Tips to Manage Inventory Turnover Ratio

Helpful Tips to Manage Inventory Turnover

Inventory turnover is the amount of inventory that is sold during a given period of time. The inventory turnover ratio is important to know to help understand how your inventory management is working. To figure out what your inventory turnover ratio is, you will take the cost of goods sold and divide that by the average value of inventory.

What is the Inventory Turnover Ratio?

What this ratio helps managers understand, is how well inventory is being managed over a given period of time. The inventory turnover ratio shows how many times inventory turned over and gives an indication of whether or not too much inventory is being held in comparison to the level of sales. A higher inventory ratio would be ideal relative to other periods of time or your competitors because it implies that a company can more efficiently sell the inventory it has and spends less on storage and holding costs.

Often times companies will compare their inventory turnover ratios to past ratios to look for increases in inventory efficiency as well as compare themselves to competitors in the same industry to understand competitive advantages or disadvantages. Low inventory ratios compared to a competitor indicates that your company is doing poorly at managing inventory and not selling inventory as fast as competitors. Inventory that is sitting for long periods of time can also become obsolete which results in losses from markdowns and other costs incurred from having too much inventory.

To easily illustrate the inventory turnover ratio, a company that has $100,000 average inventory and has an annual sales of $1,000,000 means they were able to turnover 10 times. Say sales were $800,000, this means makes our ratio 8 showing how a higher ratio is desirable.

Tips to Better Manage Inventory Turnover

1. Forecasting

Perhaps the most important factor in better managing your inventory is proper forecasting. Understanding your best selling items vs less popular items and other yearly fluctuations including seasonality will help you determine the correct amount of inventory to keep on hand. It is always a good idea to look at recent trends in your sales data to better determine what items you will need a lot of and which items you will need less of.

2. Managing Old Stock Items

A common pitfall of many business owners is how to best deal with older stock or items that are not up-to-date or may otherwise be nearing obsolete. These items often become a burden to managers and highlight the importance of accurate forecasting. Issuing coupons, offering special sales prices and providing discounts to these items are a great way to offload them. Marketing and advertising these items can be an effective way to communicate they are offered for cheaper prices and can stimulate demand helping you to reduce burden items in your inventory.

3. Use Automation to Improve Insights

Part of improving your forecasting models to improve your inventory management is to utilize  automation. A warehouse management system (WMS) can help set this up. Your WMS should be able to monitor your inventory turnover ratio. Additionally, this insight will help clearly define which products are providing a solid return and which products are not. Setting up your warehouse management system and utilizing the best software is key to automating your inventory and accurately forecasting your stock.

4. Increasing Your Sales

One of the best ways to increase your inventory ratio and avoid some of the issues of having too much inventory, especially harder-to-sell inventory, is to simply improve your sales performance. Various tactics can be used to increase sales such as marketing promotions, advertising, discounts, price reductions etc. As mentioned previously, price reductions on less popular stock items is a great way to move more inventory.

5. Optimize Purchase Quantity

An important element is optimize your purchase quantity based off of current demand. However, when in doubt it is usually best to lean on the side of reducing purchase quantity and wait for this to sell before purchasing more. This way, you can avoid getting stuck with high levels of inventory because you never had them in the first place.

Conclusion

In closing, understanding your inventory levels and managing your inventory turnover ratio are key to operating a business successfully. If you need help with inventory management or need hardware or software, talk to an expert for help selecting the right equipment.