A company’s inventory turnover is linked to its competitiveness and performance. The faster the turnover, the better the company’s performance.
This is an important indicator for inventory management as it reflects the overall efficiency of the supply chain from supplier to customer. This ratio can be calculated for any type of inventory (materials and supplies, work in progress, finished products, or all of them combined), and can be used for both distribution and manufacturing.
Let’s learn more about stock rotation, how it is calculated and the importance it has for good inventory management.
What is inventory rotation?
Inventory turnover measures the frequency with which, in a given period of time, your organization is able to sell all of its inventory.
Inventory turnover is an important efficiency metric and is useful for analyzing pricing, product demand, and, of course, inventory purchasing and costs. It is also a critical tool when selling perishable products, where the potential for waste is high.
Importance of inventory rotation
Inventory turnover is an important indicator of the efficiency of your supply chain, the quality and demand of the inventory you have, and whether you have good purchasing practices.
Generally, a higher stock turnover ratio is better, while a lower stock turnover ratio suggests inefficiency and difficulty converting stock into revenue.
Each type of industry will have different benchmarks and standards. For example, a fresh produce supplier will have many more turnovers than a heavy machinery manufacturer.
A fast turnover is a good sign because it means that the company is managing its supplies, stock and purchases well.
The way a company manages its inventory is also related to working capital needs. If inventories are low, the company will need fewer resources to finance storage.
It is also important to avoid overstocking and shortages.
How to calculate inventory turnover
To calculate inventory turnover you must add the following:
ƒ Sum(Cost of goods sold) / ((Beginning inventory value + Ending inventory value) / 2)
Example:
If a clothing retailer generates $1 million in sales each month, with $400,000 in costs of goods sold, and the month’s beginning inventory was valued at $45,000 and ended at $55,000; Using the sales method, inventory turnover = $1 million / (($45,000 + $55,000) / 2) = 20 times per month
Using the cost of goods sold method, inventory turnover = $400 / (($45,000 + $55,000) / 2) = 8 times per month.
There are two types of calculations that can be used: The sales method and the cost of goods sold method. The cost of goods sold method produces a more accurate result because the profit margin is not taken into account.
The average inventory value is calculated by adding the beginning and ending inventory and dividing by two.
Impact of inventory turnover
Stock rotation affects the operation of your center and determines:
- The design : Knowing your turnover rate is essential to organize your logistics center. This will allow you to decide where to place your products within the areas of your establishment, and classify them according to the ABC stock management method (A: high rotation, B: medium rotation and C: low rotation).
- Storage capacity : to manage the space occupied by your goods or the available space, it is essential that you have your stock levels and rotations under control.
- The organization of your workflows : if your center works with different stock rotation rates, merchandise flows are more complicated to manage.
How to improve inventory rotation?
There are three keys to improving your stock rotation:
- Contracting, choosing new suppliers with shorter delivery times, or “negotiating” shorter delivery times with existing suppliers.
- The service rate, adjusting the acceptable frequency of stockouts (Note: zero stockouts are not a reasonable option in most sectors).
- Forecasting, refining the precision of demand forecasts, in order to reduce safety stocks without increasing stockouts.
Dashboard to track inventory rotation
With the help of a dashboard you can determine the storage capacity you need, better manage the planned arrivals and departures of goods and effectively plan the activity of your warehouse.
By having the correct inventory KPIs in the same visual space , you can have better warehouse management and make this entire process more efficient to focus on other important aspects of your business.
A dashboard allows you to have transparency in the information in various areas of your business, so it is undoubtedly an excellent tool to manage your warehouse and keep better control of your inputs and outputs.