I operate a small online retail operation.
I order product from my wholesale suppliers. Once it arrives, I list it for sale on a couple of websites.
As product sells out, I re-order from my suppliers.
Due to the nature of my product, items are frequently out of stock or understocked at my suppliers’ warehouses. In some cases, I can only place one order for an item with no possibility of refill orders.
I have a 7-day lead time on orders.
Every week I analyze sales, then project sales on a per-item basis.
If an item has less than a 21-day supply in my warehouse, I order enough units to get back to a 21-day supply.
Given the lag time between order and arrival, I wind up bouncing between a 7 and 14 day supply of product. Sometimes the market changes, and I wind up with turkeys or out of stock, but that’s the game.
All of this works for me.
What vexes me is the fact that I can’t figure out how to calculate the time-based yield of my inventory.
If I buy a share of stock at $10 and sell it a year later at $15, that’s a 50% ROI. All kinds of calculators on the web will let me do calculations with one purchase and then one sale a year later.
When it comes to the APR I’m getting from my inventory, I can’t find an appropriate calculation or calculator. Has no proprietor before me ever wanted to know if his stack of widgets is earning him a 50% ROI or a 500% ROI?
I’ve got an item that costs me $17 while I make a $8 profit per unit. I sell 3 units per day. I can calculate that my profit margin is 53%.
My money for the first 3 units is tied up for 8 days (7 days to get here, about 1 to sell). If I could avoid going out of stock, that means my $17 would turn over just under 45 days per year. In effect, my $17 turns into $360 in profit in addition to me getting my money back. I’m showing that as a 2117% annual ROI.
However, I’m not going to just order 1 unit. I’m going to order 63 units (a 21-day supply). I could plug in the sales and purchases into a calculator on a per-transaction basis, using a calculator like this:
Which I got from this page:
My problem is that over the course of the year, that would mean making entries for 1095 retail sales and 52 wholesale buys.
How in the heck would I calculate ROI on my inventory without doing all that work?
By way of background, what I find myself wanting to do is buy more pieces (days) of higher-yielding product while I buy less days of lower-yielding product.
Normally, carrying more than 7-14 days fill would be irrational, but in quite a few cases I will find myself unable to re-order a given item next week.
I have cobbled together a calculation that gives me a number that reflects yield vs turn time, but I know it’s not right.
((PROFIT) / (COST)) / ((CURRENT STOCK LEVEL)/(SALES PER DAY)+7) * 365 * 100
The problem here is that it seems to neglect internal rate of return, as well as only giving the product credit for its profit at what amounts to the 21-day point.
What am I supposed to do in order to get this calculation?
Does no one else think the way I do on this?