Improve business performance. Free up cash. Grow your bottom line. How? By analyzing your inventory turnover. Once you predict what you need and when you need it, you can use revenue as operating capital instead of spending it to support inventory sitting on a shelf.
Inventory turnover is a conventional benchmark that reveals a company’s inventory-management efficiencies compared with industry standards. “One of the advantages of this measure is that it’s straightforward. Plus it’s easy to research and calculate,” says Dr. Ernie Nichols, associate professor of Supply Chain Management and director of the FedEx Center for Supply Chain Management at the University of Memphis. Although there are several ways to calculate inventory turnover, Nichols references this as the most common formula:
Costs of Goods Sold (COGS) / Average Inventory at Value = Inventory Turnover
Typical causes of sluggish inventory turnover
Too much inventory means too much cash tied up in inventory. “I tell my students that businesspeople would focus more on inventory if, instead of seeing pallets of boxes in a warehouse, they imagined pallets of money,” says Nichols. “Inventory is like insurance — do you have the right coverage?”
Small businesses amass excess inventory for a variety of reasons:
- They worry about losing a sale if an item isn’t in stock.
- They buy too much because volume discounts seem like a good way to save money.
- They keep more on hand because the supplier is unreliable.
- They don’t plan for, or measure, inventory levels and sell-through rates.
Tips for optimizing inventory turns
Changing the way you manage your inventory can make the difference between watching your bottom line grow and sitting on your cash waiting for better turnover. “Think ‘just in time’ rather than ‘just in case,’ ” suggests Wendi Nolan, an international marketing advisor for FedEx SupplyChain®.
Try these tactics to take on your inventory management challenges:
- Establish metrics. Measure your inventory turns and compare them with industry norms.
- Segment your inventory. A one-size-fits-all approach to accelerating your inventory turns may not work if items vary widely by profitability and turnover speed. “If you sell multiple product lines, calculate turns for each distinct product family,” Nichols recommends. “What may be appropriate for one line of products may not be attainable for another.”
- Work with your suppliers to reduce cycle inventory. Revisit your inventory holding and reordering policies periodically with your sources. “I’ve worked with a number of companies that set up their systems 10 or 15 years ago,” says Nichols. “A supplier who once needed a month of lead time now may be able to get you product in a week.”
- Reduce stock-level safety margins by using technology that gives you accurate and timely reports on inventory levels.
- Reduce inventory carrying costs by reducing or eliminating trunk stock held by your field sales or service reps. “Instead of having the same item in every service truck or salesperson’s car, consolidate items at central or regional stocking locations where the inventory can be obtained by several reps when needed,” Nolan recommends.
- Measure customer service as well as inventory. “Even though inventory turnover is important, if you’re out of stock, your customers can’t buy,” says Nichols.
How FedEx can help
You can reduce your inventory carrying costs with FedEx Freight® Priority. We can meet your time-sensitive LTL (less-than-truckload) shipping needs with our fast transit times and proven reliability. For time-specific deliveries, choose A.M Delivery, Close of Business Delivery or Custom Delivery options. And you can ship with confidence because your freight will get the special handling and attention it deserves.
Go to FedEx Freight to learn how our LTL freight services can help you fine-tune your inventory turns.