How to improve inventory turnover – six simple steps

The benefits of improving your inventory turnover

If you carry a lot of stock items you’ll have a lot of money (working capital) tied-up in inventory and this can impact your cashflow and profitability. Improving your inventory turnover can therefore speed up how quickly these items move through your business – converting your investments back into accessible cash (by selling the items or using them in manufacturing processes).

It’s important to keep a close eye on your inventory turnover ratio so you can understand how efficient you are at doing this. The inventory turnover calculation helps measure your inventory management efficiency, as it shows the number of times you buy and replace (or turn) inventory over a certain period of time, usually a year.

In general, a high turnover of stock can improve profitability because:

• Items that turn faster have lower carrying costs
• Cash is constantly freed-up for reinvestment
• Businesses can remain responsive to the marketplace and react to changes in demand
• There’s less chance of excess stock becoming obsolete and being sold off at a loss.

Before we look at how to improve your inventory turnover you might want to read about the causes of low stock turnover.

Increasing inventory turnover isn’t as simple as it sounds!

Improving your inventory turnover isn’t as simple as just ordering fewer items more regularly. Or holding less stock in your warehouse.

For starters, some businesses don’t have the resources to place and receive more orders – and they have minimum order quantities to hit from their suppliers. Plus simply holding less stock in the warehouse could increase the risk of stockouts, leading to lost sales and angry customers.

The key is to manage your stock smarter: know what stock you’re holding, what stock you’re going to need in the foreseeable future, and order the optimal amounts of the right items, at the right time.

Here’s how to make this happen.

Six ways to improve inventory turnover

Here are six ways to improve inventory turnover without damaging stock availability:

1. Know your inventory items’ position in their product life cycle
2. Improve demand forecasting accuracy
3. Prioritise your inventory
4. Reorder smarter
5. Use-up excess inventory by redistributing stock
6. Use automation to improve insights

Let’s look at each one in turn.

1. Know your inventory items’ position in their product life cycle

As items move through their product life cycle, their demand will change. Most items in the growth stage will experience an upward demand trend, at maturity demand often levels off and becomes quite steady, and during decline it can become more erratic and then fall off. This means that in your product portfolio you’ll have 1000’s of SKUs with different demand patterns/types.

Demand types are important when you’re aiming to improve inventory turnover (read points 2 and 3). But when focused on the product life cycle, it makes sense to concentrate on items that are entering their decline stage. This is so you can monitor their demand more closely and come up with strategies to reduce stock levels, before the items become obsolete e.g have no demand.

Possible strategies include reducing your reorder quantities and levels of safety stock, or using marketing campaigns or pricing tactics to increase demand and move the stock faster before your customers lose interest altogether.

2. Improve demand forecasting accuracy

When looking to improve stock turnover, it’s important that purchasers only order items that have a demand in the marketplace. Accurate demand forecasting is therefore critical.

Until now you may have only used simple moving averages to calculate demand, based on a certain number of stock days. However, these calculations are just too simplistic to deal with the demand and supply fluctuations of today’s markets. As a result, they can be a cause of over-forecasting, leading to a low inventory turnover.

To improve your stock turnover, you need to go beyond these basic calculations and aim to use statistical demand forecasting principles. Firstly, you need to factor into your forecasts an item’s demand type, based on its position in the product life cycle, and adjust your forecasting algorithms accordingly.

Secondly, you should identify items with seasonal demand patterns and market trends and again fine-tune the forecast.

Thirdly, you should refine your forecasting parameters to reflect demand volatility in the market e.g set longer forecasting periods for slow-selling markets and much shorter ones if market demand is volatile.

And finally, allow for qualitative demand insights, such as adjusting forecasts for promotions or competitor activity.

3. Prioritise your stock with inventory classification

We’ve already discussed how every item in your product portfolio will have a different demand type. But, at the same time, every item will also differ in terms of their:

• Value e.g. revenue or profit margin
• Cost to sell
• Demand volatility
• Pick frequency

It therefore makes no sense to have one generic stocking policy where you manage every item in your portfolio in the same way. Instead you should look to prioritise stock items based on the above characteristics. By classifying every inventory item into groups, you can manage items with similar characteristics in the same way. By doing so you can optimise your inventory levels, and, therefore improve your inventory turnover.

A basic form of inventory categorisation, such as ABC analysis, lets you group products based on one-dimension e.g value, with A items being the most valuable to the business, B items less valuable and so on.

But for more sophisticated inventory classification, you need to consider more variables that affect turnover rates, such as an item’s pick frequency, cost or demand. You can then produce multi-dimensional inventory stocking policies that show what items to stock and in what quantities.

By optimising inventory levels, you’ll quickly see an improvement in your inventory turnover, without risking stockouts of your most important lines.