what is the optimal inventory turnover ratio?
TRANSCRIPT
What is the Optimal Inventory
Ratio?
Does “The higher – the better” seem an obvious answer?
What does it mean higher inventory turnover ratio (ITR)?
ITR - Less inventory is required to support sales, less warehouse space and capital are needed, which leads
in turn to higher ROI and an increased bottom line.
What to do in order to increase the ITR?
in most cases this question remains without an answer.
This may end up:• ruining the service level
and cutting the sales• creating an image of
your company as an unreliable supplier.
What happens if you decide to decrease only
the inventory level?
Good news is that reduction of the inventory without cutting the service
level, is possible!
Wondering how?
Distribution company must know the MAIN FACTORS that restrict the ITR from infinite
increase.
Factor no.1.
Replenishment Frequency
The inventory level for each single SKU fluctuates over time…
Optimal inventory level is the quantity that covers all sales in the period between
two stock arrivals.
Ideal case• Future sales are 100% known• Supply is 100% reliable• No minimal supply batches are set
The ITR for an optimized inventory is 2x the number of replenishments per year.
A lower inventory level without increasing the replenishment frequency
will certainly cause stock-outs
What happens if you increase replenishment frequency?
It enables a faster reaction when market conditions are changing, providing a higher service level in hardly
predictable conditions.
Push the button and see what happens….
But that is exactly where modern inventory
management software systems can help.
Additional costs for processing orders and
receipts is the downside of an increase in replenishment
frequency.
...almost every company can increase the replenishment frequency for more than half of the SKU’s by at least twice, without any increase in operating costs.
Factor no.2.
of Supply
Even the most reliable vendors fail from time to
time in supplying goods.
What to do?Optimized inventory level
according to replenishment frequency and stock-outs
may occur.
If reliability of supply is not very high?
Add some quantities on top of the optimal inventory level in order to cover supply failures and provide a higher service level.
Factor no.3.
Supply Batches
What is“Harmful” batch?
When supply batch is much higher
than the quantity sold during the
shortest possible period between replenishments.
Inventory level can be safely reduced by removing harmful
batches
Factor no.4.
Dynamics
Depending on sales dynamics, the lowest possible inventory would still be higher compared to the ideal case.
cccComparison
A higher inventory will be required for the item with bigger sales peaks
and fluctuations.
Two items that have exactly the same
replenishment frequency, annual sales and minimal batches.
Soft4Inventory suggests the optimal inventory level for real-life sales dynamics and optimize it according to the
replenishment frequency.
The maximum ITR is restricted by factors:• replenishment frequency,• reliability of supply,• supply batches, • sales dynamics;
So, what is the optimal inventory turnover ratio?
ITR can be lower because of the poor quality of the inventory management
software system.
Improved inventory management systems such as Soft4Inventory can help!
It allows the inventory
levels to be kept close
to the level set by the
before-listed factors.How?
Optimal ITR is a very individual indicator
Even the best ITR in your industry can be improved by making the right decisions based on reliable
data.
Would you like to get more details?
Read the full article and get more insights about optimal turnover ratio.
