For example, comparing two companies, one that carries inventory and another that drop ships directly from the manufacturer, shows how completely different inventory turnover ratios do not tell the entire story. For the best supply chain strategy, it’s important to compare your numbers against companies with a similar structure to determine the most relevant benchmarks. Another way to reduce inventory hold times is by improving efficiency for inbound transportation. For instance, reducing purchase order quantity and increasing the frequency means less inventory sitting idle in your facilities. To optimize inventory turnover, companies must ensure that the products in demand are shipped and delivered to the customer in the shortest timeframe.ĭifferent supply chain management techniques will also influence inventory turnover ratios. The best method to find your ideal inventory turnover is to use your inventory software, such as QuickBooks, NetSuite, Sage 100, and Dynamics GP, to evaluate what products are selling more than others. While you can get an idea of what your industry-specific turnover ratio should be by consulting this resource, nothing replaces crunching the numbers yourself. Inventory turnover ratio varies by industry. Instead, your business needs to find the right balance between having too much inventory and not enough. These are not situations you want for your business. On the other hand, companies turning their inventory over at a sluggish pace, or overstocking, are unnecessarily limiting their cash flow, and may get themselves into a position of needing to sell their stock at cost or liquidate at a loss. Not having enough stock on hand to meet a sudden surge in demand can cause a stock-out, leading to missed sales and unhappy customers. Yet there is also risk in having too high an inventory turnover rate. The higher the inventory turnover number, the more often inventory is “turned,” or replaced, which means the company is more efficient at managing its inventory. It measures the amount of capital invested in inventory. Inventory turnover is a simple ratio showing how many times a company’s inventory is sold and then replaced over a period of time. Here are some things to keep in mind as you calculate your inventory turnover ratio. It will help your inventory flow smoothly through your supply chain, keeping your customers happy and increasing your margins. This ratio helps you find the sweet spot between having so much product it becomes obsolete and having enough so it doesn’t hinder sales. įirst, you need to determine your company’s inventory turnover ratio. It varies based on the nature of your business, your industry, and your financials, but ultimately, it’s about finding a balance that’s right for your business. You may be wondering: What’s the solution, then?
Too much and too little stock both drag down your bottom line.
If you’re in an inventory-based business, managing your inventory efficiently is critical to your profit and success.
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