Published on June 8, 2016
1. What is the Optimal Inventory Ratio?
2. Does “The higher – the better” seem an obvious answer?
3. What does it mean higher inventory turnover ratio (ITR)? ITR - Less inventory is required to support sales, less warehouse space and capital are needed, which leads in turn to higher ROI and an increased bottom line.
4. What to do in order to increase the ITR? in most cases this question remains without an answer.
5. This may end up: • ruining the service level and cutting the sales • creating an image of your company as an unreliable supplier. What happens if you decide to decrease only the inventory level?
6. Good news is that reduction of the inventory without cutting the service level, is possible!
7. Wondering how? Distribution company must know the MAIN FACTORS that restrict the ITR from infinite increase.
8. Factor no.1. Replenishment Frequency
9. The inventory level for each single SKU fluctuates over time…
10. Optimal inventory level is the quantity that covers all sales in the period between two stock arrivals.
11. Ideal case • Future sales are 100% known • Supply is 100% reliable • No minimal supply batches are set The ITR for an optimized inventory is 2x the number of replenishments per year.
12. A lower inventory level without increasing the replenishment frequency will certainly cause stock-outs
13. What happens if you increase replenishment frequency? It enables a faster reaction when market conditions are changing, providing a higher service level in hardly predictable conditions. Push the button and see what happens….
14. But that is exactly where modern inventory management software systems can help. Additional costs for processing orders and receipts is the downside of an increase in replenishment frequency.
15. ...almost every company can increase the replenishment frequency for more than half of the SKU’s by at least twice, without any increase in operating costs.
16. Factor no.2.
17. Even the most reliable vendors fail from time to time in supplying goods.
18. What to do? Optimized inventory level according to replenishment frequency and stock-outs may occur.
19. If reliability of supply is not very high? Add some quantities on top of the optimal inventory level in order to cover supply failures and provide a higher service level.
20. Factor no.3. Supply Batches
21. What is“Harmful” batch? When supply batch is much higher than the quantity sold during the shortest possible period between replenishments.
22. Factor no.4.
23. Depending on sales dynamics, the lowest possible inventory would still be higher compared to the ideal case.
24. cccComparison A higher inventory will be required for the item with bigger sales peaks and fluctuations. Two items that have exactly the same replenishment frequency, annual sales and minimal batches.
25. Soft4Inventory suggests the optimal inventory level for real-life sales dynamics and optimize it according to the replenishment frequency.
26. The maximum ITR is restricted by factors: • replenishment frequency, • reliability of supply, • supply batches, • sales dynamics; So, what is the optimal inventory turnover ratio?
27. ITR can be lower because of the poor quality of the inventory management software system.
28. Improved inventory management systems such as Soft4Inventory can help!
29. Optimal ITR is a very individual indicator Even the best ITR in your industry can be improved by making the right decisions based on reliable data.
30. Would you like to get more details? Read the full article and get more insights about optimal turnover ratio.
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