In the past, people think a company is prosperous if its warehouse are full of products. But modern management such as MBA, CEO 12 and EMBA believe that zero inventory is the best inventory management. More inventory, more capital unavailable. And there is a ratio can shows how effectively inventory is managed.
“Inventory Turnover Ratio” means “Inventory Turnover times”. It means how many time a company’s average inventory (Current Inventory + Previous Inventory) / 2) has been sold during a period. The formula is: inventory turnover ratio = cost of goods sold / the average inventory. For example, A company’s average inventory is $2000 and sales is $20000, then the inventory turnover ratio is 10.
Generally speaking, it would be better if the ratio is high. The high inventory ratio means the company can effectively sell the inventory and the company does not overspend by buying too much inventory or wastes resources by storing non-salable inventory. The low ratio means the company have problem with selling the inventory, which often led to storage costs and other holding costs and even causes goods damage, such as corruption and oxidation. But above can only be considered as a general rule. Some times, the too-high ratio would often causes stockout which would trouble some companies. In a word, sales should be match with inventory purchases.
There Provides several advises to increase inventory turnover ratio. You can see from the formula (inventory turnover ratio = cost of goods sold / the average inventory). There are two facts that can affect inventory turnover ratio is cost of goods sold and average inventory. So the first way come to our mind would be to increase sales.
1. Increase sales
1) The company could focus on advertisements or have promotional events and offers.
2) The company also needs to formulate better marketing strategies to create more demand in the industry and thus give a push to its sales.
3) Discount strategy to reduce the price to an attractive level can also be applied to increase the sales.
2. Decrease inventory
1）Better forecasting: The company should improve the forecasting techniques. If you can forecast customer’s demands correctly, you only need to stock those items. This will reduce inventory, which in turn will increase the inventory turnover ratio.
2）Focus on top selling products: According to Pareto’s ‘80:20’ principle, we should invest only in the products that get you the maximum profit. Eliminate those products that are creating losses for you.
3）Cooperate with your suppliers: It would be great if you can put your stock in your suppliers’ warehouse, and buy the products anytime and anywhere from your supplier.
4）Sell your whole old and obsolete stock to a liquidator. It is a quick and easy way to apply.
3. Try to get lower inventory price
Contact your vendors to reduce the price they quote you for the inventory items. This way you can reduce the inventory cost.
That’s all for today. Hope you could sell out whatever you want to sell.
Thanks for reading.