Skip to main content
Key Takeaways

Inventory Is Everything: Understanding and managing inventory effectively is fundamental for ecommerce success. It ensures products are in stock when needed and aids in financial forecasting.

Count Your Blessings... And Your Products: Regularly counting inventory is crucial to maintain accuracy in stock levels, avoid overselling, and reduce the risk of stockouts that can frustrate customers and hurt sales.

Tech to the Rescue: Incorporating inventory management software streamlines the process, offering real-time visibility and data analysis, which can significantly improve operational efficiency and decision-making.

Calculating inventory is key to a successful ecommerce business. 

It’s critical to understand how quickly inventory moves in and out of your warehouse, whether you sell through your own store, a platform like Amazon, a brick-and-mortar shop, or a hybrid approach. 

Your inventory turnover ratio tells you when to restock, how much to hold at which point, and how to tie rate-of-sale into metrics like reorder points and restock flows. 

In turn, that prevents stockouts, overstocking, cash flow problems relating to either overstocking and tying up capital in unsold goods, and more. 

Mastering this ratio also improves operations, giving you opportunities to streamline and boost overall profitability while improving your financial analysis

That’s a lot to ask of one formula, but inventory turnover does it and more. 

This guide will walk you through how to understand, calculate, and optimize your inventory turnover so you can see those results. 

What Is Inventory Turnover?

Inventory turnover is the rate at which you sell and replace inventory within a given period of time

The basic calculation is the cost of goods sold (COGS) divided by average inventory:

Cost of Goods Sold COGS / Average Inventory Cost = Inventory Turnover 

You can monitor this per period (i.e., monthly, quarterly, annually), but most ecommerce stores opt for monthly calculations. 

A high inventory turnover ratio indicates efficient inventory management, strong sales, and little room for optimization. On the other hand, a low rate suggests weak sales, overstocking, and significant room for optimization. 

For example, if your Amazon electronics retail store has a COGS of $1,200,000 and an average inventory of $100,000, the calculation would be as follows: 

1,200,000 / 100,000 = 12

This reveals your store has a complete inventory turnover 12 times per year, meaning you replace the full inventory every monthly period. 

For most businesses, an inventory turnover of 12 would indicate efficient operations, depending on lead times, cost to replenish, etc. For example, if your cost to replenish is very high, you might be adding on extra costs by keeping inventory turnover at a monthly cycle. 

However, if your store has a COGS of $800,000 and an average inventory of $200,000, this would mean the store only sells through stock about four times per year, or once a quarter (800,000 / 200,000 = 4). 

This is concerning, as it drives high warehousing costs (especially with FBA) and potential cash flow problems, because capital is tied up in expensive, slow-moving stock. 

But, we’re getting ahead of ourselves.

We’ll dig more into how to interpret your results later on here. First, let’s look at the metrics that you need to calculate inventory turnover.

Key Components Of Inventory Turnover

If you have insight into your data, calculating inventory turnover is relatively simple. 

If you don’t though, you’ll first have to collect that information and make sure you establish a method of tracking and accounting for inventory on a periodic basis (i.e., inventory management software). 

The two variables used to calculate this important rate are COGS and average inventory, both of which an inventory management software solution will automatically calculate for you.

COGS

COGS is the most significant factor in the inventory turnover calculation. Quantifying it requires a firm grasp on your ingoing and outgoing stock, which you can total using this formula: 

Beginning Inventory + Purchases During a Given Period - Ending Inventory = COGS

Wherein: 

  • Period: A specified time frame, usually monthly but potentially aligned with sales or restock periods 
  • Beginning Inventory: The value of inventory at the start of the accounting period (e.g., inventory left over from the previous period) 
  • Purchases During a Given Period: Any inventory purchased during a specified time frame 
  • Ending Inventory: Inventory remaining at the end of the financial period 

COGS is used to calculate everything from gross profit (Revenue – COGS = Gross Profit) to inventory turnover, profit margins, pricing strategies, and more.

Average inventory

Average inventory defines the median amount of stock you have each period

Normally, you’d calculate this on a monthly basis or by aligning it with your inventory account periods. 

This formula allows you to pinpoint average inventory per month or some other defined period:

Beginning Inventory + Ending Inventory / 2 = Average Inventory

 For an Amazon retail store, that might look something like: 

50,000 + 70,000 / 2 = 60,000

You can turn that into annual average inventory by finding the sum of your monthly inventories and dividing by 12: 

Sum of all Monthly Average Inventory / 12 = Annual Average Inventory

However, most retail stores see significantly high and low peaks around holidays and vacation periods. 

So, it’s often better to calculate average inventory each month and adjust restock decisions based on those quotients

As an example, if your store has an sales of $50,000–$60,000 per month but $120,000–$150,000 during the holiday period and $30,000 in stock during the months of July and August, you might see something more like: 

∑ (55,000 x 8) + 120,000 + 150,000 + (30,000 x 2) / 12 = 64,000

Note: represents the sum of the subsequent values.

However, note that, provided your normal sales are relatively steady, and you have a low season, holiday peaks will still bring your average inventory close to normal. 

Stay in the loop! Discover what’s new in the world of ecommerce.

Stay in the loop! Discover what’s new in the world of ecommerce.

This field is hidden when viewing the form
This field is hidden when viewing the form
By submitting this form, you agree to receive our newsletter, and occasional emails related to The Ecomm Manager. For more details, please review our Privacy Policy. We're protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
This field is for validation purposes and should be left unchanged.

Interpreting Inventory Turnover Results

Interpreting Inventory Turnover Results infographic

Most brands should aim for an inventory turnover of five to 12, that is, inventory is fully replenished every four to eight weeks. 

That being said, a higher turnover rate isn’t necessarily positive, while a lower turnover rate isn’t definitively negative. 

Factors like supply chain disruptions, costs of restock and replenishment, and warehousing expenses all affect this calculation. 

High inventory turnover ratio

A high turnover rate is typically eight or more and indicates: 

  • Inventory moves in and out of your warehouses quickly.
  • Sales are healthy or high compared to forecasts. 
  • Warehousing costs per product should be minimal. 

On the other hand, it can also mean: 

  • Costs of reordering and replenishment are high (e.g., Amazon FBA’s Placement fees can be significant) 
  • The store risks facing a stockout if sales peak higher than expected 
  • Any strain on the supply chain can result in stockouts and backorders

Going back to the electronic store example, an inventory turnover ratio of 12 would see you completely go through stock every month. 

So, if you experienced a peak in sales and then a week's delay in shipment from the supplier, you’d run out of inventory. 

On average, high inventory turnover ratios are ideal for reducing costs. But, if too high, they’ll produce the opposite effect by adding shipping and stocking costs and possibly increase risks. 

Low inventory turnover ratio

A low inventory turnover ratio is normally five or lower and means you take eight or more weeks to go through a full inventory cycle. 

From this, you can infer:

  • Sales are lower than forecasted
  • You’re overstocking 
  • Warehousing costs are higher because of increased time to store 

However, low inventory turnover ratios can have benefits as well: 

  • Restock expenses are lower. If the cost of shipment is higher than the cost of storage, you may benefit from a lower inventory turnover ratio. 
  • Supplier availability is inconsistent. So, if supply chain disruptions are predicted, for example, overstocking may aid your business.

A low inventory turnover ratio can lead to overstocking, higher holding costs, dead stock, and cash flow issues. 

However, it’s important to look at the factors that influence your supply chain, distribution, and costs when optimizing. 

Industry inventory turnover benchmarks

Optimal turnover rates depend on your industry and cost of goods. For instance, if you look at Amazon’s product categories, industry benchmarks include: 

IndustryInventory Turnover Ratio BenchmarkNotes
Electronics8-12New innovations, high cost of inventory, and changing customer demand mean a higher turnover reduces risk for sellers.
Fashion and apparel4-8Seasonal trends and fashion cycles are your largest influencers, meaning inventory cycles should largely be tied to seasons.
Books1-2Depending on the books, most have high order and supply costs but low warehousing expenses and relatively stable demand after the first year of production.
Health and beauty6-9Products go out of date and should be moved through inventory relatively quickly to reduce dead and excess stock.
Home and kitchen3-6Steady demand means sales are predictable, and you can optimize for warehousing versus inbound shipment and placement costs.
Toys and games4-7With significant seasonal peaks, inventory has to be planned around selling three-quarters of it over two to three months of the year.
Grocery and gourmet food12-15Perishable goods and high frequency of purchase necessitate a high turnover.
Sporting goods3-5Seasonal and low demand for specific products cause a less frequent turnover, so brands can plan inventory around larger reorder points, depending on the local cost of warehousing.
Automotive parts and accessories2-4Specific demand and long product life cycles mean it’s usually more efficient to maintain stock for longer periods.
Pet supplies5-8Steady demand coupled with perishable products often translate to ideal restock points being about every two months.
Industry benchmarks for inventory turnover ratios

Essentially, your inventory turnover ratio will vary considerably depending on your product niche, rate of sales, seasonal demand, and the like.

Factors that influence inventory turnover

As mentioned above, several elements influence inventory turnover, including: 

  • Seasonality: Categories like toys and games see massive sales spikes during the holiday period, while other products like groceries won’t. 
  • Trends/innovations: Electronics and games or books can see demand hikes or become irrelevant due to innovations or new trends. 
  • Product life cycle: Products like books typically have a long product life cycle, whereas those like electronics can become outdated as soon as a new model is released. 
  • Consumer demand: Consumable goods typically have a much higher turnover than non-consumable goods. 

You should also take into account other aspects to tweak your turnover ratio: 

  • Cost of warehousing vs cost of supply: Most ecommerce sellers prefer to optimize for cost reduction. 
  • Risk of high/low stock: Find the safe middle ground between potentially overstocking or under-stocking by reviewing factors like market volatility, supply chain stability, and risk of damage in warehouses. 

With these two contributing elements in mind, you can determine whether it’s better to restock more frequently and take on added costs of shipment and placement, or order larger volumes at once and take on the risks of deadstock and overstocking. 

Improve your inventory turnover with a perpetual inventory system, ensuring faster restocking and reducing excess stock by tracking sales in real time.

5 Strategies For Improving Inventory Turnover

5 Strategies for Improving Inventory Turnover infographic

You can improve your inventory turnover in a number of ways. 

In most cases, these strategies largely require keeping an eye on inventory and adopting a quality inventory management solution

1. Leverage just-in-time inventory to limit storage costs

Just-in-time-inventory (JIT) is an inventory management strategy that aims to maintain high inventory turnover ratios by cutting stock down to what’s needed for immediate sales

That means you look at lead times for reorder and restock and order the minimum amount necessary to make it through that period. 

JIT frees up cash flow, lowers the risk of dead or wasted stock, and reduces the need for warehousing.

However, it can add to costs and increases the possibility of stocking out if demand isn’t properly forecasted or supply chain disruptions slow delivery. 

2. Use demand forecasting for prognostication

Demand forecasting uses previous sales data to predict conversions for an upcoming period

That allows you to adjust inventory per period and stay in line with seasonal demand. Here, factors like seasonality, historic sales trends, external events, and industry benchmarks play a role. 

Inventory management software also increasingly employs AI to help businesses better anticipate sales, so you ensure products purchased during a specific period matched the predictions. 

3. Do regular inventory cycle counts

Regular inventory cycle counts let you categorize inventory and count it in subsets (such as by category, as you do with ABC analysis). 

You can then audit and take inventory more frequently, without conducting a full count at once. 

For example, many large warehouses implement daily cycle counts using low periods to mark a category or section. 

This reduces the labor for annual physical counts while ensuring inventory values are correct

4. Set your safety stock and reorder points

You can set safety stock and reorder points by calculating lead time for replenishment. Then, use your rate of sale to determine how much inventory you normally sell during that period. 

So, first find these numbers:

  • Average daily sales: Sales made per month divided by 30
  • Safety margin: Number of days you’d like to have safety stock as a buffer 
  • Reorder point: The point at which you order new stock 

Once you have these variables, you can find your reorder point as follows:

(Lead Time in Days +Safety Margin) x Average Daily Sales = Reorder Point

If you sell five products each day, you'll need at least seven days’ worth of safety stock to cover any supply chain disruptions. 

With a lead time of 18 days from order to manufacturer, you'd want to submit a purchase order when inventory hits 125 items.

Most inventory management software solutions will automate this for you—you just have to decide on priorities for safety stock. 

5. Manage slow-moving stock

Slow-moving stock opens the risk of overstocking and increased holding costs, and so can hurt sales on platforms like Amazon. 

An ABC analysis allows you to see which items are slow so you can optimize accordingly. 

Some inventory naturally doesn’t move fast. 

In this case, you can refine your purchase and sales strategy, experiment with different marketing and merchandising, or reduce order volumes with the supplier to decrease stock levels. 

How Inventory Management Software Can Improve Inventory Turnover

Inventory management software (IMS) is a must-have for any ecommerce store. It uses real-time data to: 

  • Automatically calculate inventory turnover per period (typically monthly and yearly)
  • Track inventory in real time
  • Deliver advanced demand forecasting
  • Optimize and potentially automate reorder points
  • Prevent stockouts 
  • Integrate with financial statements for automatic COGS calculations 

You want a robust solution that takes the work out of calculating inventory turnover ratio so all you have to do is look at a dashboard. 

And, as with many things, The Ecomm Manager has opinions. Our favorite inventory management software solutions are (drum roll):

Final Thoughts

Inventory turnover ratio determines how quickly stock moves through your warehouses, so you better understand your holding costs, rate of sale, and operational risks. 

Optimization depends on your niche and industry though, as a “good” inventory turnover ratio depends on what you sell, your holding expenses and risks, and supply costs. 

You need to balance these elements with rate of sale, lead times, and seasonal peaks to minimize costs while preventing stockouts—all of which an IMS solution can handle automatically. 

The world of ecommerce moves fast—and so do you. Subscribe to our newsletter with the latest insights for ecommerce managers from leading experts in ecomm.

Inventory Turnover FAQs

Let’s end on some quick answers, in case you still had questions.

What is a good inventory turnover ratio?

A good inventory turnover ratio typically falls between five and 12, meaning you sell and replace inventory five to 12 times a year.

However, the ideal ratio depends on your industry—higher for fast-moving consumer goods, lower for luxury items.

Is high inventory turnover good or bad?

A high inventory turnover is generally good as it indicates strong sales and efficient ecommerce inventory management. But if it’s too high, it could mean you’re not keeping enough stock to meet demand, leading to lost sales.

What should I do about a low inventory turnover ratio?

A low inventory turnover ratio suggests overstocking or weak sales.

To fix this, analyze your inventory to identify slow-moving items, adjust pricing strategies, and improve your marketing efforts to boost sales.

How do I increase my inventory turnover rate?

To increase your inventory turnover rate, streamline your ordering process, optimize your stock levels, and implement dynamic pricing strategies.

Additionally, enhancing your marketing campaigns can help move products faster and keep your inventory fresh.

Rachel Go

Rachel is the marketing director of MyFBAPrep, an ecommerce warehouse network for Amazon aggregators, enterprise brands, and top Amazon sellers. Operating a global network of more than 100 warehouses and 85 million square feet of operating warehouse space, MyFBAPrep offers a full suite of ecommerce 3PL services. She creates content that wins customers for B2B ecommerce companies, and has scaled organic acquisition efforts for companies like Deliverr and Skubana.