While high inventory turnover can mean high sales volumes, it can also mean that you’re not keeping enough inventory in stock to meet demand. Inventory is one of the most important aspects a business should track. Today, you can use software to track your inventory and automate the calculation of your ITR and other vital metrics. Using software will allow you to track your ITR against your profits and discover the healthiest ratio for your business.
Still have questions about finding a good inventory turnover ratio for your business? Here are some of the most common questions (and answers) about nailing your inventory turnover ratio. This helps you identify which lines are moving slowly and not providing high returns, so you can improve forecasting. Supply chain issues are challenging businesses that don’t plan for mishaps—which are bound to happen at some point. Just take a look at the most recent supply chain issues that were felt worldwide. When demand forecasting, you making predictions about future sales based on past sales data that are both qualitative and quantitative.
Experience the simplest inventory management software.
Calculating inventory turnover ratio is a great way to determine if you need to increase or decrease your inventory supply while also helping you understand your company’s inventory for future financial decisions. You need to track your ecommerce store’s orders closely to ensure that you can manage your inventory in a cost-efficient way that maximizes your business’s cash flow while meeting customer demands. The right inventory management software gives you real-time visibility into inventory levels across channels, as well as analytics tools and data tracking capabilities. These features make it easier for you to find dead stock, forecast demand, and monitor your inventory turnover over time. For most retailers, an inventory turnover ratio of 2 to 4 is ideal; however, this can vary between industries, so make sure to research your specific industry.
- The second is the just-in-time method, which only orders inventory as needed to meet customer demand.
- High turnover signifies rapid sales, while low turnover may indicate weak performance or overstocking.
- To calculate the inventory turnover ratio you divide the (COGS) or cost of goods sold by your average inventory (starting inventory plus ending inventory in a given time period, divided by two).
- With an inventory ratio of 4, the company knows that its inventory was sold and replaced 4 times in the past quarter.
Consider lowering the price to make them more accessible to a larger number of consumers. If you can’t do so, consider negotiating discounts with your manufacturer or supplier. If you’ve built a strong rapport with your supplier, you may be able to negotiate shipping discounts for recurring orders, which you can pass onto your customers. Drops have also helped mask supply chain delays given their ‘surprise’ nature of timing.
How to Calculate Your Inventory Turnover Ratio:
Maybe it becomes part of a semi-regular rotation — giving people all the more reason to sign up for your email list and pay close attention. One pallet holds all 300 electronics, but you’d need 11 extra pallets to house the 275 remaining units of pillows. For lower-velocity items (and in cases of excess inventory that won’t sell out for a while), a longer-term storage option in a less expensive facility may be a more cost-effective solution to low inventory turnover. Separating out long-term and short-term storage can improve a facility’s inventory turnover ratio, and even save some brands money in certain scenarios. For example, if your COGS was $200,000 in goods last year, and your average inventory value was $50,000, your inventory turnover ratio would be 4. When you know how fast items turn over, you can make sure to order popular items well in advance and in sufficient quantities to meet customer demand.
Optimizing inventory turnover is one of the most critical parts of inventory control. You’ll want to look a bit deeper into inventory turnover differences based on industry, the size of the business, and other factors. If you are looking for a 3PL that will help you manage your inventory in real time, check out ShipBob.
Average Inventory (AI)
A high inventory turnover rate refers that after purchases or productions you make sales quickly; your inventory does not hold in the warehouse for a long time. If you’re off target, consider incorporating the supply chain and customer-facing solutions we recommended for your business. Still, with reliable processes in place and a long-term inventory management strategy, you’ll be able to strike that balance sooner than you think. Luxury businesses like the jewelry industry tend to see a high-profit margin with low inventory turnover.
There is no right or wrong turnover rate — but optimizing your product line, replenishment strategy, and even warehouse can help your bottom line. Inventory ratio is one of the most versatile metrics a business can track. If you don’t bother calculating it, you are missing out on valuable data that you could use to optimize many of your existing operations, gain new insights, and improve your overall supply chain performance. Whether you store your products yourself or partner with a 3PL, understanding the data around your inventory and operations can help you increase efficiency, and maximize cash flow. Inventory management software comes with many features that will help you modernize and optimize your inventory management processes and policies. For example, such software enables your company to switch to the perpetual inventory method in accounting with a continuous real-time record of inventory.
Products
Overstocking can be just as hurtful as understocking, as it’s bound to reflect on your balance sheet. When you use product bundling, you’re curating a set of complementary items to capture more buyers. For example, a buy-more-save-more strategy can be beneficial if products aren’t moving off the shelf fast enough. You pair complimentary items that are selling the slowest together in hopes of clearing your shelves faster while still turning a profit.
What is a low inventory turnover ratio?
For example, if you sell 50 items over a year and always have 50 units of inventory in stock, you’d have a rate of one. However, this is far more inventory than is needed to meet demand — meaning you’ve significantly overstocked. A low inventory turnover ratio signals that sales are weak and inventory isn’t moving off the shelves. Many industries consider an inventory ratio under 4 a low turnover ratio. In most cases an inventory turnover of 4 to 8 illustrates a good balance of restocking and sales. For most retailers and e-commerce brands, a turnover ratio of 4 is considered healthy.
Low-margin Industries
While there’s more potential to get it right than to get it wrong as Professor Kumar said, it’s best to take a quantitative, data-driven approach to a product bundling strategy. For example, the data suggests that it’s not a good idea to offer a product bundle without also offering the option to buy each product individually. Extremely high inventory turnover is often easier to fix than extremely low inventory turnover. Here are a few strategies that you can use to either order more inventory or make fewer sales. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.
There are also quantity discount bundles to consider if you’re selling bundles of the same product. Think of three-for-two deals in which customers receive more for their money. Is inventory not moving fast enough, and storing it for longer eating into your profit margins? A good inventory turnover ratio in retail depends on what you sell, how you sell it, and who you sell to. Research shows that the inventory turnover ratio benchmark for retailers is 10.86. To figure your average inventory value, or AI, add your starting inventory during a given period of time with your ending inventory during that same period of time, then divide that by two.
The inventory turnover ratio helps determine how much inventory you need to keep shelves stocked while avoiding overstocking. Industries that sell luxury goods can enjoy a lower inventory turnover ratio since they operate in a niche market, unlike more competitive industries such as retail. Since they must dispose of these products after a certain period, vendors must sell them quickly, thus maintaining a high inventory turnover ratio. Trimming unnecessary delays and strengthening your supply chain can help safeguard you from the headaches that come with delayed product deliveries.
