Inventory turnover calculates how many times specific goods have been sold and reordered during a given period. It’s a ratio that first divides COGS by average inventory:
Then, divide your inventory turnover rate by 365 to determine how many days it normally takes to turnover that inventory:
Maximizing inventory turnover can dramatically increase profitability by helping you determine the right reordering points and thereby reduce holding costs as well as spoilage.
To maximize turnover, you have to know what inventory to prioritize. Not all products are created equal.
Highlighted above, ABC inventory management places products into three categories based on their value to your business. It’s an adaption of the Pareto principle: 80% of all effects come from just 20% of causes.
Applied to inventory:
As you assign merchandise to each category, align value with your company’s goals. Normally, this is profitability but it can also be increasing market share through gross sales.
With demand volatility at an all-time high, there is no universal standard, which is why demand planning and inventory optimization are hard to get right.
Traditionally, accurate demand forecasting has been easier said than done. Extensive product ranges, multiple sales channels, promotional offerings, price changes, and external factors like seasonality have made it difficult to get an accurate picture of future growth. Especially if you rely on spreadsheets and trawling through volumes of historical data.
Today, however, automated demand forecasting is available to businesses of all sizes, thanks to intelligent inventory management systems.
Take the guesswork out of business planning and goal-setting.
First-in, first-out (FIFO) is an accounting discipline that — just as the name implies — means the first items in your inventory are also the first ones to leave: i.e., oldest items go first. Last in, first-out (LIFO) is the opposite: that is, the newest items take priority.
If you sell perishable items, then FIFO is a necessity. Otherwise, you’ll end up with spoiled inventory that you’ll have to write-off as a loss.
For non-perishable goods, LIFO is usually the default because you won’t need to rearrange warehouses or rotate batches. The only caveat is if you sell both non-seasonal staples alongside highly seasonal products, in which case you’ll need a mixed approach.
As an inventory management best practice the key is being intentional, disciplined, and organized around the approach that works for you.
Far too many businesses let incoming shipments or their 3PL decide for them.
Pipeline inventory refers to any item that’s been purchased but hasn’t yet reached its final destination. For example, if a wholesaler buys stock from an overseas manufacturer, that stock is considered pipeline — i.e., within the business’ supply chain — during the shipping and receiving process.
Optimal pipeline inventory can be calculated by multiplying lead time — how long it takes between ordering and receiving stock — by demand rate — how many units you sell between orders:
Keeping your pipeline flowing smoothly is one of two safety measures to ensure you don’t run into stockouts.
Decoupling inventory — or decoupling stock — refers to goods that are set aside in case of a hitch or stoppage in production. This inventory is also known as safety stock.
Decoupled inventory provides a safety net to mitigate the risk of a complete halt in (1) production if one or more components are unavailable and (2) order fulfillment in the case of stockouts.
Considering pipeline inventory and decoupled inventory together is important because they help you strike the right balance between risk and cost. Maintaining that balance makes for effective inventory management and sustained growth.
Inventory kitting — also known as “product bundling” — groups, packages, and sells separate items as a single unit. When a kitted or bundled item is purchased, an inventory system should automatically link each individual item to the sale.
Bundling can benefit both B2C and B2B businesses by:
Here’s how to get started bundling:
If you sell packs made up of multiples of products, you can quickly set up different pack sizes for existing products using a pack size variant. This essentially creates a new product from your bundled products.
If you want to make a product bundle of different variants (such as blue pajamas and yellow slippers), you can easily do so with bundles functionality.
You also have the option of assigning product variants to batches for tracking. This helps to ensure you have enough stock on hand of each variant.
The truth is even the best techniques, the best process, and the best best practices have their limits outside of a centralized inventory management system. Otherwise, you’ll find yourself fighting an uphill battle.
This is even more vital when it comes to pillars like real-time visibility, automation, and smart insights…
All your products, customers, orders and transactions synced and secure in the cloud.
