For a wholesale distribution business, the speed at which inventory is sold is a critical indicator of business performance. One wholesale inventory metric that can help to measure how effective your business is at selling inventory is Inventory Turnover Rate.
If you are asking yourself “how do I measure my Inventory Turnover Rate”?” or “what can I do about a low Inventory Turnover Rate?” then this is the article for you.
Inventory turnover rate, also known as inventory turnover, is the number of times a business sells its entire stock of inventory in a given time period. The period used is usually a year.
You can calculate inventory turnover by dividing the cost of goods sold (COGS) over average inventory. Average inventory is generally calculated by summing up your beginning and ending inventory and dividing it by two.
The higher the inventory turnover rate is, the more efficient your business is at selling your inventory, and generating a higher return for your company from its assets.
When a business has a low inventory turnover, it could imply it is experiencing low sales and excess inventory. However, having an overly high inventory turnover is not always a good thing either. Too much turnover can strain a business’s resources and increase carrying costs. If your business is ill-prepared to handle such a high inventory turnover, it could lead to serious inventory management issues.
Knowing the right amount of inventory to hold is the key to unlocking the success to an optimal inventory turnover. On average, most wholesalers aim for eight to nine full inventory turnovers per year, but this figure varies across different industries.
In this blog article, we will provide you with the 8 essential tips you need to help optimize the inventory turnover rate for your business.
1. Optimize Your Supply Chain Process
Having a streamlined supply chain plays a pivotal role in helping your company optimize its inventory turnover rate.
One way to streamline your supply chain process is to reconfigure your warehouse space based on how quickly inventory experiences turnover. Inventory with the fastest turnover rate should be placed as close to the shipping area as possible for easy access to trucks and distribution. On the other hand, inventory with lower turnover should be set further back into the warehouse. This system of classifying your inventory allows your warehouse personnel to clear stock more efficiently, thus improving your inventory turnover rate.
One tool that can help with streamlining your supply chain process is an inventory management platform. With it, you can seamlessly manage and track all your inventory and stock movements. You can also take quick action to address any problems with real-time insights from your inventory data. With an efficient inventory management system in place, you can produce and sell your stock quickly without delay, hence improving your inventory turnover rate.
2. Conduct a Review Of Your Business Pricing Strategy
Price is one of the key considerations for a customer when she decides to purchase a product. However, setting the right price is not an easy task. Lowering your product price is not always the right solution to increase sales. For premium products, the price is often an indicator of quality. Reducing prices for premium products could have the opposite intended effect and result in a drop in sales as customers could perceive your product to be of lower quality.
There are many wholesale pricing strategies you can use. You can explore using different pricing strategies such as competitive, geographical or set different pricing levels for different customers. However, before making any significant changes to your pricing structure, it would be wise to do some market research to see how your customers will react to any price changes.
With the right prices, your products will sell quickly, resulting in your inventory to run out faster, and causing your inventory turnover rate to increase.
3. Focus On Your Top Selling Products
Increase sales by focusing on the products that will generate the most revenue. Start by analyzing your inventory reports to identify your top-selling products and worst-performing products. From the insights gathered, you should decide if you need to drop the products that are not selling well and focus on the products that are generating the most revenue for you instead. Products that are not performing well tend to have a lower turnover ratio. By eliminating unprofitable products, it will help to improve the overall inventory turnover for the company as a whole.
4. Increase Inventory Demand
Increase demand for your inventory with a well-designed and targeted marketing campaign. With a successful marketing campaign, you should see an increase in sales. This would result in more movement of stock out of your warehouse, thus improving your inventory turnover ratio.
At the end of your marketing campaign, you should also analyze the return on investment (ROI) of the marketing campaign, and determine if it is worth for the changes in the inventory turnover ratio.
5. Eliminate Excess And Old Inventory
Excess inventory is a severe problem faced by many businesses, where 20 to 30% of the company inventory is often dead or obsolete. This can be costly for your business. In the food industry in the United States, businesses lose more than $650 million yearly on food waste alone.
Optimize your inventory turnover rate by clearing excess and old inventory that is not selling. Excess inventory occupies valuable warehouse storage space that can be used for other products, and result in unnecessary holding cost. If excess and old inventory is sitting in an area that can be put to better use, get rid of that stock.
When clearing excess stock, your business also needs to examine the causes causing this phenomenon so that it will not happen again. By reducing excess inventory in your business, you can lower cost and increase profit in the long run.
6. Maintain A Low Inventory Level
One way to increase your inventory turnover rate is to keep your stock level as low as possible. The less inventory you have on hand, the faster you can sell your inventory, hence improving your inventory turnover.
However, to achieve a lean inventory strategy, your supply chain needs to be strong enough to replenish your stock on time. Having a low inventory level means you have a higher risk of running out of inventory. Your business needs to be able to replenish your inventory on time to prevent it from running out of stock.
The best way to manage this would be to purchase your inventory based on your targeted sales forecast with some safety stock as a buffer and reorder it on a regular basis.
7. Incentivize Customers to Order Inventory In Advance
By having customers pre-order, your business will be in a better position to predict the inventory level needed to fulfill customer orders. Your business can better anticipate your order fulfillment needs and plan inventory purchases according to the customers' demand. It is a more efficient way to manage inventory compared to irregular and last-minute orders. Without customer pre-ordering inventory, your business is required to store excess, and often, unnecessary stock to fulfill customer's orders that they might receive anytime.
To persuade customers to order from your business early, you should provide some incentive. Often, a small discount for advance orders will be enough.
With better order management, you can eliminate unnecessary inventory, hence optimizing your inventory turnover ratio.
8. Improve Forecasting Accuracy
The more accurately you can forecast your customer demands, the more accurately you can plan your inventory purchases. The result: lower inventory level, which will cause your inventory turnover to increase. To better forecast future demand, talk to your customers to find out their needs and stay ahead of industry trends and news. Within your company, hold meetings with your salespeople and analyze past sales trend to determine if any seasonal patterns exist.
You can also use techniques such as demand planning to help manage your inventory turnover. With accurate predictive numbers, your business will know which product and what quantity should be stock in the warehouse.
Monitoring your inventory turnover rate is essential to help your wholesale business be highly profitable. Most of the methods employed to optimize your inventory turnover rate above can be easily achieved through the use of inventory management software.
At Sweet, we have the perfect inventory and order management software for your wholesale business needs.
To find out how Sweet can help your wholesale business, request a demo today.