Increase inventory turnover: 5 tips for more liquidity

Inventory turnover is an important key figure in logistics. Unnecessarily high inventories tie up a lot of capital and thus burden a company's liquidity. The aim is therefore to increase the inventory turnover rate wherever possible. You will find tips for this in the following article.

Table of Contents:

  1. Inventory turnover rate: definition
  1. Formula: Calculate inventory turnover rate
  1. Measures: Improve inventory turnover rate
  1. Effect of the increase in inventory turnover rate
  1. Inventory turnover rate: A question of the right balance

Inventory turnover rate: definition

This important key figure indicates how often the inventory of all or individual products or product groups is sold within a certain period. Each company can define for itself which interval - whether weeks, months or the entire year - is considered. In this way, goods movements can be tracked in order to optimize procurement and the associated warehouse processes.  

As a rule of thumb, the higher the inventory turnover rate, the better this is for your company's liquidity situation and working capital. The lower the inventory turnover rate of a certain product group, for example, the more capital is tied up unnecessarily. If this value is not determined for the total stock but for a single product, there is often talk of so-called stock rotation. For logisticians, however, it is always particularly important that the supply is secured.

Formula: Calculate inventory turnover rate

There are various ways to determine the inventory turnover rate. A widely used and simple formula is based on sales and is as follows:

Sales / average total capital = inventory turnover rate

So, if you generate 100,000 euros in sales per year with a product and the average inventory of this product corresponds to a value of 20,000 euros, the inventory turnover rate is 5. In other words, the inventory turns over five times per year. Another formula for calculation looks at the inventory levels for a predefined period of time:

Stock issues / average inventory at Sites = inventory turnover rate

For inventory management planning, however, the Sites range of coverage is also of great importance for a logistics company. This can be calculated using the inventory turnover rate as follows:

Average stock (of the time period) / consumption (of the time period) = stock range

What is a good inventory turnover rate?

The target value that a company sets for itself as a ratio depends heavily on the product range, the segments served, and the target groups. In addition, the industry, availability, seasonality and inventory management play a role. In B2C retail, for example, a stock turnover rate of 2 to 4 is recommended - this guarantees rapid turnover so that inventories are sufficient for prompt delivery to customers.  

On the other hand, if the inventory turnover rate is less than 0.5, it is generally advisable to reduce stock - anything else ties up capital unnecessarily. It should be noted, however, that Sites is not the same as Sites . Depending on which Sites you are dealing with, the guide values may look different. Therefore, you should also consider these figures only as a guideline and not as a fixed target.

Depending on the type of bearing, the guide values for the inventory turnover rate may vary.

Measures: Improve inventory turnover rate

To optimize inventory turnover, you have a whole range of options for action:

1. classify stock

Assign all products to categories A (80 percent sales), B (15 percent), C (5 percent) or D (0 percent) depending on the sales you generate per year with the respective item. A-products should always be available in sufficient quantities to service customer orders in a timely manner. Large inventories, especially of C and D products, should be consistently reduced.

2. get rid of shopkeepers

Through the classification you can see immediately if stock items have crept in with you. These would then fall under classification D. Consistently reduce the inventories of C and D group items - they only tie up capital unnecessarily and also clog up your logistics capacities. In view of the capital tied up and the permanently ongoing storage costs, targeted sales campaigns can make sense for real "slow sellers".

3. use forecasting tools

What do your customers buy, when, and in what quantities? In addition to the historical data available, you should also use the usual forecasting tools in order to be able to plan the expected sales - and thus the necessary procurement - more optimally. Important: Take into account seasonal aspects or regional peculiarities if you have several locations.

4. change of the disposition rules

A simple method for inventory optimization: store fewer products per order - but order more frequently. This not only reduces capital commitment, but also optimizes logistics costs. However: Reduced inventories are only possible if goods availability and supply are guaranteed and if the transport processes function reliably. This requires a close connection between logistics and purchasing. Systems for optimized inventory management can provide support in planning. In order to optimize inventory, changes can be made to the disposition rules or to the procurement strategy.

5. increase transparency in the supply chain

Effective planning is not possible without reliable data. Create comprehensive transparency across the entire supply chain. From procurement and manufacturing to logistics. This is the only way to identify optimization opportunities in a targeted manner.

Effect of the increase in inventory turnover frequency

The increase in inventory turnover leads directly to a sustainable improvement in your liquidity. The capital commitment of your company is optimized and reduced. It should be noted that a higher inventory turnover rate also increases the risk of unavailability.

Improve ranking and credit scores

One effect that should not be underestimated is that an improvement in inventory turnover usually results in a better credit rating or a better ranking. This is because financial institutions often specifically scrutinize these and other key logistics figures of a company. Above all, however, an increased inventory turnover rate has an impact on working capital and cash flow.

FAQ: Frequently asked questions about stock turnover rates

What is meant by inventory turnover rate?

The inventory turnover rate indicates how often the stock of either an individual product or the entire warehouse is sold within an individually defined period of time. The higher this logistics ratio, the better for a company's sales and profit development. Products with low inventory turnover rates tie up capital unnecessarily.

How to calculate the inventory turnover rate?

Various formulas are suitable for calculating inventory turnover. One possibility is to divide the sales achieved with a product by the value of the average inventory in the same period. Another formula is: stock issues / average stock at Sites = inventory turnover.  

For logisticians, however, the warehouse range is often an even more important value. It can be calculated with the following formula: Average stock (of the time period) / consumption (of the time period) = stock range.

What does a high inventory turnover rate mean?

A high inventory turnover rate increases liquidity and reduces a company's capital commitment, thus having a lasting positive effect. As inventories are turned over frequently, capital commitment decreases and storage costs are also reduced. Therefore, the inventories of the various products should always be adjusted to their expected inventory turnover rate.

How to increase the inventory turnover rate?

Various measures are suitable for increasing the inventory turnover rate. It is advisable to classify products according to their share of total sales and to control the storage ranges in a differentiated manner. It is also helpful to optimize procurement by reordering goods more frequently and in smaller quantities.

How does an increase in inventory turnover affect inventory costs and inventory risk?

An increase in inventory turnover means that the stocks of a product are permanently reduced. This not only reduces the amount of capital tied up, but also lowers warehousing costs. Inventory risks are minimized because a high inventory turnover rate means there is less risk of products spoiling or no longer being saleable for other reasons. However, supply risk can also increase due to shortages, unavailability and missing parts.

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Inventory turnover rate: A question of the right balance

Purchasing, production and distribution pursue different goals. Accordingly, logistics must strike a balance between the commercial goals of tying up as little capital as possible at Sites and achieving the best possible operational performance. With an optimally controlled inventory turnover, more dynamics and speed come into your Sites. The aim is to create the right balance between optimum inventory levels and the availability of important products at all times, especially from classes A and B. Intelligent systems for inventory management help to achieve this. Intelligent systems for optimized delivery coordination and inventory management provide assistance here.

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