Managing your inventory is a crucial part of running your business. You need enough inventory on hand to meet customer demand without carrying excess product. Having too much inventory on hand eats into your profits by way of storage and disposal costs. Having too little makes it harder for you to meet your demand.
You can better understand how well you’re managing your inventory by paying attention to your inventory turnover. Here, we’ll break down inventory turnover, including how to calculate it and how to use the data to your advantage.
What Is Inventory Turnover? An Overview
Inventory turnover refers to the rate at which you sell and replace your stock during a set time period. Understanding your inventory turnover ratio can guide your decision-making. It’s a crucial metric for tracking your general performance.
Turning your inventory over quickly signals strong sales and efficient operations. A slower turnover rate can help you identify product lines with weaker sales than others. A drastically low turnover rate can help you identify obsolete lines that you may need to discontinue altogether.
An inventory analysis can guide your decisions regarding marketing various product lines, pricing your products, and managing your warehouse, among other important decisions.
How to Calculate Inventory Turnover
Use the inventory turnover formula below to calculate your inventory turnover ratio.
Start by calculating your average inventory using your inventory volume at the beginning of your desired time period and your volume at the end. Add these two numbers together, and divide the total by two.
For example, if you’re measuring your inventory turnover for a full year, track how much inventory you had at the start and then at the finish. If you had $25,000 worth of inventory at the beginning of the year and $17,500 at the end, you would calculate your average inventory as:
$25,000 + $17,500 = $42,500
$42,500 / 2 = $21,250
Once you know your average inventory, divide your cost of goods sold by your average inventory. If your cost of goods sold for the year is $50,000, you would divide that by $21,250. In this case, your inventory turnover ratio is 2.35. This means you turn over your entire inventory approximately 2.35 times per year.
What Is a Good Inventory Turnover Ratio?
There’s no straightforward answer for determining what a good inventory turnover ratio is. In general, a higher number is better, but your industry matters. Industries with fast sales cycles, such as clothing and groceries, will have a higher inventory turnover ratio, because customers frequently buy and replace these items.
On the other hand, if you’re a manufacturing company specializing in capital goods, a lower inventory turnover ratio may be perfectly acceptable. If you’re new to this concept, consult trade associations, industry reports, and other sources to learn the averages in your industry. Make sure you account for seasonal fluctuations and other factors that impact your sales throughout the year.
3 Strategies to Improve Inventory Turnover
If you’ve calculated your inventory turnover and want to improve it, use these tactics.
Streamline Supply Chain
Streamlining your supply chain will help you optimize your inventory levels and lower your operating costs in the process. It can also speed up your delivery time, which makes your customers happy. Analyze your current supply chain to identify bottlenecks, waste, and other areas for improvement.
Use technology, including IoT platforms, to monitor inventory levels, track packages, and optimize shipping routes. Technology-driven supply chain visibility can help you better predict customer demand and manage your inventory. It can also automate parts of the process, such as submitting purchase orders if your inventory drops too low.
Improve Forecasting
Modern supply chain technology uses artificial intelligence and machine learning to analyze historical data and make better predictions. These platforms use your previous sales information, industry data, and other sources to detect customer behavior patterns that can improve your forecasting.
Such platforms can help you shift your production schedules and inventory orders to stay well-stocked without having to carry excess inventory. Supply chain forecasting can also help you identify new sales opportunities based on emerging trends and changing customer behaviors.
Employ Inventory Management Software
Inventory management software works hand in hand with supply chain management and forecasting technology. These platforms can help you track important inventory management KPIs and give you insights into your stock turnover.
Using software to manage your inventory also benefits your customer service team. Automated updates of supply levels in your warehouses and physical stores give you an accurate inventory position. Your sales team won’t accidentally try to sell an item that’s already stocked out.
Optimize Your Inventory Turnover and Streamline Your Operations
Every business should aim to optimize its inventory turnover, but proper controls are particularly crucial in industries that rely on fast turnover to be profitable. Groceries and other perishable items will spoil if they don’t turn over quickly. Pharmaceuticals often expire as well, meaning you have to turn them over to get them to customers on time.
Inventory management for small businesses doesn’t have to be complicated. Surgere can help improve your supply chain visibility as well as your inventory turnover ratio. Our IoT solutions let you track products throughout the supply chain. We also understand the data, including how to use AI for better accuracy. Our engineers will work with you to deploy a supply chain solution that gives you valuable insights into how you manage your inventory.
Contact us today to learn more about how we can help streamline your operations.
Frequently Asked Questions About Inventory Turnover
What Does Inventory Turnover Tell You?
Inventory turnover tells you how well you’re managing your inventory. A higher turnover ratio generally means you’re effectively selling and replenishing your inventory. However, if your rate is too high, it may signal potential stock-outs. If you’re having trouble meeting customer demand, you may need to shift your inventory management strategy to avoid stock-outs and back orders.
Is High Inventory Turnover Good?
High inventory turnover means you have strong sales and are effectively managing your inventory. A high ratio indicates lower storage costs and a reduced risk of obsolete inventory. If your inventory turnover ratio is too high, though, you run the risk of selling out of items, which can cost you sales and often leads to customer dissatisfaction.
