How to Detect Alarming Inventory Turnover Ratio to Proactively Improve it?

Inventory management is the heart of your business and you work your heart out to have it in perfect shape. However, there are certain factors that could still be overlooked. Inventory Turnover happens to be the first among this.

What is Inventory Turnover Ratio?

Inventory Turnover Ratio is the reflection of how quickly your goods are leaving your shelves. To calculate inventory turnover ratio, you can use this simple math.

stock turnover

Here, the cost of goods is considered instead of the amount for which your products are sold in order to take into account the complete expenditure done on making your product.

How to Measure Your Inventory Perfection with Inventory Turnover Ratio (ITR)?

Inventory Turnover Ratio is one of the most crucial business performance indicators. ITR determines how good are you at procurement.

If your inventory turnover ratio is less than average, it means that either your selling ideas are not working out or you have stocked too much than required. In case of perishable goods, this could be a disaster that it leaves the business owner with very less time to get it sold. Adding to this, your inventory holding cost gets high costing you more damage.

If your inventory turnover ratio is more than average, that’s not a happy sign as well. It means that you might end up in stockout situations. Inventory turnover ratio could be more if you have not aligned your procuring time and quantities appropriate to the demands.

Tips to Keep Your Inventory Turnover in Check

ABC Classification of Inventory

The ABC classification is aligning products in the inventory based on sales volume. For this classification to be done, you can consider the annual sales volume. Find the best seller in terms of sales volume and stocking them more would save you from reaching high inventory turnover rate. However, for newly introduced products and certain critical items, there needs to be a different strategy.
ABC analysis

Purchase Order Quantities and Frequencies

Alteration in frequencies of placing purchase orders and quantities of products in every purchase order could drive in change that can immunize your business getting an unhealthy inventory turnover ratio. However, you need to devise special methods for determining order frequencies.

Refinements in Inventory Forecasting

inventory forecasting
No mathematical calculations will work. Get data from what drives demand for your products. Keep away seasonal and trend based demands from this figure. Try to stay close to real customer demand which can be known from POS data or average customer orders count.

Get rid of Obsolete Stocks

Obsolete stocks stall your inventory management activities so getting rid of them is mandatory in to utilize the space for more profitable inventory. Refined inventory policies, better deciphering of real customer demands and understanding towards product life cycle could help in ditching out obsolete stocks.

Finding and Reducing the Variability of Demand

Variability in demand makes things hard to predict the exact demand. These fluctuations in demand keeps us guessing all the time so it is necessary to take efforts to understand the variability in demand. To understand the variability, you should observe the big skyrocketing boosts and sales slumps and take into account the effect they had on your service delivery. Demands can be categorized into several types like New, Positive, Negative, Fast, Slow, Dying and more.

To better your inventory turnover ratio management, you’ll have to find a perfect inventory management solution in place. In case of multi-channel selling, inventory management becomes all the more mandatory. Aligning inventory management system with your ERP systems, you’ll have the entire supply chain connected to your business network making things more easier to.

inventory turnover

inventory turnover

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