There was a time when companies with large inventories were seen as prosperous companies. Everything was in stock to meet customer demand and few were concerned about the relationship between large inventories and an unnecessary amount of tied up capital. Today it looks different.
For many trading companies, the reality is that they have far too high inventory levels and too low a capital turnover rate. It may be an ambition to reach a high level of service with high availability, which means that working capital is tied up in inventory instead of being used for something more productive such as marketing and sales activities.
Capital turnover rate is a key figure and it is one of several that are important to trading companies. Other examples are service level, inventory value, forecasts and inventory turnover rate. As a key ratio, capital turnover rate is a business measure that shows how efficiently a company uses its capital in relation to turnover.
The higher the capital turnover rate, the less tied up capital a company has. Reducing the inventory is usually described as the easiest way to increase the capital turnover rate and thereby reduce the tied up capital. Although the use of KPIs is becoming more and more common, there are many companies that can do better at developing important KPIs and then also ensuring that they are actually used by buyers and inventory planners.
Common causes of excess inventory and reduced capital turnover rate
One might ask what it is that causes many companies to build up too large a warehouse. A situation with overstock has more negative effects than tying up capital. The risk of obsolescence increases, as do operating costs. First, we must establish that there is a difference between overlay and safety layer.
In the event of an overstock, inventory levels uncontrollably exceed forecasted demand. In the case of a safety stock, a stock buffer in addition to the forecast is planned and intentional.
There can be a number of reasons why trading companies have far too high inventory levels. One could be incorrect or insufficiently precise demand forecasts. This is often due to not having good enough forecasting tools, but working with Excel or business systems that cannot handle statistical forecasts.
Another reason is that seasonal variations are not taken into account or that buyers do not consider the life cycle of products in their forecasts. When demand suddenly drops, the effect can quickly become an overstock of products that cannot be sold.
A company that has a high level of ambition in terms of service level easily ends up in a situation where too much is bought in and you end up with overstock for parts of the range. Sean, there may be buyers who work with great focus on getting a good purchase price. Large purchases can give a good price per item, but the cost when building up overstock is often significantly higher than what was saved at the time of purchase!
SOLO provides full control over the key figures and quickly increases the capital turnover rate
Once you have understood the reasons why overstock is built up, a big step has been taken towards reducing inventory and speeding up working capital. A good start might be to review how demand forecasts can be improved. To trim the forecasts, statistical models are required that take into account, for example, demand patterns and seasonal variations.
If you have a tool that, with algorithms and support from AI/machine learning, automatically updates the forecasts, you can quickly reduce inventory. The SOLO system is such a tool, and trading companies that have automated their purchasing and inventory routines with SOLO have found that it is possible to quickly both reduce inventory levels and increase the speed of capital turnover.
In order to gain full control over important key figures, it is necessary to successfully implement the use of the key figures in an organisation. That's why SOLO includes the interactive analysis tool SOLO Dashboard, which helps our customers reach their determined key figures.
For example, for a buyer with access to the SOLO Dashboard, it is easy to control purchases and make adjustments by always having access to updated key figures. An important advantage is also that SOLO eliminates the problems that often arise with personal purchasing decisions. Instead, everyone works uniformly and towards the same goal when you know which key figures apply and you always have access to updated key figures.
SOLO Dashboard has been around for many years and the tool has been continuously developed. New functions have made it possible to sort, group and break down key figures on A items, product categories, brands and suppliers.
The level of service for all or parts of the range can be followed both in the present and in the past. For companies where a reduced inventory is a priority goal, SOLO Dashboard also quickly informs you of how much the inventory can be reduced in a couple of years' time if the inventory control is based on the parameters that apply today. Results? Full control of the capital turnover rate even in the short term!
At Promosoft, we work actively to increase our customers' capital turnover rate through our system SOLO. Contact us and we will tell you more about how we can help you.