There are many metrics available to evaluate your inventory management key performance indicators (KPIs). In this article, we’ll share 3 common metrics used for optimizing inventory management. Utilizing these metrics will offer an analytical view of your revenue, purchasing decisions, sales promotions, and marketing strategies.
KPI: INVENTORY TURNOVER RATE
What it is: Inventory turnover is the rate at which an aesthetic practice replaces inventory in a given period. Inventory turnover rate is a top-level metric designed to evaluate turnover annually using average monthly inventory turns.
Why we use it: Calculating inventory turnover can help you make better purchasing decisions by identifying how much you need to order and at what frequency. Well-managed inventory levels support positive cash flow.
How to calculate it: The inventory turnover formula is calculated by dividing the cost of goods sold (COGS) by average inventory. Keep in mind that average inventory accounts for seasonal fluctuations in demand.
Inventory Turnover Rate = Cost of Goods Sold/ Average Inventory
How to evaluate the KPI: The inventory turnover ratio is a metric used to determine how well your practice generates sales from its inventory. The higher the inventory turnover, the better, indicating you are selling products quickly and generating revenue from patient demand.
- High turnover rate: Indicates the demand for products to maintain target pricing and profit margins.
- Low turnover rate: Often results in price reductions to move products and can result from declining demand for a product or excess inventory.
Track your inventory monthly to keep track of the turnover rate. Next, set a goal for turnover rate and measure it over a specific timeframe. For example, target a turnover rate of 4-6 weeks as a starting point.
Bottom Line: For most practices, creating a target turnover rate of 4-6 will ensure that you don’t tie up too much money in inventory.
KPI: SELL-THROUGH RATE
What is it: Sell-through rate measures the amount of inventory sold within a given period relative to the amount purchased within the same period. This calculation offers a more detailed metric than the turnover rate.
Why we use it: Sell-through rate estimates how quickly you sell inventory and convert it to monthly revenue. We look at the sell-through rate to understand how long it takes to convert product costs into revenue to ensure you’re not incurring excess expenses related to storage, discounting, or product expiration.
How to calculate it:
Product Sell-through Rate = (# of units sold/ # of units received) x 100
How to evaluate the KPI: Since we’re comparing monthly sell-through rates to annual turnover rates, there are a few things to keep in mind when evaluating this metric. Sell-through rates will reveal seasonal demand. For example, before beach season, you may see a spike in products and services related to the body, therefore seeing an increase in sell-through rates of related products in the spring. When evaluating sell-through rates, account for seasonality and consumer trends to best understand the causes for high and low sell-through rates.
High sell-through rate: As with turnover rate, high sell-through rates indicate inventory is converted to revenue quickly. If sell-through rates are very high, purchase more of that product(s) to keep up with demand.
Low sell-through rate: Indicates that products are being sold at speeds slower than anticipated; this could be due to seasonal demand or changes in consumer preferences. Evaluate this monthly to ensure you’re not over-purchasing slow-moving products.
Bottom Line: Sell-through rate can help optimize your inventory and frequency of SKU purchases.
KPI: WHAT IS ROI AND HOW TO CALCULATE IT
What is it: Return on investment (ROI) is a performance measure indicator used to evaluate the efficiency/profitability of an investment.
Why we use it: This metric will help you evaluate which investments are yielding the most return to help you make more informed purchasing decisions to optimize profitability.
How to calculate it:
ROI [Revenue – Cost of Investment/ Cost of Investment/] x 100
How to evaluate the KPI: High ROI indicates better returns achieved on your investments. A commonly used application for ROI analysis is to look at the profitability by SKU. For example:
- Injectable A costs $100 – we sell an average treatment for $600, yielding an ROI of 500%
- Injectable B costs $250 – we sell an average treatment for $600, yielding an ROI of 140%
Bottom Line: Performing an ROI analysis can reveal the profitability of different products offered by your clinic to help you optimize the SKUs you offer.
If you’re interested in more KPIs, check out this post on Patient Performance Indicators. Stay tuned for more articles on measuring KPIs in your aesthetic practice!
At Synergy Aesthetics, we are here to support you. Our team is available to speak with you should you have any questions, contact us today—Your Success is Our Success!