How and Why to Track Inventory in Shopify

Ashley Stander
By Ashley Stander
Romi Hector
Edited by Romi Hector

Published April 29, 2022.

A young woman tracking details from her tablet into a book whilst sitting in a warehouse

Tracking your company's inventory is not a nice to have, it is a necessity in this fast-paced world we live in. In this blog, we will take you through what an inventory is, why it is so important to track it, formulas for calculating your inventory, and finally, we'll leave you with some important tips for managing your inventory on Shopify.

What Is Inventory Management?

Inventory management is the smooth management of the logistics around demand forecasting, ordering, receiving, storing, producing, shipping, packing, and final delivery of your product—otherwise known as supply chain management. It goes as far as to include the management of your product's dimensions, weight, and exact location in the supply chain. The key to good inventory management is obtaining the right amount of product and stock so that you can avoid excessive storage costs. In other words, keeping as little inventory stock as you can in your supply chain without disappointing your customers by running out of products.

Managing your inventory in a succinct way helps you to keep a finger on the pulse of your business. It has these important benefits:

  • Less spoilage Products like medication or tinned food have sell-by dates that can't be sold after the date has been passed.
  • Optimized fulfillment When you have the right amount of stock, orders and returns are fulfilled quickly and seamlessly.
  • Optimized storage costs Keeping extra stock can cost a fortune, especially if you need your stock to be refrigerated or kept at a specific temperature.
  • Avoid costs for the storage of dead stock Dead stock is any stock that can no longer be sold. A good example of dead stock is seasonal goods or goods that have gone out of fashion.
  • Optimized cash flow We all know that cash is king. If you don't have enough cash flow to run your business, your business could miss out on special deals and discounts offered by suppliers

The Different Types of Inventory

Now that you understand the reasons why it is good to manage your inventory well, let's take a deeper look into the different types of inventories:

  • Raw goods These are the materials that you need to produce your products. A good example of raw goods for a furniture manufacturer is wood. Raw goods are also separated into direct raw goods, like wood, and indirect raw goods, which is what you use to assist with production, like oils needed to lubricate your machinery.
  • Work-in-progress (WIP) This is the inventory that holds products that are not yet finished, representing all your production costs, like labor, machinery, raw materials, and so on.
  • Finished goods This inventory includes all your stock that is available for your customers to buy. It is important to remember that, in this inventory, the prices will have a mark-up included that will change it's value.
  • Maintenance, repair, and operations goods (MRO) This inventory includes materials and equipment that are used to fix returned goods. The operational goods include office stationery and equipment, cleaning materials, laptops, printers, scanners—anything you use in your office.

All of these inventory types need to be tracked to give you a full and complete picture of the value of your business at any given time.

Formulas for Calculating Inventory

There are various formulas that you can use to track the flow of your inventory and keep you on top of your cash flow. These include:

Reorder Point

Reorder point = lead time demand + safety stock

The reorder point formula tells you when it is time for you to reorder stock. You can also set reorder points in Shopify Admin to get notifications when your stock is low. This will give you enough time to replenish your stock before it is too late.

Inventory or Stock Turnover

Cost of goods sold (COGS) / [(beginning inventory) + (ending inventory) / 2]

Your inventory turnover tells you how many times your business has sold and replaced inventory over a specific period of time. This formula takes into consideration the beginning inventory on the first day of the month and the ending inventory on the last day of the month.

Sell-Through Rate

Sell-through rate = the number of units sold / number of units received) x 100

This formula tells you how quickly you sell your products once they reach the finished goods inventory. You should aim for between 40–80% as an ideal sell-through rate.

Days Inventory Outstanding (DIO) or the Inventory Period

Inventory days = (average inventory / COGS) x number of days

This is calculated to establish how many days your products stay in your inventory on average before being sold and turning into revenue.

Economic Order Quantity (EOQ)

EOQ = square root of [2SD] / H

This formula tells you how much you need to order to optimize your inventory costs.

  • S = setup costs per order (including shipping and handling)
  • D = demand rate, or quantity sold per year
  • H = Holding costs per year, per unit

If you don't feel up to doing these calculations yourself, take a look at some of the best e-commerce analytics tools that can help.

How to Track Inventory on Shopify

Tracking your inventory on Shopify is much easier than most people think. Follow these two easy steps to get started:

Step 1: Go to your Shopify admin and click on Products. You'll see a list of products. Find the product that you want to track and click on it.

Step 2: Go to the Inventory panel. Click on the Inventory policy drop-down menu and then click on Shopify tracks this product’s inventory. Enter the quantity of the product in stock so that you identify the volume of your inventory. Click on the Save button on the top right side of the screen.

Benefits of Tracking your Inventory on Shopify

There are many benefits to managing your inventory on Shopify, including:

  • An inventory history
  • The ability to log, track, and receive transfers between your different suppliers and warehouse locations
  • The ability to change your inventory quantities for multiple product variants and locations on your Shopify store when using the bulk editor
  • The ability to manage variations of a single product in one place
  • The ability set up individual listings for each product and organize them by type, category, and season

Tips for Managing Inventory on Shopify

Make the most of your Shopify inventory with these important tips:

  • Always set your par levels so that you can get fair warning for low stock levels.
  • Use the FIFO system to rotate stock even if you don't have perishables. The first-in-first-out principle will ensure that you don't end up with old and damaged packaging.
  • Organize your inventory to know your most ordered items. This will allow you to focus more on profitable products.
  • Audit your inventory regularly. This will help you to manage your stock flow.
  • Invest in a good Shopify inventory management app for the effortless management of your stock.