Inventory Age i.e. Days in inventory (DII) is an efficiency ratio that measures the average number of days the company holds its inventory before selling it.
Inventory Age = Average Inventory level / total cost of goods sold per year
Majority of E-Commerce companies operating in India are logically based on an inventory-led business model.
“Unsold inventories gives losses and increase a big cost to the companies’ “
Inventory Aging is critical for the OWH E-Commerce models. Cost of maintaining inventories are very high in India considering the following facts
Many E-Commerce companies try to reduce their inventory exposure by using some restoration technique for example SOR (sales on return). The sales-on-return basis is a working capital management technique or negotiation style that assumes that the e-commerce company is buying an item from a supplier and in case the product is not sold within a stipulated time, the supplier will take the item back. Another practice that is in vogue is to create a back-to-back arrangement, i.e., get a customer order and then procure the item and ship it to the buyer. These practices are fine when you are doing small unit shipment per day but beyond that, it is not sustainable.
SOR & back-to-back restoration techniques are not sustainable. Majority of E-Commerce companies buy advance inventories or start holding inventories for the sale every year. On an average they left 13-16% unsold inventories at end of year. These unsold inventories furthermore give losses and add 3-5% toll in terms of cost.