providing a seamless shopping experience and fostering repeat business. When manufacturers have a healthy inventory velocity, it’s known as Inventory Optimization.

How to Calculate Your Inventory Velocity

In this section, we’ll outline how to calculate your Inventory Velocity / Inventory Turnover Rate.

The basic formula for calculating your turnover rate is:

Inventory Turnover Rate = Cost of Goods Sold (COGS) / Average Inventory Value

Let’s break this down a little to make sure each part of this turnover formula is clear:

Cost of Goods Sold (COGS): This refers to the total cost incurred for producing and selling your products, including materials, labor, and direct expenses. Not sure how to calculate this? See our blog post here: How to calculate your COGS

Average Inventory Value: This is the average value of your inventory over a specific period. To calculate this, add up the start and end inventory values for a given period (e.g., monthly or annually) and divide by two.

Analysing your Inventory Turnover Rate Result

Ideally, a healthy inventory turnover rate falls within the range of 2 to 4.

So what happens if your inventory turnover is outside of this range?

A rate below 2 signals an excess of stagnant inventory (i.e you are holding too much stock), while a rate exceeding 4 indicates a heightened risk of stockouts (i.e. you aren’t holding enough stock).

The power that comes with knowing your inventory turnover rate is that now you can do something about it.

Let’s take a quick look at an example to consolidate the thinking:

Imagine a scenario where you own a flourishing soap business, called Pure Suds Co. After experiencing a surge in demand and a couple of stockout situations, you quickly realize managing inventory through static numbers in spreadsheets isn’t sustainable. You decide to calculate your Inventory Velocity to improve operations.

In January, your COGS was $20,000. Your inventory value at the beginning of January was $5,000, and by the end, it increased to $10,000, giving you an average inventory value of $7,500. Using the formula provided:

Inventory Turnover Rate = COGS / Average Inventory Value Inventory Turnover Rate = $20,000 / $7,500 = 2.67

This turnover rate is within the “healthy range” which indicates that, in general, Pure Suds Co. has an inventory strategy that is well optimized.

Strategies to Improve Inventory Velocity

Calculating your Inventory Velocity is merely the beginning. The real magic lies in boosting this metric to catapult your DTC business into the stratosphere.

So what can you do if you find your inventory velocity is outside of the desired range?

Let’s firstly take a look at some steps you can take if you have an Inventory Velocity under 2 (as a reminder, this is a velocity where you have too much stock on hand):

• Evaluate your production process: identify and address any bottlenecks that are slowing down inventory turnover.
• Review your purchase order history for raw materials: are you ordering too far ahead of time, or ordering too much each time? Consider ordering smaller amounts more often to smooth out your cashflow.
• Analyze your sales data: pinpoint which products are selling slowly and consider phasing them out, bundling products to encourage multiple sales, or offering promotions to increase their movement.

And if you have an Inventory Velocity above 4 (this means you aren’t holding enough stock):

• Increase your safety stock levels: this can help avoid stockouts during high demand periods.
• Improve demand forecasting: invest in advanced tools such as Craftybase to accurately predict and meet future product demand (we’ll cover this below in more detail).

Using Technology to Optimize your Inventory Management

Inventory tracking software can streamline the process of monitoring sales and stock movements. It also empowers you to make data-driven decisions rapidly, pivoting and adapting to market changes with agility.

Integrating an effective inventory tracking system like Craftybase can drastically enhance your DTC brand’s operational efficiency.

Craftybase offers a specialized inventory solution that caters specifically to the needs of the DTC landscape, simplifying the complex process of tracking your products, materials, and costs.

With real-time analytics and tailored reports, it provides invaluable insights for optimizing your inventory turnover.

Are you ready to streamline your manufacturing workflow and bolster your bottom line? Lean into the future of inventory management with Craftybase. Take the first step towards unparalleled inventory optimization — Start your free Craftybase trial today.

Conclusion

Inventory Velocity is not just another data point. It embodies the very essence of a DTC company’s existence – to supply products efficiently and promptly to a waiting market.

Armed with the insights and strategies outlined in this comprehensive guide, you now have the blueprint to sharpen your competitive edge, rev up your inventory turnover, and optimized your path to profitability.