This can help you decide which products to stock, how much inventory to hold, and when to reorder. Additionally, monitoring your inventory turnover rate can help prevent losses due to obsolescence or spoilage since it encourages timely liquidation of existing stocks before they lose value. Knowing this critical metric helps businesses optimize their operations and maximize profits while minimizing wastage and inefficiencies in their supply chain processes. The eTurns TrackStock app can help companies improve their inventory turnover ratio and lower their inventory carrying costs through helpful inventory optimization tools.

• If you had no use for them, you could try selling them at a reduced price to entice orders.
• Let’s say two customers with identical inventories of 500 pallets store their product at the warehouse.
• Short shelf life items require more frequent restocking, thereby increasing turnover.
• Regularly assess inventory reports to determine which products are not contributing significantly to revenue and decide whether to reduce prices, run promotions, or discontinue them altogether.
• You can also use the inventory turnover ratio for business forecasting, to identify market trends, and more.

Since wholesalers stock thousands of SKUs, this is unfortunately too time-consuming to be done on a frequent basis. Since poor-performing SKUs contribute little to the company revenues, they are understandably ignored. Thrive’s Thermostock product identifies these SKUs and automatically turns them to nonstock or calculates an optimal Min to hold. Effective supply chain management is another crucial factor affecting inventory turnover.

Cost of Goods Sold (COGS)

To calculate average inventory, find the value of your entire inventory at the beginning and end of the financial period. Again, the right software can help you keep accurate records of this. Once you have done this, add your beginning and ending inventory together. By automating your purchase orders, you can ensure that you are replenishing inventory at the right time. This can help you avoid stockouts and reduce the risk of overstocking. 2021 saw many struggles throughout the supply chain – which look like they will continue through 2022.

• Example – You have a COGS of $4 million and an average inventory cost of $1 million.
• That’ll therefore mean you’re more productive and more efficient.
• To maximize profits, it’s essential to maintain an optimal balance between having enough inventory on hand without overstocking.
• However, a lower ratio will suggest you’re managing your inventory fairly well and cutting out waste wherever you can.

Each bike costs $1,400 to produce, so you start with $9,800 in inventory. Because you practice lean inventory, you have limited raw materials and MRO in stock, valued at $1,200. Many assume a scaling manufacturer is just a scaled-down version of a large one — but this assumption could be detrimental to the business.

Strategies To Improve  Inventory Turnover

Buying less stock more often can help wholesalers to improve inventory turnover rates by reducing the risk of overstocking. This strategy involves ordering smaller quantities of inventory more frequently, which can help to reduce holding costs and minimize the risk of dead stock. By buying less stock more often, wholesalers can also respond more quickly to changes in customer demand and market trends. Most ERP systems leverage the Economic Order Quantity (EOQ), a formula over a hundred years old and invented before computers were available. The EOQ is OK for low-cost items to increase efficiencies in warehouses and branches (i.e., reduced put away).

One of the problems with very high inventory turnover is that it might mean you have excessive stockouts. When you sell inventory faster than you can replenish it, you run the risk of running out of stock. Additionally, it can be costly to expedite shipping or air freight to get inventory back in stock quickly. At Tyler Distribution we provide our customers valuable insight to help them manage their inventory. One example of this is a report that shows slow-moving inventory which will help point out items that sit for long periods of time. Many customers will decide to sell off slow moving stock at a discount and/or discontinue future production to help increase overall inventory turns.

Importance of Inventory Turnover for a Business

But do you have to buy the entire $10,000 of product at one time? Then, just before running out of stock, you bought an additional $5,000 worth of the product using part of the revenues received from selling the first shipment. At the end of the year, you still sold $10,000 of product and still made $2,500 gross profit, noncumulative preferred stock but on a $5,000 investment. Inventory turnover ratio is a crucial measure of efficiency, as it calculates how much a business sells as a percentage of its total inventory. It tells you how much you sell as a ratio to what you keep in stock. This ratio tells you how many times you fully replenish your stock in a period.

Although, it’s important to note that inventory turnover is based on an average. On the other hand, a lower rate of inventory turnover number, or ratio, would show the opposite. Either you need to light a fire in the sales team, or you have excess inventory you can’t shift. You can calculate your rate of inventory turnover by dividing the cost of goods sold by the average inventory value.

What is a good inventory turnover ratio?

Sell most of that shipment and then repeat the process two more times before the end of the year. You generated an annual $2,500 gross profit with an investment of about $2,500. But having raw materials and finished goods waiting around just raises your average inventory while doing nothing to increase sales. Besides differences in industry, the size of the business will also determine the best inventory turnover ratio.

Inventory and Turnover Ratio in the Soft Drink Industry

There are lots of moving parts involved in making your inventory turnover work seamlessly. But again, this additional investment in stock will have a huge impact on your stock turn ratio. Let’s say you pay £100,000 for a container’s worth of stock for one product. Compare that with other businesses, like a company that distributes car parts for vintage vehicles and the difference is dramatic. However, a lower ratio will suggest you’re managing your inventory fairly well and cutting out waste wherever you can. A higher ratio will denote the opposite and highlight a potential problem that needs fixing.

The ratio can be used to determine if there are excessive inventory levels compared to sales. Encouraging pre-orders is a great way to increase inventory turnover rates. By allowing customers to pre-order products, wholesalers can ensure they have enough inventory to meet demand without overstocking. Pre-orders also help to reduce the risk of backorders, which can negatively impact customer satisfaction. Another strategy to increase inventory turnover is rebalancing overstocked SKUs to different locations. This can help to increase sales by making products more accessible to customers.

The financial industry has an incredibly high ratio of around 48, as these firms don’t hold much physical inventory. Brightpearl’s retail operations platform helps retailers stay on top of their data. You’ll be able to manage multichannel and multi-location retail operations with ease. If you’re not tracking your inventory accurately then your inventory turnover ratio isn’t going to be accurate, either. Having precise inventory data at your fingertips is absolutely essential.

Mobilizing inventory turnover as part of your everyday retail management practices doesn’t have to be mind-boggling. With the right retail operating system under your belt, you’ll be able to manage your inventory without any of the stress of number crunching on Excel or—worse—on paper. In this article, we’ll be walking you through everything you need to know about inventory turnover, including the full inventory turnover definition and the meaning of inventory turnover ratio.