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Inventory Management / Optimisation
Inventory Management / Optimisation
9 min read

Achieving Healthy Inventory Turnover: Insights, Formulas, and Tips

Published on:
May 12, 2024

Whether goods are flying off the shelves or hanging around even after deep discounts, you need to know. To find out, you need to take the pulse of inventory turnover — how quickly products sell and are replaced during a set period. A high turnover ratio indicates strong sales or understocking, while a low one suggests weaker sales or excess inventory. By monitoring your turnover ratio and keeping a healthy balance, you can improve cash flow, reduce carrying costs, and boost overall profitability.

Ready to check your inventory’s vital signs? Keep reading for essential insights, formulas, and tips for optimising your inventory turnover.

Why does efficient inventory turnover matter?

Whatever your industry or business size, it’s essential to strike the right balance in your inventory. On the one hand, maintaining high stock levels gives you the flexibility to fulfil any order,  but it can lead to excess inventory. On the other hand, operating with minimal inventory for higher turnover risks stockouts. Understanding inventory turnover will let you set the right course, keeping your business lean and responsive.

Here are a few ways optimised inventory turnover can help.

  • Lower holding costs: A high inventory turnover ratio means lower holding costs, which frees up capital that can be reinvested in other areas of your business.
  • Improved cash flow: When inventory turns over quickly, sales are converted faster into cash—the lifeblood of your business.
  • Less risk of obsolescence: Faster turnover reduces the risk of products becoming outdated or obsolete—helping you avoid discount sell-offs or product write-offs.
  • Better decision-making: Knowing what’s selling and how quickly is key to making the right choices on pricing, purchasing, promotions, and more.
  • Enhanced competitiveness: Optimising inventory turnover lets you offer shorter lead times, respond quickly to demand, and avoid stockouts – helping you attract and retain customers.

Essential inventory turnover formulas

There are two key formulas that can help you measure, understand, and improve inventory management.

  1. Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory Value

This more basic formula assesses average inventory turnover efficiency for a specific period such as a quarter or a year. It provides a straightforward gauge of how many times inventory is sold and replaced over time, smoothing out short-term variations to offer a more reliable measurement.

  1. Inventory Turnover Days = 365 (or number of days in the period) / Inventory Turnover Ratio

This formula expresses inventory turnover in terms of days, providing insights into the average length of time inventory stays on shelves before being sold. This offers a more granular understanding of inventory movement and can identify bottlenecks in your supply chain or sales processes.

Whichever formula you are applying, it’s vital to regularly track your progress. Periodic calculations let you monitor inventory management effectiveness and identify trends over time. Comparing your inventory turnover ratio to industry averages also lets you benchmark your relative performance and pinpoint areas for improvement.

Common inventory turnover challenges

While there are clear benefits to efficient inventory turnover, achieving this outcome isn't always smooth sailing because it’s affected by numerous complex factors. Here are some frequent challenges wholesalers face.

  • Accurate data and analytics: Effective inventory management relies on accurate data about product demand, stock levels, and sales trends. Lack of access to accurate data, or manual data entry processes can hinder analysis and lead to poor decision-making.
  • Forecasting accuracy: Accurately predicting demand is crucial for maintaining the right amount of inventory. However, this can be tricky, especially for wholesalers dealing with a diverse product range, seasonal fluctuations, or volatile markets. In particular, SKU proliferation can be a challenge if you offer a wide range of products with unique demand patterns and turnover rates.
  • Internal collaboration: Inefficient communication or siloes between different teams can lead to inaccurate forecasts, poor order planning, and suboptimal inventory levels.
  • Supplier relationships: Longer lead times or unreliable suppliers can impact inventory planning and efficiency. Wholesalers also often negotiate bulk discounts with suppliers, leading to larger-than-needed order quantities that tie up capital in excess inventory.
  • Limited technology: Outdated inventory management software or lack of automation can hinder real-time stock tracking, demand forecasting, and reorder point calculations.

Tips for optimising inventory turnover

Here are some practical ways to refine your inventory management and enhance overall efficiency. By following these tips, you won’t just optimise inventory turnover — you’ll set the stage for better financial health and higher customer satisfaction.

Enable data-driven decisions

  • Invest in data analytics tools to track demand, sales, and inventory levels for insights into high-performing and slow-moving items. Use data insights to refine forecasting, adjust inventory strategies, and make informed decisions about purchasing and promotions.
  • Use effective demand forecasting by analysing historical data to refine forecasts and reduce excess stock. Consider advanced forecasting techniques like machine learning if large data sets and complex demand patterns are involved.
  • Implement ABC analysis to categorise products based on value and turnover, focusing on managing high-value, high-turnover items closely using stricter controls and frequent forecasting. For C items, consider alternative strategies like vendor-managed inventory or dropshipping to minimise holding costs and management.

Optimise purchasing & supply chain

  • Strengthen relationships with reliable suppliers to ensure quality, on-time deliveries, and transparent communication.
  • Negotiate for shorter lead times and flexible order quantities.
  • Explore just-in-time (JIT) inventory principles to minimise holding costs and reduce the risk of obsolescence.

Use safety stock effectively

  • Maintain a buffer of safety stock for critical items to avoid stockouts in case of unexpected demand surges or supply chain disruptions.
  • Calculate optimal safety stock levels based on lead times, demand variability, and service level targets.
  • Regularly review and adjust safety stock levels based on changes in demand patterns and supplier reliability.

Coordinate sales & marketing efforts

  • Promote slow-moving items through bundling, discounts, or targeted marketing to boost demand.
  • Run clearance sales regularly to free up space and capital for faster-selling items.
  • Leverage customer insights to tailor marketing campaigns and promotions effectively.

Improve operational efficiency

  • To track key metrics and identify potential issues quickly, automate inventory management tasks for efficient stock tracking, order processing, and reorder point calculations.
  • Use barcodes or RFID tags for real-time inventory visibility and to streamline order fulfilment and avoid stockouts.
  • Improve communication and collaboration between sales, procurement, and logistics teams to ensure everyone works towards common goals.

We can help!

By optimising inventory turnover, you’ll ensure the right products are available at the right time, reduce holding costs, improve cash flow and maximise profitability. You’ll also be more competitive, thanks to happier customers, stronger supplier relationships, and the ability to make more informed decisions quickly.

Fast to implement, easy-to-use and highly scalable, our cloud-based software has everything you need to unleash inventory efficiency. From harnessing the power of data to automating time-consuming manual tasks, there are many ways we can help. Here are just a few.

  • Monthly ABC analysis can identify the high-value, fast-moving items that have the biggest impact on your bottom line.
  • Precise safety stock calculations will keep you one step ahead in the ever-evolving marketplace.
  • Five different forecasting models will let you find the most accurate fit for each item’s future demand.
  • Advanced data visualisation and clear reporting will let you make informed decisions and drive coordination across your business.

Learn more about how we can help or book a personalised demo.