More flexibility with suppliers – With lower inventory turnover, you can use long lead times to your advantage, and negotiate better rates with suppliers.Īmple safety stock – It’s much easier to have lots of buffer stock in place when demand is low. Lower chance of stockouts – With fewer products being shipped, you product availability should be much higher. Less flexibility on bundles and bulk orders – With a high inventory turnover, you will have less stock on hand to fulfil larger orders and bundle discounts. Greater risk from supply chain issues – High inventory turnover puts more pressure on the efficiency of your supply chain. Lower safety stock – Similar to the above, it can be difficult to have adequate buffer safety stock in place when sales are high. Potential stockouts – If products are flying off the shelf, you may struggle to replenish inventory quick enough to meet demand. Less wastage – Products that move quickly have less chance to go out of date or become obsolete.Ībility to capitalise on trends – Fast sales mean you can better respond to customer demand and market trends. Increased cash flow – A steady stream of cash means that you’ll have more cash on hand for marketing, product development, and other essential business activities. Lower storage costs – By selling goods quickly, you’re lowering the storage costs associated with each inventory turn. Let’s take a look at the advantages and disadvantages of a high inventory turnover: Advantages That said, there are some disadvantages to a high inventory turnover rate if your inventory management isn’t optimised properly. After all, the higher your inventory turnover, the more sales you’re getting. High inventory turnover rateĪ high inventory turnover rate is generally seen as a good thing. We’d recommend doing a bit of research into your industry to see whether you’re in the ideal range. In some industries, an inventory turnover ratio between 2 and 4 is optimal, whereas in others an inventory ratio between 5 and 10 might be more ideal. When looking at your inventory turnover ratio, the ideal number will depend on your industry. Inventory turnover ratio = 2 Analysing your inventory turnover ratio With these figures, your inventory turnover ratio would be 2: Let’s imagine that you’re an established business with a COGS calculated at £800,000, and your average inventory value was £400,000. Inventory turnover = COGS / Average inventory value Example With COGS and average inventory value identified, you can use the numbers in the following formula: Once you have identified the COGS, calculate your average inventory value using the following formula:īeginning inventory + ending inventory / 2] Formula for inventory turnover ratio To work out inventory turnover ratio, you’ll first need to calculate COGS (cost of goods sold) over the period you want to cover.ĬOGS is defined as the costs associated with sourcing and fulfilling your goods, including the cost of raw materials, shipping costs, storage costs, labour costs, and more. How to calculate inventory turnover ratio It’s something your customers are bound to notice too, as understanding inventory turnover means you can better avoid stockouts and backorders, and create a better customer experience. With a good understanding of inventory turnover, you can make much better decisions around budgets, forecasting demand, and supply chain management. The inventory turnover ratio is a vital calculation to evaluate business health and improve key processes in sales, inventory management, financial planning, and more. The importance of inventory turnover ratio Inventory turnover is calculated through a ratio that shows how many times inventory has been sold and replaced over a specific period of time.Įssentially, it’s a measurement of how fast a company sells their stock, with high inventory turnover generally pointing towards a thriving business, with low inventory turnover usually, but not always, indicating a struggling business.
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