What is the optimal inventory turnover ratio?

What is the Optimal Inventory

Ratio?

Does “The higher – the better” seem an obvious answer?

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.

What to do in order to increase the ITR?

in most cases this question remains without an answer.

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?

Good news is that reduction of the inventory without cutting the service

level, is possible!

Wondering how?

Distribution company must know the MAIN FACTORS that restrict the ITR from infinite

increase.

Factor no.1.

Replenishment Frequency

The inventory level for each single SKU fluctuates over time…

Optimal inventory level is the quantity that covers all sales in the period between

two stock arrivals.

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.

A lower inventory level without increasing the replenishment frequency

will certainly cause stock-outs

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….

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.

...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.

Factor no.2.

of Supply

Even the most reliable vendors fail from time to

time in supplying goods.

What to do?Optimized inventory level

according to replenishment frequency and stock-outs

may occur.

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.

Factor no.3.

Supply Batches

What is“Harmful” batch?

When supply batch is much higher

than the quantity sold during the

shortest possible period between replenishments.

Inventory level can be safely reduced by removing harmful

batches

Factor no.4.

Dynamics

Depending on sales dynamics, the lowest possible inventory would still be higher compared to the ideal case.

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.

Soft4Inventory suggests the optimal inventory level for real-life sales dynamics and optimize it according to the

replenishment frequency.

The maximum ITR is restricted by factors:• replenishment frequency,• reliability of supply,• supply batches, • sales dynamics;