How to Calculate Weeks of Supply and Improve Inventory Health

If you're a retailer or plan to run an e-commerce store, you know how vital it is to manage and plan your inventory. Many businesses utilize the WOS or the weeks of supply formula to ensure enough inventory to meet the demand. 

Your business can benefit from this concept as soon as you understand it & implement it. In this post, we'll walk you through what weeks of supply is as well as the best ways how you can optimize planning your inventory.

Let’s jump in.

What is Weeks of Supply (WOS)?

Weeks of Supply (WOS), is a key performance indicator (KPI) that every seller needs to watch closely to understand the health of their inventory.

WOS is a formula that accounts for how quickly you sell certain products and how long it takes you to get stocks. In the ecommerce world, it helps merchants view inventory in terms of time. 

With it, you can determine how long the current inventory will remain based on the sales demand. With WOS, depending on your inventory on hand and the projected weekly sales, you'll eventually determine how many weeks it takes to sell a particular item. 

Why Calculating Weeks of Supply is Matters

Even in businesses that have good inventory management, there is usually room for improvement. So, let’s take a moment to review why calculating weeks of supply is important:

1. Better Inventory Management

Inventory management makes or breaks a business. Issues with your inventory often lead to business losses, even causing it to fail.

Excellent inventory management strikes a good balance between the inventory coming in and going out. It also controls the timing and the price of non-capitalized assets and stock items, allowing your business to reach optimal profits.

2. Avoiding Stock Outs

Knowing how quickly your business will use up its inventory levels on average helps you set up more accurate reorder points. That way, you can replenish your stocks on time and have the right amount of SKUs whenever needed.

If you have fewer stockouts, you can give your customers an optimal experience and avoid backorders.

3. Minimizing Excess Inventory

Even if your supplier consistently delivers your items on time, and you have yet to experience a supply lag, you should still expect issues to come up. There will be unexpected delays in transportation and production, like the bottleneck at our supplier's end or a delay because of the weather, which will cause your products to return a lot later than you expected.

In this situation, safety stock will act as your defense against a possible stockout, which will fulfill your order until the stocks you ordered are delivered.

4. Supply Chain Efficiency

While supply chains have been here for a long time, many companies have recently paid attention to them as an added value to their operations.

By managing supply chains, companies can reduce excess costs, delivering products to customers much quicker. This can be done by keeping tight control of internal inventories, distribution, sales, internal production, and the inventories of company vendors.

5. Financial Planning

Any improvements to your inventory management also lead to enhanced cash flow. You can decrease the losses if you plan your business inventory accordingly.

That way, you won't need to overspend on the products you don't need. The number of products on your shelves that weren't sold will stay at a minimum. It allows you to keep your inventory at a rotation because many more customers will purchase what you're selling.

Downstream means you'll have more revenue coming in, and your business will have fewer expenses in the long run. It allows you more free capital in the areas you see fit.

6. Demand and Seasonality Analysis

Fluctuations in your inventory demand are the main reasons you should have a safe stock. There are a lot of factors that can affect these spikes in demand, and this includes sudden shifts in customer trends, changing seasons, panic buying, or your competitors leaving. Find winning products that you can sell from the get-go here. 

Safety stock will give your company enough breathing room so that you can quickly replenish the stock while meeting the increased demand.

7. Reduce Your Working Capital

A long working capital cycle means that cash is tied up in your business. If you have lots of products sitting in a warehouse, you can’t use that money to grow your business (or keep it alive).

“Reducing your working capital cycle frees up cash to provide a lifeline during tough times.” Says Sean Meagher, CEO of q-commerce grocery retailer Shuppa. “This is especially important for retailers in 2023, as interest rates are high which means borrowing money is much more expensive” He adds.

8. Better Supplier Relationships

By understanding your inventory levels in advance, you can keep your orders consistent and communicate with your suppliers at an earlier pace. Accurate weeks of supply make it much easier, helping you build better supplier relationships.

9. Optimize Your Evergreen and Seasonal Inventory Levels

Evergreen products sell consistently all year. Meanwhile, seasonal products such as Christmas decorations or sunscreen may reflect a particular event or time of the year.

Good inventory planning will consider these seasonal forecasts so you'll know how much you need to reorder without filling your warehouse with all these excess inventories. Check out the best shipping and fulfillment guides here.

How to Calculate Weeks of Supply

To calculate weeks of supply, you need two pieces of information: the inventory quantity and the average weekly consumption rate.

The formula to calculate weeks of supply is as follows:

Weeks of Supply = (On-hand Inventory Quantity) / (Average Weekly Consumption Rate)

Here's how you can calculate it step-by-step:

1. Determine the Inventory Quantity: This refers to the amount of inventory you currently have on hand. It could be measured in units, kilograms, or any other relevant unit of measurement.

2. Determine the Average Weekly Consumption Rate: This is the average amount of inventory consumed or sold per week. To calculate this rate, you need historical data on the quantity of inventory consumed over a specific period, such as the average weekly sales volume. This period should be consistent with the time frame you're considering for weeks of supply.

3. Plug the values into the formula: Divide the inventory quantity by the average weekly consumption rate to get the weeks of supply. The result will indicate the number of weeks your current inventory is expected to last based on the average weekly consumption rate.

For example, let's say you have 1,000 blue t-shirts in your ecommerce warehouse, and your sell 200 blue t-shirts per week on average. Using the formula:

Weeks of Supply = 1,000 units / 200 units per week = 5 weeks

In this case, you have a 5-week supply of blue t-shirts based on your average weekly consumption rate.

Remember that this calculation assumes a consistent consumption rate and does not account for changes in demand or other factors that may impact inventory levels. It's important to regularly review and adjust the calculation to reflect changes in consumption patterns or market conditions.

Common Pitfalls of Calculating Weeks of Supply

While WOS is a very helpful formula in helping you determine your inventory supplies, its lack of precision also leads to an unnecessary excess in your inventory. 

That's because it's often calculated in weeks rather than days, and retailers can inadvertently trap cash in those days wherein your stocks aren't selling. 

To be more specific, here are the most common pitfalls when you calculate weeks of supply: 

1. Depends on insufficient data

WOS is a simple inventory management KPI that evaluates the health of your inventory since you only need to know your existing inventory levels and past demand calculations. 

Although this simplifies computing, it also makes weeks of supply forecasting tools less accurate. This is because some of the factors that may affect demand, such as DTC trends, shortages in raw materials, etc., aren't considered. 

2. Ignoring Seasonality

You must also single out products that show a seasonal tendency. While seasonality may look like a simple concept on the surface, it isn't. The challenge is in the products that aren't so obvious. 

Knowing what these items are, when they'll peak, and experiencing their off-season, you can increase and decrease their demand whenever needed.

3. Overlooking Sales Trends

A product's popularity changes over time. Even online retailers were caught off guard during the panic buying stage during the pandemic. Even the most critical supplies flew off at record levels, causing widespread stockouts and delays in shipping. 

Your WOS formula will fail when real-time shifts in the market happen when it: 

• It doesn't account for the unprecedented increase in demand (since it usually relies on historical data.)
• Normalizes this increase for your calculations in the future- In the case of panic buying during the pandemic, this type of demand usually doesn't last. 

Suppose you go out of stock because of a recent market shift. Your sales didn't stop because there wasn't a demand. It stopped because there was more demand than what you have in your inventory. 

Your WOS calculation wouldn't reflect this, which could leave your future operations in the dark. 

4. Insufficient Data

With weeks of supply, you usually use limited data to calculate optimum stock levels. 

While you know your forecasted OH, velocity, and even some SKU-level data, you may need to consider other marketing campaigns, direct-to-consumer events, and other data points that might be influential.

5. Quality of Your Data Outputs 

In the world of retail, you probably heard the phrase, "garbage in, garbage out." 

If you rely on compromised or data that’s inaccurate in your calculations, your output insights will not give you the desired results. This applies not only to WOS applications but to all of your inventory management KPIs. 

6. It Doesn't Account for Viral Growth

You probably saw a post that went viral. But on the operations side of the business, a viral post may cause serious logistical issues, especially for smaller DTC brands with limited finances. 

So, in this scenario, WOS won't work. That's because a viral post may cause spikes in demand that aren't often shown in past trends. Also, you can't necessarily plan for virality. Thus, it usually needs to be represented in your forecasts, which can be used for FWOS. 

Tips for Optimizing Weeks of Supply & Inventory Replenishment

1. Keep on Top of Minimum Order Quantities (MOQ)

When you place an order with manufacturers or wholesalers, they usually require you to pay them with a minimum order quantity or MOQ. It means some customers will usually be turned away if they can't meet the minimum order quantity. 

While it may seem counterintuitive for businesses to turn away customers, it's vital to know how MOQ works and why certain suppliers go with them, especially for low-margin or highly customized businesses. The minimum order quantities can boost your bottom line if managed well. 

2. Analyze Performance and Stock

You should still know whether you lost part of your inventory due to damage or threat to something else. 

One of the best ways to stay on top of your inventory levels is to run regular audits. You can do full stock checks regularly. However, big gaps are often left between each one. Another alternative is doing consistent cycle counts.

It usually involves counting a small portion of your stocks daily or weekly. In the long run, you can check your entire inventory without shutting down your business operations. 

3. Forecast Seasonal Fluctuations

Seasonal forecasting usually is where business owners and managers determine the ebb and flow of their sales the entire year or over various seasons. 

Usually, your customer's needs change between seasons. Usually, you won't see a high volume of swimsuit sales if you're in the middle of winter. You'll also unlikely come across holiday decorations during the summer months. 

Some changes are more subtle. Let's say office supplies may experience a rise in sales at the beginning of the year, but they may also experience another uptick when final exams are scheduled. 

Forecasting seasons changes can make a significant difference in your stock levels. With an accurate demand forecast, you can better satisfy your customers' needs and boost your sales. 

4. Keep Strong Supplier Relationships

Having a good relationship with your suppliers helps improves your customer service and your efficiency. 

A good supplier relationship also gives you a fresh perspective, allowing more opportunities to come your way. If your business is flourishing, so will your suppliers, so it's a win-win. 

Therefore, if you want to maintain an excellent supplier relationship, you must approach it correctly. Doing so will allow you to prepare, especially if you're tracking variability properly, and then basing your forecasts on tailored models. 

5. Stay on Top of Supply Variability

In a nutshell, supply variability refers to the difference between the expected and the actual lead times. In the long run, this can affect a brand's ability to stay in stock and meet the demand. 

For example, historically, leads times, on average, are predicted for about 8-10 weeks. However, some brands could experience 3x longer than usual lead times. 

You need to monitor your lead times to know that this supply variability does happen, which in turn , could put you at a greater risk for stockouts. 

However, if you accurately track your WOS calculation, you can identify these changes and account for any supply delays in the replenishment process. 

Go Forth & Calculate Weeks of Supply!

So is WOS right for your business? Now you know about what weeks of supply is, the importance of its accuracy, its most common pitfalls, and how you can set targets. 

By keeping these things in mind, you can ensure that all of your inventory levels stay in balance and avoid any dead stocks or stockouts. As a result, you'll increase your business's overall cash flow and revenue. Good luck!

Author Bio:

Andi Croft is a freelance writer whose main interests are topics related to business, technology, and travel. This is brought about by her passion about going around the world, meeting people from all walks of life, and bringing along with her the latest tech to enhance her adventures.