Shopify Ecosystem

9 Operations Metrics To Keep Your ECommerce Business Booming

9-operations-metrics-to-keep-your-ecommerce-business-booming

eCommerce operations metrics are the unsung data point heroes of successful brands. They’re not as well-known as marketing metrics like CPA, but they answer crucial questions that impact CX, CS, profitability, efficiency, and the ability to scale. 

And they’re more important than ever: in the pandemic times, even for enterprise brands with robust supply chains, folks in operations have unfortunately looked a lot like this:

To keep you actually fine, we’ve collected nine fundamental operations metrics to consider incorporating into your data tracking. Go wild and use all nine, or experiment to find the set of metrics that function as the best indicators of success for your business.

1. Average Days in Transit

“When will my order arrive?” asks every customer everywhere.

Average days in transit is the typical time it takes for products to ship from your fulfillment center to the customer.

Why it’s important: Average days in transit helps you understand if your fulfillment network, including your shipping carrier(s), is functioning efficiently. 

If shipping is taking longer than it should, and products aren’t getting to customers on time (a big problem for perishable goods, in particular), it will cost you in terms of both money (reshipping and replacement costs) and customers (unhappy people who may feel inclined to send a 1-star review your way).

How to use it: If your average days in transit jumps to an unacceptable range, or you’re regularly seeing delays, it’s time to investigate. Dive into the data to see if delays are higher when you ship on certain days and times–and consider tweaking your shipping schedule. 

One of our clients, dog wellness company Maev, did exactly that and saw a direct increase in customer lifetime value!

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2. Backorder Rate

“Dang, it’s out of stock! I guess I’ll buy somewhere else.”

Backorder rate is the percentage of products that cannot be immediately fulfilled due to insufficient stock. 

backorder rate formula

Why it’s important: Backorder rate helps you make accurate inventory orders. A high backorder rate or regular occurrence of backorders may result in unhappy customers, canceled orders, and additional costs (e.g., expedited shipping costs to make up for delays).

How to use it: Backorders are a part of the eCommerce game, especially during peak periods, but if they become a regular occurrence throughout the year, it’s a sign to take a closer look at your forecasting, order lead times, transportation, and other reasons why you may be running out of stock so often. 

3. Carrying Cost

“Why isn’t our cash flow higher?”

Carrying cost (also called carrying cost of inventory and holding costs) is the sum of all expenses related to storing products in your warehouse until they sell. The expenses include:

  • Insurance
  • Taxes
  • Labor
  • Energy
  • Product depreciation
  • Inventory storage costs (rent of building or rented warehouse space)

Besides calculating and tracking carrying cost on a monthly basis, we recommend tracking carrying cost on a percentage basis. In other words, track how much your carrying cost compares to your total inventory value:  

how to calculate carrying cost

On average, a healthy carrying cost should be about 20-30% of your total inventory value at any point.

Why it’s important: This operations metric ensures that your operations are running efficiently. If your carrying cost is too high, it’s a red flag for issues in key areas, including order planning, forecasting, inventory management, and overall profitability.

How to use it: Monitor carrying cost % as you make changes to optimize your inventory levels, and use carrying cost to forecast profit from your inventory on a monthly basis. Reducing carrying cost increases your cash flow, which means you can invest elsewhere in your business.

 4. Inventory Turnover

“Shoot, we should’ve ordered more widgets last week!”

Inventory turnover (or inventory turnover ratio) shows how many times you sell through and replace your inventory over a period of time. It represents the conversion of inventory to sales.

According to our friends at Skubana , a good inventory turnover ratio is between 5 and 10 per year. In other words, this means you’re selling through and restocking inventory 5-10 times per year, or every 1-2 months. 

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Why it’s important: Inventory turnover is a great indicator as to whether you’re moving product at a healthy clip. If the ratio is off, you can apply tactics to increase demand (e.g., work with marketing) and/or optimize how much you purchase from your suppliers.

How to use it: Monitor and adjust your ordering cycle to make sure you have an optimal level of inventory at any given time.

5. Inventory to Sales Ratio

“We’re making money, right?” 

The inventory to sales ratio (or I/S ratio) represents your inventory as a percentage of total sales. It indicates how much of your inventory converts to sales. 

A healthy inventory to sales ratio is less than one. The lower the ratio, the more money you make on sales per item: if you have the right amount of inventory on hand, you will have a lower carrying cost. 

However, the lowest possible inventory to sales ratio is not always best. Too little inventory may result in products being out of stock and missed sales.

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Why it’s important: This operations metric is a high-level way to check that a healthy amount of your inventory is selling and that you’re appropriately profitable because you’re not overstocked. 

The inventory to sales ratio helps you know when to restock and which items are a priority to purchase and restock.

How to use it: Along with inventory turnover ratio, track your inventory to sales ratio to optimize your inventory size. 

To improve your inventory to sales ratio, understand which of your products are best sellers.

Just as a majority of your revenue comes from a small number of customers (i.e., your High Value Customers), you may find that a small % of your products make up a high % of your sales. 

6. Out of Stock Rate

“Ouch, we could have had record sales.”

Out of stock rate (or OOS rate) tracks the number of lost sales due to insufficient inventory. A low out of stock rate—below 10%—is ideal to keep customers happy and reduce the number of lost sales. For this metric, the lower it is, the better.

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Why it’s important: Your out of stock rate can help quantify the revenue you could be making if inventory levels were optimized–and it can help make the case for investing in technology, staff, data analytics, etc. for operations. 

This operations metric is also a useful high-level red flag for monitoring CX–if you have a high out of stock rate, it’s a strong indicator that some of your customers are frustrated because they can’t buy the products they want.

How to use it: Monitor your out of stock rate to ensure it’s in a healthy range for your business. If it’s higher than normal, do a deeper dive into why you might be selling out of certain SKUs too quickly and if you should adjust your ordering cadence or quantities.

7. Priority SKU

“Do we have enough of what customers want?”

A priority SKU (stock keeping unit) is a product you’ve identified as one that’s important to keep in stock–perhaps it’s your hero product or most profitable item. You can have more than one priority SKU and rank them A, B, C, etc.

Why it’s important: Identifying priority SKUs helps ensure you always have your most important products in stock and ready to sell.

How to use it: Understand which SKUs are most important to always have on hand to help you allocate your purchasing budget and optimize your ordering cycle. 

8. Sell-Through Rate

“We have a new Priority SKU!”

Sell-through rate tracks how much of a product is sold compared to the unsold inventory of that product over a time period. Ideally your products will have a high sell-through rate (at least 80%).

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Why it’s important: Sell-through rate can be calculated at the product/SKU level so that you can monitor how quickly a product is selling each month.

How to use it: Sell-through rate tells you if you need to rebalance your inventory, particularly for top-selling products and products that are slower to sell.

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9. Weeks of Supply 

“We’re going to run out when?!”

 Weeks of supply (aka WOS) is an estimate of how many weeks the inventory of a product will last based on your current sales rate. A healthy weeks of supply is often around 6 weeks, but this depends on your brand and products.

You also can calculate forward-looking weeks of supply, which is based on an estimated future sales rate. Using an estimated future sales rate may result in a more accurate forecast than using a current or historical sales rate: you can incorporate factors such as seasonality as well as previous holiday data for guidelines.

weeks of supply formulas

Why it’s important: Weeks of supply keeps you on top of your inventory levels. You can understand at a glance if you have a healthy amount of inventory at the product level and ensure your inventory will last until your next purchase order arrives.

How to use it: You can use weeks of supply to monitor and compare inventory levels across different types of products and create standard KPIs for different product categories depending on their average/target rate of sale (ROS).

Share the Operations Metrics Love

Using these operations metrics can help your operations team run a tight ship and make your business more profitable. That said, encourage them to share what they see and learn.

Sharing insights with other teams including finance (e.g., missed revenue, cash flow), merchandising (e.g., what sells, how customers use products) and marketing (e.g., what needs to sell faster, what you’re running low on) can make your whole business stronger and better aligned.

For more insights and tips on running a successful operations team, check out our webinar Elevating eCommerce: Operations.

Special thanks to our friends at Daasity for their insights on this topic.
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