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Inventory Turnover Metrics for Effective Business Management
In retail, sales can sometimes happen in seemingly inexplicable ways. Some products may become out of stock before properly hitting the shelves, while others sit there no matter the discount. And even those that sell at a “normal” rate are subject to shifts, moving at a pace that can be complex to predict. Calculating your inventory turnover for every product allows you to make strategic decisions, from your relationship with your suppliers to your approach to pricing, promotions, and other aspects of the product’s lifecycle. From operational tweaks to digital price tags, let’s take a look at inventory turnover, what it reveals about your company’s forecasting, and how you can boost your performance.
What Is Inventory Turnover?
Inventory turnover refers to how long an item remains in your store’s possession—either in your inventory or on the shelf—before it is sold. In other words, it shows how much time has elapsed between the day you received it from your supplier and the moment a customer buys it. In a perfect world, you repeatedly achieve a complete turnover of your inventory, indicating that you have sold all the stock you purchased, not accounting for any items you may have lost to shrinkage or damage.
Naturally, typical sales differ—sometimes significantly—from one industry to the next. However, it is possible to optimize your operations to achieve higher turnover. For most industries, the optimal inventory turnover ratio is between 5 and 10, translating into a complete stock replenishment every one to two months. For retailers who sell perishable goods, the ratio will likely be much higher to prevent losses due to spoilage. For luxury goods with a much higher price tag, it will typically be lower. Having maximum control over your inventory management and supply chain planning can be crucial. As is demand forecasting and a perfect understanding of the key metrics that affect inventory turnover directly or indirectly.
Key Metrics for Inventory Turnover
Calculating your inventory turnover demands that you take a few metrics into account. By analyzing this data, you will gain valuable insights into the performance of your sales strategy, which will allow you to make informed decisions to improve it.
Inventory Turnover Ratio (ITR)
The inventory turnover ratio corresponds to the number of times your company has sold and replenished its inventory over a given period. You can calculate this metric on a per-product basis or analyze your entire inventory. The same formula will also show you the number of days it will likely take to sell your current stock, which is useful for forecasting.
The formula to calculate your ITR is:
(Cost of Goods Sold—or COGS)/(Average Inventory—or AI) = Inventory Turnover Ratio
The higher your inventory turnover ratio, the better, as it indicates stronger sales. Keeping track of this metric can help your business make better-informed decisions regarding manufacturing, purchasing, warehouse management, marketing, and pricing.
Days Scales of Inventory (DSI)
Days sales of inventory is a metric that expresses the average number of days it takes a retailer to convert an inventory into sold goods. Being able to calculate and interpret your DSI is a crucial part of your logistics management since it shows how many days it takes, on average, to sell your entire stock. The formula requires you to know the cost of the goods being sold, the cost of average inventory, and the time period for which you are performing the calculation.
The formula to calculate your DSI is:
(Number of days in the time period)/(Inventory Turnover) = DSI
You can use your DSI to analyze several aspects of your business, including the speed of your cash conversion cycle, cash flow, demand, inventory management, etc.
Why Is Inventory Turnover Crucial for Businesses?
Keeping an eye on your inventory turnover will allow you to identify potential issues early on and make strategic decisions based on relevant data. For instance, a decreased market demand for certain items will immediately translate into a slower inventory turnover. This could indicate that it’s time to review your pricing policy or consider offering incentives to help shift your stock. It can also help you optimize your product mix and ensure it is aligned with customer demand.
A fast turnover also needs to be addressed, as it may indicate that your purchasing strategy is causing delays in your supply chain, preventing you from keeping pace with market demand. It will also let you know if a surge in demand happens, giving you the necessary insight to decide whether you should increase orders, raise your prices, feature a specific product more prominently, diversify suppliers, purchase additional related inventory, and more.
Of course, for all this to be relevant, you need to be able to calculate your inventory turnover and assess it constantly using different indicators… which is practically impossible to do manually. This is where automated systems such as Captana come in. The solution is designed to maximize product availability in retail stores by leveraging the power of computer vision/AI to interpret all relevant metrics. Everything is handled automatically through digital labeling for supply chain management. A network of sensors and smart labels collects data at every stage of your internal supply chain to calculate and interpret your inventory turnover in real-time.
How Can You Improve Inventory Turnover?
Whether you need to boost your inventory turnover or equalize it by catching up on customer demand, there are several ways you can optimize this key metric.
Demand Forecasting
Having a good understanding of your sales numbers and inventory reports provides valuable hard data you can use to improve the accuracy of your forecasting. As explained above, knowing how long you have before you need to replenish your stock can help with future sales planning. Thanks to this relevant information, you can explore new and creative ways to boost your inventory turnover, for example, by bundling items or changing your product mix.
Efficient Inventory Management
Inventory turnover is closely tied to inventory management. A good grasp of your inventory turnover can help you manage your inventory based on pertinent, factual information. In turn, optimizing your inventory management will maximize your inventory turnover.
Inventory management software paired with digital price displays for supermarkets (or other retail stores) and automated features can establish and deliver a continuous, real-time record of your inventory. While companies that rely on a periodic inventory system need to use averages and compare mean inventory levels at strict points in time, perpetual inventory methods provide a comprehensive, constant, and accurate overview of the situation. Thanks to AI-capable software, you can leverage this information to supercharge your agility and automate pricing and purchase orders. This will streamline your supply chain while giving you more control, reducing errors, improving customer satisfaction, and boosting sales.
Supplier Relationship Management
Switching to a perpetual inventory method will let you automate purchase orders through an order management system, facilitating inventory replenishment at the most suitable time. That way, the items you need are always in stock without sitting on the shelves for longer than they must and without putting additional strain on your suppliers. You can set up your system to make sure they are notified early enough to give them ample time to prepare your orders, yet not so early that you end up with a surplus of stock.
