Key Resale Inventory Metrics and KPIs

Karri: Hello, I'm Karri Hiekkanen, the host of Recommerce Podcast. And I'm Tuomo Laine, CEO and co-founder of TWICE Commerce. Today we are focusing on resale inventory KPIs. So insights and performance indicators how your inventory is performing in your resale business. So Tuomo, what is the first thing to look at in your resale inventory?

Tuomo: I think the first thing for anyone is kind of understanding what do you have available kind of the available to sell level of your inventory. That's kind of just telling you that at any given time point, how much can you take in sales? And that's of course a kind of a subset of your total stock balance. I think those are the two first things to look at. Stock balance meaning how much stuff do I actually have in my inventory at any given time? And then how much is the available to sell rate for my items? So out of that stock balance, how much can I actually sell to new customers?

Karri: The items that are in your stock but are not available now, so they have some type of commitment.

Tuomo: Yeah, so those are items that have some commitments to those kind of depends on your operational model. But commitments in resale can be, for example, that you've registered them into your stock already as a product return or a buyback. But before they can kind of go to be available to be sold, you need to inspect them or grain them. So there's kind of commitments on the registration flow itself. Other kind of commitments might be that you've sold an item, but the actual delivery of that item has been scheduled for later time. So the customer might visit your store in a week to do a click and collect fulfillment or maybe the shipping is taking some time. So that is then a commitment for a future sales. So you can of course sell that specific item anymore because that's already committed to a sales order. So I think these are maybe two of the most common commitments that you might see that are eating out your stock balance and thus kind of reducing the available to sale quantity, so to say.

Karri: Okay, so these are some metrics or KPIs that you have and they are kind of reflecting your current status of your inventory. And what about when you want to maybe look back and kind of understand your inventory? How has it been performing for the last 30 days or last year?

Tuomo: That's where the kind of temporality comes into play a game. So software like twice commerce where your inventory is kind of continuously mapped for every millisecond on what the state was. That allows you to go always back into the history or even go to look at forecasts of the future and look at these numbers over time. And that helps you then calculate things like for example, what was the kind of utilization rate or kind of the inventory cycle? Like how fast items were going forward. There's a lot of things that you can kind of then analyze from that data. But just by the fact by having this kind of a continuous knowledge of how much stock did I have at any given time, how much of that stock was committed to various things at any given time and how much of that stock was available to be sold kind of the stock levels that can be commercialized. That already gives you a great picture on how your stock has evolved over time and maybe whether there's something that you can adjust there.

Karri: So this type of analysis is basically saying how much or how long is your stock just sitting on the shelf and basically not generating any money and how much is it actually in use and how often you are getting new items, how fast those are being sold.

Tuomo: Exactly. I think there's there's almost no limit to what kind of stuff you can start to analyze when you have this modeled like in a temporal way. But those are the kind of key cases. So I think one fundamental that we could add to this list is that if these KPIs were like a fundamentals that were more of like quantities, then we could add also a thing called kind of more value metrics. So meaning that how much you, for example, like a thing like a purchase price. So how much did I pay for this item? So you start to track the value of the item over time and we can track both cost drivers. So the purchase price and maybe some deprecation on the kind of as they lose value on the shelf as the market price might go down or some costs regarding inspections or refurbishment. And then we might track also income drivers. If you're simply reselling those items, the income might always be the kind of last thing that happens there that you got that successful sale. But tracking these components also over time gives you an understanding of the kind of value life cycle of any given item or a group of items over time.

Karri: And what are some of the most common ways to calculate this? And I guess in resale business inventory turnover is something that's very, very common and interesting for many businesses.

Tuomo: So when we start to look at KPIs like inventory turnover rate, there's a few decisions that we have to make. There's the decision of my averaging this to all of my stock items or looking at a specific item. Of course, in resale, if I go to a specific item, it might be that I sell it only kind of one side on buy it back multiple times, for example, inside a year. So it might often make sense to look through multiple items when trying to calculate your inventory turnover rate. The other decision that we have to make is that like, for what period of time are we calculating that rate for? Am I trying to understand how fast my inventory cycles in a day, in a week, in a month or in a year or a quarter? So to give an example, we can, for example, look at a year and let's imagine that we're running a resale bicycle business. So I'm buying back old bikes and then I'm doing some repairs maybe on those and then selling them forward. The inventory turnover rate tries to tell us how fast our inventory is turning over, how fast the cycle is. So the calculation goes so that we look at the cost of the items that we had on that period. So if I spent $200,000 in acquiring the bikes from the suppliers, which might in this case be end users, that's our cost. And then we go and we look at what was the average inventory value at any given time. At any given time over that period of a year, how much value did we have in our inventory? Then when we divide that cost of how much we paid for our stock and then how much value did we on average have throughout the year? So let's say that on average, the value of the stock balance, so the items on hand in our inventory was $50,000. We divide the $200,000 with that $50,000 we get to four and that four indicates that on average, that inventory that we were looking at over a period of a year, we're able to kind of cycle it four times over. So it is just an indicator of speed on how long an item, not necessarily an item, but how long does kind of value sit in your inventory and how quickly it turns over. It's very helpful in trying to figure out whether you need to speed up things and it's very connected to your financial needs on how much you need to kind of finance the inventory that is sitting in your operation.

Karri: And I guess it's better the faster you are able to turn over the value.

Tuomo: Yes, so it kind of indicates that you are kind of getting cash from the operation faster. So you have less cash tied to your inventory, meaning that you can use that cash then to buy more stuff that you can refurbish and sell forward again. If you have high value of items that keep their value over time, but the inventory turnover rate is a bit slower, let's say one. So that on average, you buy an item and it sits in your inventory for a year. It just means that you're going to need to finance that whole year, which might mean that you need to secure some bank loans or to finance that warehouse somehow. It's very common that retailers who are operating purely on that operative model need to do this. So this is again one of those things that probably as you've moved into resales, you the product category where that you're operating in, you have a sense of how fast moving these goods are. So that gives you an idea how much capital you might need to tie to your inventory. And also the category of the product might indicate how risky is it. If you have an item that sits on the shelf for six minutes, you don't have that much risk in financing it. But if that item sits in your shelf for two years, you kind of run with the risk that over that period of time, the value of that item is in the market is going down faster than what you're able to make out of it in cross-margin. And this is the reason why when you do profitability calculations in resales, you take into account the kind of deprecation of shelf value over time. Where in resales where things get super interesting is that you do have categories like collectibles, like glocks or art or any category of collectibles where the reverse might actually happen. That over time, maybe due to market scarcity or something happening in pop culture or whatever, the shelf value of your items actually goes up over time. So then you're kind of holding on to your stock and you are trying to figure out the optimal time to sell it. This is why in your inventory, even though you might track an accounting-based purchase cost and the cost of the inventory, you probably want to have an individual attribute that you track over time, where you store your understanding of the market value of this item. Because that might evolve over time due to various drivers and that market value really gives you the idea of the value that you have tied in your inventory, which isn't always immediately clear in your traditional financial statements.

Karri: Okay, so now we have the basics of like a snapshot of what you have now in your inventory and what's available for sale. And then the inventory turnover is probably one of the most common KPIs to actually understand how your inventory is performing in your business. Are there any other metrics that are like very basic and maybe something that almost everybody should focus on?

Tuomo: Well, there's maybe two that come to mind. The first one is super simple thing. It's kind of profitability on almost like an item level. If turnover was kind of the speed in which value goes through you, the other one might be just general profitability that on average, how much do you get from any item that you get through the system? And then the second one is maybe inventory accuracy. And I think it's a very sobering KPI to look at. So inventory accuracy essentially is a percentage number between 0 and 100. And it just describes how accurate your current state that you have modeled in your inventory system was compared to the real world. Because we know that in real world stuff happens, stuff gets damaged, they get lost, they get stolen. There's a lot of things that might happen, which isn't automatically translated to your digital picture of the situation. That's why we do the actual act of doing an inventory, depending on the speed and the turnover speed of your inventory and the value maybe there. You might need to do your inventory once a year to figure out whether the digital record is correct or not. It might be that you need to do it weekly, monthly, quarterly, or even in some cases, systems like twice often help you to have kind of a continuous image. Then the inventory tracking solution is so tied to your operational flows that it continuously gets a nice feedback on what's happening. Now the accuracy then tells you after you've done the act of doing the inventory check, you get a picture that for example, if I the system said that I had 100 bikes, I do the inventory, I have 98 bikes. So we don't know what happened to those two. We kind of do our due diligence and they've just disappeared into thin air. Maybe they were lost, maybe someone stole, they were stolen. But so our inventory accuracy was about 98% at that point. Now if it would have been 50 bikes, then it would have been 50% accuracy. And the accuracy is something that gives you a feeling of how much we can kind of trust our process and how much can we trust our tracking capabilities, which again educates you on decisions like how tight of a ship do we want to run in terms of what kind of value promises can we give the customer. Do we want to have some buffers, for example, we can have an inventory accuracy of 90% on average. So maybe the 10% we need to take into account operationally in buffers. And it's one of the core value propositions that systems like twice should help you that if you have a very pen and paper operation with very laborsome ways of tracking the inventory, it might be that that kind of proof of the state of the inventory is lagging so much that your inventory accuracy tends to be quite low when you do your checks. So you don't have a up to date clear picture, whereas with software like twice, we come to the table with the goal of giving you 100% inventory accuracy. But the key thing here, I think anyone who's ever been involved in any of the roles, whether working in a warehouse or being a store manager or running a retail business, understands that even though you would have the best digital tool, it's then still kind of at the mercy of the inputs that people give it. So if you're thinking about running a resale operation, this is again a point, why might you want to have a resale like native commerce operating system or inventory management system? Is that likely the patterns that that system has in enabling you to store the information and acknowledging the lifecycle of products is a lot more friendly when it comes to accepting input of what's happening in your operation, which then gets reflected to the inventory accuracy being higher, which then gets reflected to you having more capabilities in productizing faster, selling items faster, appraising them with the appropriate price points, which again then gets reflected into your inventory turnover rate and profitability and overall better business. So, so inventory accuracy is kind of a nice concept to think about and to reflect when you're, for example, thinking the ways on how you track your inventory.

Karri: Okay, I think that's a pretty nice overview of the basics of how to look into your resale inventory and maybe understand how it's performing and maybe even start to optimize it a little bit. But we are going to make a separate video on what kind of questions you can kind of ask about your inventory and how to make it more efficient and optimize it. But hey, Tuomo, thank you for sharing all of your knowledge.

Tuomo: Thank you, Karri.