Does your company suffer from product obsolescence or unnecessary storage costs? You may need to apply inventory turnover, a technique used to account for every time items enter and leave the warehouse!
In this article, we explain what inventory turnover is, why it matters, and how the calculation that defines the average product replenishment time works. We also show how an ERP can help you apply the technique. Check it out!
Inventory turnover: what is it?
Inventory turnover is simply a procedure used to measure how goods circulate within the warehouse. Based on the calculations, the inventory manager can identify, for example:
- The average time an item sat idle throughout the year;
- How many times a given product was repurchased for restocking;
- Which goods moved the most and the least;
- Which products are obsolete, generating unnecessary storage costs.
Why is inventory turnover important?
Imagine your company has a portfolio of around one hundred different products. How will you identify which items are actually delivering financial returns if you do not keep track of every product that enters, moves through, and leaves the warehouse?
Managers who want to identify the products with the highest and lowest movement, as well as the average replenishment time, need to track inventory turnover and, based on that data, create strategic actions that will help the company sell more, or reduce the time raw materials stay in stock.
By tracking inventory turnover, the professional prevents, for example, waste caused by expiration dates. It also frees up valuable space that can be filled with other items, or helps save on storage.
READ ALSO | Optimize supply chain management with 6 tips
How is it calculated?
To find out the average time a product stays in stock and needs to be replenished, run the calculation using the following formulas:
Inventory turnover = consumption in the period ÷ average inventory
(opening inventory + closing inventory / 2)
or
Inventory turnover = volume of products moved ÷ average inventory value
Let's look at an example:
Annual consumption = 20,000
Average inventory for the year = 5,000
Inventory turnover = 20,000 / 5,000 = 4 turns per year
If the company works with a variety of products, the ideal is to run the calculation using purchase values. For example:
- Inventory: R$ 7,000.00;
- Annual sales volume: R$ 21,000.00;
- Calculation: 21,000.00 / 7,000.00 = 3 turns per year.
Use the purchase value from the supplier, not the final sale price.
To find the average replenishment time — that is, the number of days in which product movement typically occurs — take the number of days in the year and divide it by the number of annual turns. For example:
Average inventory replenishment time = 365 / 10 = 36.5 days
P.S. If the inventory turnover value is below 1, it means one or more products are obsolete and the company should therefore look for ways to increase the rotation of those items.
READ ALSO | See 10 tools that help with inventory control!
Tips to increase product rotation
If your company is dealing with obsolete inventory, you will need to apply a few simple strategies to increase product rotation. Here are the main ones:
Update the inventory records
Which products does your company currently have in stock? Take a full count to identify every product in your warehouse, and keep that inventory up to date to make it easier to analyze inflows and outflows.
Identify the products with the highest and lowest movement
Which products move the most? Based on the inventory, identify the items with the highest and lowest movement to ensure that, going forward, your company only purchases the materials and goods that make sense for production and sales.
Integrate the purchasing, sales, and inventory departments
How is information flowing between departments? To keep products from being purchased unnecessarily, your company needs to integrate the purchasing, sales, and inventory departments. That is the only way to guarantee an up-to-date, instant exchange of information.
Invest in an ERP
Which tool should you use to integrate the departments? The ERP is a technology capable of integrating people, data, and departments into a single ecosystem. Everything involving the movement of goods can be recorded within this software, simplifying information sharing and optimizing inventory control.
How an ERP can help with inventory turnover
Besides integrating the purchasing, sales, and inventory departments, the ERP is a tool that can help managers with inventory turnover, since it keeps all company information recorded in the system.
Managers can use the solution to generate reports that help them track the movement of goods, indicating exactly when new orders occurred, when purchase requests were made, or when losses were recorded.
This data can help them more easily identify:
- Which products are worth keeping in stock;
- Which items can be discarded;
- Which periods of the year have the highest demand.
This, in turn, helps the professional prevent unnecessary purchases, avoid the risk of obsolete inventory, and minimize storage-related expenses. The professional can also use KPIs that indicate movement volumes.
Companies that want to improve inventory turnover — and, as a result, control over their goods — need modern tools. Get to know the Useall ERP and optimize your inventory management process once and for all!
Originally published in Portuguese at useall.com.br.