When it comes to analyzing inventory turnover, every supply manager should think of inventory turns as a measure of how well the company’s products are doing in the market and how well its inventory is managed. The inventory turnover ratio is one of the best indicators of how efficiently a business is turning its inventory into sales.
Most supply managers today leverage technology such as enterprise resource planning (ERP), warehouse management systems (WMS) or inventory optimization software to track inventory turnover at the item level. There are other strategies beyond just inventory turnover that should be used to ensure inventory levels are optimized.
To keep service levels high and costs low, an inventory optimization solution should be in place to monitor the following:
Historical performance and item level demand can be used to calculate possible future trends, taking into account possible changes or demand variability. In vertical supply chains, supplier communication can be improved to ‘pull’ systems, which manufacture only on demand (and therefore need considerably less inventory). Since most wholesale distributors require inventory to be on hand, refining order-purchasing processes are the fastest way to reduce costs in the supply chain and to ensure demand forecasting accuracy.
Redistribution helps companies to redistribute items to other stock locations that have greater demand for those items. This process eliminates the need to procure more inventories from the supplier and helps keep inventory item counts low and lean. When the stock is moved from one warehouse location to another, a record still needs to be maintained across all systems to maintain accurate inventory analysis.
Track Inventory Obsolescence
In the unfortunate event that items in inventory have reached the end of their product lifecycle and are classified as “obsolete”, it is important for an organization to work backward to identify why that item is still in stock without associated customer demand. Was it an issue with the forecasting plan, did operations carry too much excess stock or did finance order too much from the supplier to save on a bulk quantity discount? Additionally, inventory items that are scrapped should be written off the balance sheet, to comply with prudent accounting conventions. Optimization systems today can alert managers when item level demand is falling off and large quantities of inventory are still in stock and are at risk of becoming obsolete.
Inventory systems that are seamlessly integrated can easily gather records of items purchased for more advanced inventory control and turnover analysis. Advanced optimization software today is mostly offered as a cloud solution and can be dynamically integrated to almost all older ERP’s or legacy inventory tracking systems.
Don’t Just Manage Inventory, Optimize it!
The monitoring and control of inventory turnover are important to the profitability and performance of wholesale distribution companies because it helps to improve inventory optimization while measuring how well the business is generating sales.
In almost all cases, a higher turnover ratio is desired, as this tends to indicate that more sales are being generated by the business. Alternatively, for wholesale distributors that report constant sales figures, making efficiency improvements in the supply chain (speed of response, increased customer satisfaction, reducing supplier lead times, reducing supplier costs or delivery timescales etc.) will also improve the profitably of the supply chain.
Many of these alternative cost savings methods can be implemented with inventory optimization software like easy stock. The ideal inventory turnover ratio is different for every company and should be considered carefully based on relevant industry benchmarks in order to establish whether the company is managing stock levels and stocking policies successfully.
Daniel Fritsch July 23, 2015