The benefits of improving your inventory turnover
If you carry a lot of stock items you’ll have a lot of money (working capital) tied-up in inventory and this can impact your cashflow and profitability. Improving your inventory turnover can therefore speed up how quickly these items move through your business – converting your investments back into accessible cash (by selling the items or using them in manufacturing processes).
It’s important to keep a close eye on yourinventory turnover ratioso you can understand how efficient you are at doing this. Theinventory turnover calculationhelps measure your inventory management efficiency, as it shows the number of times you buy and replace (or turn) inventory over a certain period of time, usually a year.
In general, a high turnover of stock can improve profitability because:
- Items that turn faster have lower carrying costs
- Cash is constantly freed-up for reinvestment
- Businesses can remain responsive to the marketplace and react to changes in demand
- There’s less chance of excess stock becoming obsolete and being sold off at a loss.
Before we look at how to improve your inventory turnover you might want to read about thecauses of low stock turnover.
Increasing inventory turnover isn’t as simple as it sounds!
Improving your inventory turnover isn’t as simple as just ordering fewer items more regularly. Or holding less stock in your warehouse.
For starters, some businesses don’t have the resources to place and receive more orders – and they have minimum order quantities to hit from their suppliers. Plus simply holding less stock in the warehouse could increase the risk of stockouts, leading to lost sales and angry customers.
The key is to manage your stock smarter: know what stock you’re holding, what stock you’re going to need in the foreseeable future, and order the optimal amounts of the right items, at the right time.
Here’s how to make this happen.
Six ways to improve inventory turnover
Here are six ways to improve inventory turnover without damaging stock availability:
- Know your inventory items’ position in their product life cycle
- Improve demand forecasting accuracy
- Prioritise your inventory
- Reorder smarter
- Use-up excess inventory by redistributing stock
- Use automation to improve insights
Let’s look at each one in turn.
1. Know your inventory items’ position in their product life cycle
As items move through theirproduct life cycle, their demand will change. Most items in the growth stage will experience an upward demand trend, at maturity demand often levels off and becomes quite steady, and during decline it can become more erratic and then fall off. This means that in your product portfolio you’ll have 1000’s of SKUs with different demand patterns/types.
Demand types are important when you’re aiming to improve inventory turnover (read points 2 and 3). But when focused on the product life cycle, it makes sense to concentrate on items that are entering their decline stage. This is so you can monitor their demand more closely and come up with strategies to reduce stock levels, before theitems become obsoletee.g have no demand.
Possible strategies include reducing your reorder quantities and levels of safety stock, or using marketing campaigns or pricing tactics to increase demand and move the stock faster before your customers lose interest altogether.
2. Improve demand forecasting accuracy
When looking to improve stock turnover, it’s important that purchasers only order items that have a demand in the marketplace.Accurate demand forecastingis therefore critical.
Until now you may have only used simple moving averages to calculate demand, based on a certain number ofstock days. However, these calculations are just too simplistic to deal with the demand and supply fluctuations of today’s markets. As a result, they can be a cause of over-forecasting, leading to alow inventory turnover.
To improve your stock turnover, you need to go beyond these basic calculations and aim to usestatistical demand forecastingprinciples. Firstly, you need to factor into your forecasts an item’s demand type, based on its position in the product life cycle, and adjust your forecasting algorithms accordingly.
Secondly, you should identify items withseasonal demand patternsand market trends and again fine-tune the forecast.
Thirdly, you should refine your forecasting parameters to reflect demand volatility in the market e.g set longer forecasting periods for slow-selling markets and much shorter ones if market demand is volatile.
And finally, allow forqualitative demandinsights, such as adjustingforecasts for promotionsor competitor activity.
3. Prioritise your stock with inventory classification
We’ve already discussed how every item in your product portfolio will have a different demand type. But, at the same time, every item will also differ in terms of their:
- Value e.g. revenue or profit margin
- Cost to sell
- Demand volatility
- Pick frequency
It therefore makes no sense to have one generic stocking policy where you manage every item in your portfolio in the same way. Instead you should look to prioritise stock items based on the above characteristics. By classifying every inventory item into groups, you can manage items with similar characteristics in the same way. By doing so you can optimise your inventory levels, and, therefore improve your inventory turnover.
A basic form of inventory categorisation, such asABC analysis, lets you group products based on one-dimension e.g value, with A items being the most valuable to the business, B items less valuable and so on.
But for moresophisticated inventory classification, you need to consider more variables that affect turnover rates, such as an item’s pick frequency, cost or demand. You can then produce multi-dimensional inventory stocking policies that show what items to stock and in what quantities.
By optimising inventory levels, you’ll quickly see an improvement in your inventory turnover, without risking stockouts of your most important lines.
3. Prioritise your stock with inventory classification
We’ve already discussed how every item in your product portfolio will have a different demand type. But, at the same time, every item will also differ in terms of their:
- Value, e.g. revenue or profit margin
- Cost to sell
- Demand volatility
- Pick frequency
It, therefore, makes no sense to have one generic stocking policy where you manage every item in your portfolio in the same way. Instead, you should prioritise stock items based on the above characteristics. By classifying every inventory item into groups, you can manage items with similar features in the same way to optimise your inventory levels and, therefore, improve your inventory turnover.
A basic form of inventory categorisation, such as ABC analysis, lets you group products based on one dimension, e.g. value, with A items being the most valuable to the business, B items less valuable and so on.
But for more sophisticated inventory classification, you need to consider more variables that affect turnover rates, such as an item’s pick frequency, cost or demand. You can then produce multi-dimensional inventory stocking policies that show what items to stock and in what quantities.
By optimising inventory levels, you’ll quickly see an improvement in your inventory turnover without risking stockouts of your most important lines.
4. Reorder smarter
While placing bulk orders to get supplier discounts may be tempting, it’s wise to understand the impact this will have on your inventory turnover. Don’t forget that inventory costs money to carry and ties up working capital. And, if the items you’re buying in bulk aren’t best sellers, they could end up as excess or even obsolete stock at a significant cost to the business.
Ideally, you want to place small order quantities regularly to minimise stock turning and investment.
However, sometimes this isn’t always possible due to inefficient processes or suppliers’ ordering restrictions. In such situations, you have to think smartly about how you replenish items. For example, EazyStock has an order fill-up feature that allows you to work to minimum order quantity, value or weight restrictions. So, when you need to top up an order, the system simulates the order process going forward (based on forecasted demand, stock levels, and orders due to be delivered) and recommends the most suitable items to add. This simulation also factors in sales trends and seasonal behaviour to ensure the stock you fill up with is the right stock.
5. Use-up excess inventory by redistributing stock
You may notice that inventory turnover varies between locations with multiple warehouses. Whilst some sites may have excess stock of certain products, others may be short of the same SKU.
It, therefore, makes sense to look at your inventory as a whole, e.g. across all sites, and optimise stock levels across each location, through redistribution, before placing new orders. This process reduces the need to place emergency orders with suppliers (often costing more) and helps keep item counts low and lean.
6. Use automation to improve insights
Without stating the obvious, you need a good inventory management system to track your stock levels and provide an accurate base to calculate and improve inventory turnover. A warehouse management system (WMS) or an inventory module of an enterprise resource planning (ERP) system can do this for you. A good system will calculate and monitor inventory turnover ratios down to SKU level, allowing you to identify which products are not providing an adequate ROI.
However, when it comes to optimising inventory levels and carrying out the sophisticated demand forecasting, inventory planning, classification and replenishment activity described above, we (obviously) recommend inventory optimisation software.
Inventory optimisation apps, such as EazyStock, can easily be integrated with your inventory management system to provide the extra intelligence needed to increase inventory turnover without harming stock availability.
If you’d like to know more about EazyStock, speak to our team on 0121 312 2992 or request a demo.
Improving inventory turnover is crucial for business success, impacting cash flow, profitability, and operational efficiency. Inventory turnover refers to the rate at which inventory moves through a business within a specific time frame. Let's break down the concepts mentioned in the article and dive into their significance:
-
Inventory Turnover Ratio: This ratio measures how efficiently a company manages its inventory. It's calculated by dividing the cost of goods sold by the average inventory value. A higher turnover ratio typically signifies better inventory management.
-
Stock Turnover Benefits:
- Cash Flow and Profitability: Faster turnover means reduced money tied up in inventory, leading to improved cash flow and potentially higher profits.
- Responsive Business: Higher turnover enables agility in responding to market changes and demands.
- Reduced Risk of Obsolescence: Faster-moving stock minimizes the risk of inventory becoming obsolete and sold at a loss.
-
Challenges in Improving Turnover:
- Resource Limitations: Some businesses might face constraints in placing frequent orders or holding less stock due to supplier restrictions or minimum order quantities.
- Risk of Stockouts: Simply reducing inventory without smart management might lead to stock shortages and lost sales.
-
Strategies to Improve Inventory Turnover:
- Understanding Product Life Cycles: Focus on items approaching decline stages to manage their demand efficiently and avoid obsolescence.
- Demand Forecasting: Use advanced forecasting methods considering product life cycles, seasonal demand, market trends, and qualitative insights to make accurate predictions.
- Inventory Classification: Categorize inventory based on value, demand volatility, cost, etc., using methods like ABC analysis to prioritize and manage items effectively.
- Smarter Reordering: Balance between bulk orders for discounts and the impact on inventory turnover. Use tools to simulate orders considering forecasted demand and constraints.
- Redistribution of Stock: Optimize inventory levels across multiple locations to minimize excess stock and avoid emergency orders.
- Automation and Software Integration: Utilize inventory management systems, warehouse management systems, or specialized inventory optimization software for accurate tracking, forecasting, and insights.
-
Inventory Optimization Software: Such software, like EazyStock, integrates with existing systems to offer advanced capabilities for inventory planning, demand forecasting, and replenishment. It enhances inventory turnover without compromising stock availability.
Improving inventory turnover requires a nuanced approach that considers demand patterns, product life cycles, and smart inventory management techniques. Utilizing sophisticated tools and strategies tailored to specific business needs is key to achieving better turnover without risking stock availability.
