Inventory turnover rate is an important key figure for companies where inventory and distribution are the core business. The key ratio is a measure of how many times an inventory range is sold over a given period of time, and it also shows how well a company's processes work throughout the supply chain.
The inventory turnover rate is often described as a simple but also very important key figure. Our experience says that many companies do not find it so easy to calculate the key figure. One reason is often the lack of the right tools to make the calculations and set a goal for the key figure that everyone understands and can use in their daily routines.
Why is inventory turnover rate important to keep track of?
The inventory turnover rate provides a snapshot of a company's efficiency. It is usually said that a high inventory turnover rate shows efficient inventory management where no capital-intensive overstock is built up. What is bought in is sold continuously and in an even flow, which gives a regular inflow of capital to the business.
If the inventory turnover rate is low, the inventory and purchasing processes are often less efficient. Too much is purchased, inventory costs become high, capital is tied up, liquidity decreases and the risk of obsolete goods increases. Someone has expressed it as the warehouse becoming a big hole where the company's money is pushed into and gets stuck.
But, is there an "ideal key figure" for inventory turnover rate? No, it isn't! What is a good inventory turnover rate depends on the type of business. A company that stocks products for, for example, the restaurant industry must have a significantly higher turnover rate compared to a company that stocks electronic products.
Another example is that companies that sell their products with small margins must have a high inventory turnover rate as a lower profit per item sold requires large sales volumes.
Improves cash flow and liquidity
There are several reasons why inventory holding companies should place great emphasis on working with the inventory turnover rate key figure. Some of the most important are the potential for improved profitability, a strong cash flow and good liquidity.
When an inventory is turned over faster, inventory costs are lower and the company's results are better. Capital is freed up, which improves cash flow and enables offensive market investments and other ventures. Minimizing the risk of having to sell excess stock at a loss can also have a large positive effect on profitability.
Finding the optimal turnover rate is not always easy. If the speed is too high, there is a risk that some warehouse shelves may become empty, which can lead to lost sales and customers who are not satisfied with the customer service.
It is important to set a goal for an operationally adapted and optimal key figure. To succeed in this, it is necessary to have full control over a number of parameters. If you have that, a big step has been taken towards an optimal stock turnover rate.
Invest in digitization and automation
"If we're going to increase the inventory turnover rate, it's just a matter of lowering inventory levels straight away?" No, that's not a good strategy. With great probability, the result will be a warehouse where there is both overstock and shortage of goods for parts of the assortment.
When a company wants to achieve an optimal inventory turnover rate, it is much better to start by looking at a number of important inventory parameters.
One such is historical demand and demand variations. Another is seasonality. Supplier lead times and safety stock levels are two others. Finally, the goals set for the customer service level are extremely important to consider.
You can see it as a process mapping that should provide answers to why the inventory turnover rate is too low, and what can be done to increase it and streamline other parts of the inventory and purchasing processes.
For many companies, it leads to a decision to invest in digitization and automation. With Excel as a work tool, or business systems that do not have functions adapted to inventory and purchasing optimization, it is very difficult to keep track of and reach the goals set for a key figure such as the inventory turnover rate.
This applies to the highest degree to expansive companies where the number of product groups, articles and suppliers is constantly growing. Manually calculating and updating stock parameters then becomes an almost impossible challenge.
SOLO gives full control over the key figures
Customers who have chosen to digitize their inventory and purchasing routines with SOLO have experienced a transformation of their business. By handing over calculations and routine tasks to the SOLO system, they have freed up time and resources previously used for manual tasks. This has not only resulted in significant time savings, but also reduced the risk of human error and mistakes in the calculations.
In addition, SOLO has enabled a continuous optimization of the warehouse routines. This means that customers no longer need to worry about overstock or understock, as SOLO with its advanced algorithm automatically adjusts stock levels to demand and warehouse capacity. As a result, the inventory turnover rate has increased significantly. Products flow smoothly in and out of the warehouse, which reduces tied-up capital and provides better liquidity.
With the interactive tool SOLO Dashboard, it is also easy to keep track of stock turnover and other important key figures. SOLO Dashboard ensures that employees in purchasing and warehouse work uniformly and towards the same goal.
This has enabled them to clearly see areas for improvement and make informed decisions that will lead to them achieving their KPIs with increased precision and efficiency. SOLO not only gives them full control over their KPIs but also the tools to achieve and exceed their goals.