Thursday, February 22, 2024

The Importance of Inventory Turnover Ratio in Your Supply Chain

In contrast, consumer goods like personal care products and foodstuffs have shorter production times, sell quickly, and sell a lot. The demand for these items is inherently higher, contributing to a faster turnover. For distributors, the average inventory turnover (and what makes a good inventory turnover) depends on your industry.

This figure is important because it allows businesses to frame their financial footsteps. Inventory turnover is the measurement of the number of times a business’s inventory is sold throughout a month, a quarter, or (most commonly) a year of trading. In other words, inventory turnover measures how fast a company sells. A high inventory turnover generally means that goods are sold faster and a low turnover rate indicates weak sales and excess inventories, which may be challenging for a business. Having strong visibility into inventory turnover is helpful for a handful of reasons. Inventory turnover ratios can inform how you forecast sales for your business and reveal cracks in your inventory management processes.

  • For example, listed U.S. auto dealers turned over their inventory every 55 days on average in 2021, compared with every 23 days for publicly traded food store chains.
  • However, that same pallet can fit 300 units of compact electronics — each of which has a $10 manufacturing value and $90 retail value — in the same amount of space.
  • Wholesalers should focus on optimizing their replenishment timing to ensure that they have enough inventory to meet customer demand without holding onto too much inventory.

It’s important to understand what types of inventory you carry, as well as how much and when items are selling. This will help you identify slow-moving items and excess stock that can be reallocated or sold off. Price points can affect the rate at which items move off the shelves, either increasing or decreasing inventory turnover. Higher priced products typically have lower turnover rates while lower priced products tend to have higher rates of turnover. The cost of storing and maintaining inventory can greatly affect the turnover rate.

Gross Margin Return on Investment (GMROI):

If you don’t bother calculating it, you are missing out on valuable data that you could use to optimize many of your existing operations, gain new insights, and improve your overall supply chain performance. A decline in the inventory turnover ratio may signal diminished demand, leading businesses to reduce output. Low turnover implies that a company’s sales are poor, it is carrying too much inventory, or experiencing poor inventory management. Unsold inventory can face significant risks from fluctuating market prices and obsolescence.

  • With so many products to keep track of, ensuring you’re moving products quickly enough to keep your business thriving can be challenging.
  • To manage inventory levels efficiently, wholesalers must analyze their sales data and use demand forecasting tools to predict future demand.
  • Part of the functionality of Thrive’s Thermostock product is to identify SKUs with excess supply and identify the best location to move them to, reducing the cost of goods sold and the dead stock immediately.

Industries with high holding costs (e.g. vehicles and large electronics) will also prioritize a high turnover in order to minimize costs and generate as much profit as possible. However, and here’s where it gets a bit different, luxury industries (e.g. designer jewelry) tend to have a very low inventory turnover. Instead of generating profit via fast turnovers, these kinds of big-ticket items intrinsically have a very high profit margin. Understanding your inventory turnover is a one-way ticket to increased profitability. This key performance indicator (KPI) is one of the single most important retail growth indicators as increasing your inventory turnover drives profit. Businesses with high inventory turnover enjoy reduced holding costs and can respond with far greater agility to evolving customer demands.

Another strategy to increase inventory turnover is rebalancing overstocked SKUs to different locations. This can help to increase sales by making products more accessible to customers. Rebalancing tips for submitting your nih grant application overstocked SKUs also helps to optimize inventory levels in different regions by moving SKUs that are not selling in certain regions to other locations where they are still selling well.

This can help to improve inventory turnover rates by freeing up warehouse space and reducing the risk of overstocking. Discontinuing poor-performing SKUs also allows wholesalers to focus on products more likely to generate sales and increase inventory turnover. Since wholesalers stock thousands of SKUs, this is unfortunately too time-consuming to be done on a frequent basis. Since poor-performing SKUs contribute little to the company revenues, they are understandably ignored.

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Knowing how quickly products are moving from the shelves allows a business to order the correct quantity of items they need while also determining what customers are purchasing most. A higher inventory turnover ratio indicates that you are efficiently managing your inventory by quickly selling products and restocking at a rapid pace. Conversely, a lower turnover ratio suggests that you may be carrying excess inventory, leading to increased storage costs and the risk of obsolescence. Calculating inventory turnover ratio and making adjustments in your inventory management practices can help you notice and address issues such as obsolete inventory and stockouts. Through this process of evaluation, businesses can better optimize their inventory on hand in order to meet customer demand while avoiding unnecessarily high carrying costs and expiring inventory. Inventory turnover ratio refers to how quickly a company’s inventory is sold and replaced within a set period of time, such as one year or one month.

How can you calculate your inventory turnover?

The ratio can be used to determine if there are excessive inventory levels compared to sales. Encouraging pre-orders is a great way to increase inventory turnover rates. By allowing customers to pre-order products, wholesalers can ensure they have enough inventory to meet demand without overstocking. Pre-orders also help to reduce the risk of backorders, which can negatively impact customer satisfaction. Wholesalers should consider disposing of excess inventory to free up warehouse space and improve inventory turnover rates.

Can inventory turnover be too high?

The time it takes for a business to replenish its inventory can vary greatly depending on the suppliers and vendors they work with. Longer lead times mean more time between restocking, which could ultimately lower the turnover rate. What ideal inventory turnover ratio should you aim for as an apparel retailer? While there is no silver bullet for determining the right figure for your business, you will want to aim for something in the range of 5 to 10. The cost of goods sold (COGS) represents the direct costs incurred in producing or purchasing the goods that you sell during a given period.

You can also sell through a SKU until it’s done without planning on replenishing it at all. For example, let’s say one pallet can only fit 25 pillows — each of which has a manufacturing value of $5 and a retail value of $50. However, that same pallet can fit 300 units of compact electronics — each of which has a $10 manufacturing value and $90 retail value — in the same amount of space.

Also, try bundling slow-moving items with faster-selling ones as promotions or discounts; this encourages customers who want a deal while moving out old inventory. Divide COGS by average inventory to get your inventory turnover ratio. A higher ratio indicates that you are selling through products quickly while a lower ratio may suggest overstocking or slower sales.

And that will, in turn, affect your ratio as you struggle to meet customer demand. Being too quick to cut inventory levels may mean you’re not prepared should demand pick up again. If you think about FMCG or food companies, the stock turn will be very high.

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