How to Improve Inventory Turnover with Inventory Optimisation
- How to improve inventory turnover with inventory optimisation
- What is inventory turnover?
- Six inventory optimisation tactics to improve inventory turnover
How to improve inventory turnover with inventory optimisation
The concept of inventory optimisation helps many businesses improve their inventory turnover – without damaging stock availability. This post will explain how, but first, let’s deal with a few simple definitions.
What is inventory turnover?
Inventory turnover (also known as stock turnover, inventory turns or stock turns) is a measure of how well a business manages its inventory. The inventory turnover ratio can be used to measure inventory performance and shows the number of times a business buys and replaces (or turns) its inventory over a certain period of time, usually a year. Find out how to calculate and interpret your inventory turnover ratio.
Before we look at how to improve your inventory turnover rate you might want to read about the causes of low turnover here.
Six inventory optimisation tactics to improve inventory turnover
1. Product life cycle – know your products
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. Accurate demand forecasting – know your markets
For inventory turnover ratios to remain high, it’s important that inventory planners and 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 averages to calculate demand. 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 turn, you need to go beyond these basic calculations and move to 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 seasonality 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 insights, such as adjusting forecasts for promotions or competitor activity.
3. Inventory classification – prioritise your inventory
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. The aim of inventory optimisation is to prioritise which products you stock, based on their characteristics. By doing so you can optimise your inventory levels, and, therefore improve your inventory turnover. For this reason, it’s critical that you classify every item of inventory into groups, to allow you to manage items with similar characteristics in the same way.
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 ratio, without risking stockouts of your most important lines.
4. Supplier ordering – improve replenishment
Whilst it maybe tempting to place bulk orders to get supplier discounts, it’s wise to understand the impact this will have on your inventory turnover. Don’t forget that inventory costs money to carry and ties up working capital. And, if the items you’re buying in bulk aren’t best sellers, they could end up as excess or even obsolete stock at a significant cost to the business.
Ideally you want to place small order quantities on a regular basis, to keep stock turning and investment minimised.
However, sometimes this isn’t always possible due to inefficient processes or suppliers’ ordering restrictions. In such situations you have to think smartly about how you replenish items. For example, EazyStock has an order fill-up feature that allows you to work to minimum order quantity, value or weight restrictions. So, when you need to top up an order, the system simulates the order process going forward (based on forecasted demand, stock levels, and orders due to be delivered) and recommends the most suitable items to add. This simulation also factors in sales trends and seasonal behaviour, to ensure the stock you fill-up with is the right stock.
5. Inventory redistribution – use-up excess stock
If you have multiple warehouses you may notice that inventory turnover varies between each location. Whilst some sites may have excess stock of certain products, others maybe short of the same SKU.
A further principle of inventory optimisation is to optimise stock levels across each location, through redistribution. This process eliminates the need to procure more inventory from the supplier and helps keep item counts low and lean.
6. Use automation – improve insights
Without stating the obvious, you need a good inventory management system to track your stock levels and provide an accurate base to calculate and improve inventory turnover. A warehouse management system (WMS) or an inventory module of an enterprise resource planning (ERP) system can do this for you. A good system will be able to calculate and monitor inventory turnover ratios down to SKU-level, allowing you to identify which products are not providing an adequate ROI.
However, when it comes to optimising inventory levels and carrying out the sophisticated demand forecasting, inventory planning, classification and replenishment activity described above, we (obviously) recommend inventory optimisation software.
Inventory optimisation apps, such as EazyStock can easily be integrated with your inventory management system to provide the extra level of intelligence needed to increase inventory turnover, without harming stock availability.