Healthy inventory: what to reorder and what to let run out

Inventory purchasing has a cost on both sides. Order too little and a strong product may be unavailable just when customers want it. Order too much and cash remains locked in goods that move slowly or not at all. A useful decision therefore starts by separating the roles products play, not by opening a single best-seller list.

Start by separating two different kinds of inventory

A replenishable product can be bought again under reasonably predictable conditions. It has observable sales velocity and a supplier that can deliver it again. The useful question is whether today's stock will last until the next delivery.

A unique item, limited release or irregularly available product behaves differently. Selling out might not be a failure that can be fixed with another order. A long time to sale does not by itself prove a bad purchase when the item adds breadth to a collector's range or brings the right buyer to other products.

The first filter is therefore not “selling or not selling”, but whether the item can genuinely be replenished, whether the store intends to keep it in stock and whether it serves another role such as range breadth, scarcity or a useful add-on.

Without that separation, good data becomes bad advice. A unique item receives a meaningless reorder flag and a slow add-on may be removed even though it supports the main product.

Read velocity and the cost of waiting together

Two questions are useful for a replenishable item:

• When might it run out? Divide current units by observed daily sales.
• How much cash is already sitting in it? Multiply current units by the actual unit cost.

The first shows availability risk. The second shows the cost of holding too much. Neither is sufficient alone.

Shopify's official analytics uses related measures: sell-through rate, days of inventory remaining and inventory value. Its ABC analysis also has an important boundary: grades are based on revenue, exclude discounts and do not include product cost.[1][2] An ABC grade is therefore a useful attention filter, not a ready-made purchasing decision.

The accounting view adds another useful restraint. IAS 2 measures inventory at the lower of cost and net realisable value. The amount paid for goods does not guarantee that the business will recover it when they are sold.[3] This is not accounting advice for a particular store. It is a reason not to confuse inventory cost with certain future revenue.

Measure velocity only while the item could be sold

An item that was out of stock for half the month could not make sales during that time. Dividing monthly units by all 30 days understates demand because of the very stockout the decision is meant to address.

Where possible, use days when the item was genuinely available. Check whether a campaign, season or one large order changed the period. When there are only a few sales, avoid producing a precise reorder date. A small sample can create a very precise-looking but unstable estimate.

Lead time changes the priority

Two products can have the same days of inventory remaining and a very different risk. One supplier can deliver tomorrow; another needs six weeks. The first item can wait while the second needs an earlier decision.

A simple decision point compares estimated days of stock with supplier lead time plus a sensible allowance for uncertainty.

That allowance should not be a universal percentage. It grows where demand or delivery varies more and where a stockout has a material effect. It can be smaller for an easily substituted item supplied quickly.

If lead time is unknown, say so. A system can show that a best seller is running low, but it cannot honestly calculate an order quantity without knowing when and in what minimum quantity the supplier can deliver.

A stockout is not always one whole lost order

When an item is unavailable, the customer may delay the purchase, choose another variant, buy another brand or go to a competitor. Original research on stockout-based substitution shows that willingness to switch affects service levels at both item and category level.[4]

That matters operationally. A product with a strong substitute may carry less stockout risk than a distinctive item that brought the customer to the store. At the same time, sales of substitutes can hide the true demand for the missing product.

Do not assign the same financial loss to every day out of stock. Look for movement to a relevant alternative, a delayed purchase or a lost customer. Ordinary transaction data usually reveals only the first of those outcomes.

Four queues instead of one ranking

After combining product role, sales velocity, stock, lead time, margin and cash tied up, place items into four working queues.

Reorder

The item is replenishable, demand is reasonably stable, margin is acceptable and stock is unlikely to last until the next delivery. High commercial value and weak substitution increase the priority.

Hold for now

Stock is adequate or the evidence is still immature. This includes a new item, a seasonal product before its relevant period or a product where a quick decision would rest on only a few orders.

Actively sell through

Material cash is tied up, the item has barely moved and no other role is supported by evidence. Selling through does not have to mean a blanket discount. Better visibility, repaired content, a relevant bundle, a supplier return or a targeted offer may be the better first action.

Do not reorder

Demand, margin or commercial role does not justify more capital. This decision is about the next purchase; it does not by itself determine how aggressively to clear the current stock.

A field experiment on stockouts also found that discounting to encourage a backorder need not be the best response. It was the least profitable of the responses tested in that particular study.[5] One retailer cannot establish a universal ranking, but the result is a useful counterexample to treating a discount as the safe default.

What to do now

1. Separate replenishable items. Do not put unique, limited and deliberately scarce goods into the same reorder ranking.
2. Rank cash, not units. Start with items carrying the highest current cost value and add time since the last sale.
3. Add velocity and in-stock days. For replenishable items, calculate sales only across periods when the product could actually be bought.
4. Add lead time and margin. Without them, do not present a precise order quantity.
5. Create four queues. Reorder, hold, sell through and stop buying. Review the first items with the largest financial effect each week.

Korzaro combines current inventory cost, time since the last sale, observed sales velocity and availability. It can surface replenishable products at risk and items where capital has been standing still. Supplier lead time and the final order quantity still require a human decision.