Reducing Inventory Carrying Costs Through Proper Inventory Management

As the world turns, so does inventory. In your conversations with retailers and warehouses, inventory turnover will likely be a major talking point. Warehouses and retailers want fast moving and consistent items — high inventory turnover is a crucial indicator of this. At first, inventory turnover may seem like a foreign and abstract concept. However, understanding this concept is easy and essential to running a smooth and successful supply chain:

Why inventory turnover is important:

  • Simply put, inventory turnover can be defined as the frequency in which inventory is cycled through within a given time period.
  • Inventory turnover is the best metric to determine how well inventory is being managed.
  • Increased inventory turnover reduces holding costs: less money spent on warehousing, and less money tied up in slow moving inventory with the potential to expire or become obsolete.
  • Low inventory turnover can be a sign that too much inventory is being produced and can lead to unsaleable goods.
  • Extremely high inventory turnover can lead to item shortages and cut orders.

How to calculate inventory turnover:

Inventory Turnover Formula – Tyler Distribution Centers, Inc

 

  • For maximum accuracy, we recommend calculating by case quantities rather than pallet quantities: ((Cases In + Cases out) ÷ 2) ÷ Average Case Inventory = Inventory Turns
  • Inventory turnover can be calculated for any time period as long as the information is consistent, ie. yearly throughput/average inventory for the year.
  • Inventory turnover can be calculated for the entire inventory or SKU by SKU.

Examples:

Throughput = 10,000 cases in annually + 10,000 cases out annually ÷ 2 = 10,000 case throughput annually

Average Case Inventory = 3,000 cases “Beginning Inventory” + 2,000 cases “Ending Inventory” ÷ 2 = 2,500 average case inventory

Annualized Turns = 10,000 cases of throughput ÷ 2,500 cases of average inventory = 4 annualized turns

  • From here, days of inventory can also be determined: 365 days ÷ 4 turns = 91.25 days of inventory, meaning the inventory turns every 91.25 days.

How to improve your inventory turnover rate:

  • Forecast the better the sales forecast, the better you’ll be able to plan your inventory levels.
  • Manufacture in controlled batches the manufacturing cycle should reflect the sales forecast.
  • SKU optimization analyze the turns of each SKU and eliminate the slow turning SKUs.
  • Analyze the seasonality of your products – consider how much seasonality plays into your inventory turns, and whether your items turn quickly outside of that season.
  • Understanding how your entire supply chain and flow of materials limits or enables you to turn your inventory.
  • Work with industry partners that will help you identify these things.

At our warehousing operation, Tyler Distribution, these are the types of questions that we will guide you through during our qualification process. We want to understand your business so we can provide tailored service to match your distribution model, and we also want to help you to understand the intricacies of logistics and supply chain. If you are struggling with warehousing and inventory management, contact Tyler Distribution today to discuss how to optimize your inventory turnover.

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