For merchants, cash is king, and inventory is one of the most expensive assets to hold. It’s critical to make sure that your cash isn’t trapped in inventory that isn’t selling fast enough, especially in a fluctuating market. Good inventory planning is key to ensuring you have just the right inventory to meet demand. You want to order the right amount of product to have stock on hand for customers that want to make a purchase, but not so much that you are draining cash flow and paying too much for storage and warehousing costs.

One way to ensure you have the right amount of inventory is to use formulas that take into account how fast you sell certain products and how long it takes you to get more stock. An important metric to use in this process is known as Weeks of Supply.

Finding the right inventory balance

In retail and e-commerce, achieving the right inventory levels requires finding the balance between demand and supply. Merchants need to know which products and how many of them their customers will want to buy in a given period. They must then calculate when and how much inventory to purchase based on how fast goods are delivered and other logistics costs. If you don’t purchase enough goods to satisfy your customer demand, you’ll face stockout issues, leading to missed sales, unhappy customers, and an overall negative impact on your business in the long run.

However, if you purchase more inventory than what your customers will likely buy, while you won’t have to deal with stockouts, it will lead to other problems. Having too much inventory can tie up cash that can’t be invested elsewhere, leading to broken cash flow. And when excess inventory is not liquidated fast enough, it can result in deadstock, especially in sectors like fast-fashion, where customer demand shifts very quickly. Excess inventory also increases storage costs.

Inventory drives a business forward when products are sold and turned into revenue. But until it moves, inventory is likely to be the most expensive asset for e-commerce merchants to hold. In order to find the right inventory balance for your business, it’s important to know what you have, how fast it’s selling, how much extra inventory you’ll need to meet future customer demand, and how long it takes to get more. It’s also critical to factor in logistics costs and your suppliers’ minimum order quantities to balance the purchasing frequency and the ordering quantities. With this information, retailers and e-commerce businesses can calculate precisely what they need to order to maintain proper inventory levels using a formula known as Weeks of Supply (WOS).

What does weeks of supply mean in inventory planning?

Weeks of Supply (WOS) is a common metric used to evaluate inventory in the retail and e-commerce world. It is used to determine how long the stock for a particular item or item type will last at the current or predicted Rate of Sale (ROS). This allows retailers to know how much of a product to order and when. Because different products sell at different rates, it’s essential to calculate the WOS on an individual SKU level, as well as by item category, supplier, and the company overall. If you’re using accurate data in the formula to ensure you get an accurate answer, Weeks of Supply will provide a clear indicator of your business’s inventory health.

It’s also crucial to have the right Rate of Sale (ROS). Many merchants simply use their average sales as ROS. For instance, if you’ve sold 30 shirts in 30 days, the average sales are one shirt per day. But what if you had 15 days of stockouts? If we factor in the stockout days, the ROS is two shirts per day because, during 15 of the days, nothing was sold due to stockouts, not low customer demand. By simply using average sales, you can underestimate your customer demand, leading to a vicious cycle of underestimated demand and underbought inventory.

Failing to calculate an accurate WOS prevents retailers and ecommerce brands from planning properly for their future inventory needs. This can lead to purchase orders being placed at the wrong time for the wrong quantities, resulting in overstocking or understocking important products.

How to calculate Weeks of Supply

Weeks of Supply is typically calculated in two ways. It can be based on historical data, or based on future predictions, also known as Forward Weeks of Supply (FWOS). You can calculate WOS using the following formula:

• Weeks of Supply = current inventory / average weekly units sold

example: if you’re a retailer with an on-hand inventory of 100 of your best-selling shirts and you normally sell 20 units per week, you would calculate your WOS like this: 100 / 20 = 5. According to the formula, your stock of shirts will last approximately five weeks.

Unlike WOS, Forward Weeks of Supply uses forecasted demand to determine when you will sell out of a particular product. You can calculate FWOS using the following formula:

• Forward Weeks of Supply = current inventory / average forecasted weekly sales

example: you’re a retailer with an on-hand inventory of 100 shirts, but you have an upcoming promotion expected to increase shirt sales to 25 units per week, so you would calculate FWOS like this: 100 / 25 = 4. According to the formula, your stock of shirts is predicted to last approximately four weeks.

Improving inventory calculations with Days of Stock

WOS and FWOS are important calculations for tracking the health of your inventory levels. However, the formulas have their limitations. In order for retail and e-commerce merchants to generate profit and continue to grow, cash flow is crucial.

Inventory is one of the most expensive assets for merchants, so it’s critical that they avoid tying up too much cash in excess stock that isn’t selling fast enough. While Weeks of Supply is a helpful formula for determining inventory supplies, its lack of precision can result in unnecessary excess inventory.

WOS is calculated in weeks, not days, so retailers can inadvertently trap cash in additional days when inventory isn’t selling. For example, if an item’s WOS is calculated to be four weeks, but in reality, it’s 22 days, merchants are actually over-purchasing by six additional days, resulting in unnecessary excess stock. When you multiply these small discrepancies across every SKU, it can add up to a lot of extra inventory, tying up cash flow.

To improve precision and reduce overstocking, Inventory Planner uses a different metric known as Days of Stock. As the name suggests, Days of Stock uses the same formula as Weeks of Supply but calculates down to the day, allowing for improved accuracy, fewer overstocked items, and increased cash flow.

Using Days of Stock and Lead Times to calculate ordering

Once you’ve calculated accurate Days of Stock for an item, you can use it in conjunction with lead times to determine when and how much to order. The lead time refers to the amount of time that elapses between placing a purchase order and receiving products, including manufacturing and shipping times.

While lead times depend entirely on your suppliers and are subject to a variety of potential fluctuations, you can determine average lead times based on the data from past purchase orders. Using precise Days of Stock and accurate lead times, businesses can make the right ordering decisions for different scenarios. For example:

• If your lead time is less than your Days of Stock. If you made a purchase order for 90 days of stock, and the lead time is 30 days, you don’t need to place another order for 60 days.
• If your lead time is equal to your Days of Stock. If you placed an order for 90 days of stock and the lead time is 90 days, you would want to place another order immediately upon the arrival of the items.
• If your lead time is more than your Days of Stock. If your lead time exceeds your days of stock, you will most likely always need to have pending orders with your supplier to account for the overlapping time.

By keeping accurate records and using inventory planning software, retail and e-commerce merchants can ensure that their inventory levels stay in balance, avoid stockouts, reduce deadstock, and increase revenue and cash flow.