Retailers that turn inventory into sales faster tend to outperform comparable competitors. The longer an inventory item remains in stock, the higher its holding cost, and the lower the likelihood that customers will return to shop. A low inventory turnover ratio can be an advantage during periods of inflation or supply chain disruptions, if it reflects an inventory increase ahead of supplier price hikes or higher demand. Retail inventories individual mandate fell sharply in the first year of the COVID-19 pandemic, leaving the industry scrambling to meet demand during the ensuing recovery. Analysts use COGS instead of sales in the formula for inventory turnover because inventory is typically valued at cost, whereas the sales figure includes the company’s markup. Some companies may use sales instead of COGS in the calculation, which would tend to inflate the resulting ratio.
- A lower number means that a particular stock keeping unit, or SKU, is not selling quickly or is no longer in demand.
- While it is important to maintain sufficient inventory to meet customer demand, overstocking can lead to increased holding costs and the risk of stock obsolescence.
- In some cases, it can also indicate that a business is overstocking and carrying too much inventory, which can tie up capital that could be invested in other areas of the business.
- In general, low-cost/ high-turnover products have higher inventory turnovers than high-cost/ low turnover items like luxury goods.
- Learn all about trends in the inventory management industry from experts in the field.
The demand for your products and sales volume is a significant factor affecting inventory turnover. Wholesalers need to forecast demand accurately to avoid overstocking or understocking. Overstocking can lead to high carrying costs, while understocking can result in lost sales and dissatisfied customers. To manage inventory levels efficiently, wholesalers must analyze their sales data and use demand forecasting tools to predict future demand. The inventory turnover ratio measures a business’s efficiency and how it manages its inventory.
What minimum order quantities (MOQs) mean for retailers
Both companies have similar product offerings and financial metrics, except for their inventory turnover ratios. By calculating the inventory turnover ratio, businesses can assess the efficiency of their inventory management practices and gain insights into sales effectiveness and inventory control. Invest in reliable inventory management software to streamline your inventory processes and gain real-time insights into stock levels, sales patterns, and demand fluctuations. Modern inventory management systems can help automate tasks, reduce human errors, and provide data-driven suggestions for inventory optimization, ultimately leading to improved inventory turnover. Comparing your inventory turnover ratio with industry averages and competitors helps you gauge your market competitiveness and identify areas for improvement in inventory management practices. Keeping a record of your inventory turnover ratios and how they change can help support business decision-making.
- If a retail company reports a low inventory turnover ratio, the inventory may be obsolete for the company, resulting in lost sales and additional holding costs.
- A well-managed supply chain can help wholesalers streamline their procurement processes, reduce lead times, and minimize inventory carrying costs.
- But the more accurate you can be, the closer you can align inventory to actual order numbers, and therefore limit excess.
- Imagine your cost of goods sold is $25,000 and your average inventory is worth $5,000.
This can help to improve inventory turnover rates by freeing up warehouse space and reducing the risk of overstocking. Discontinuing poor-performing SKUs also allows wholesalers to focus on products more likely to generate sales and increase inventory turnover. Since wholesalers stock thousands of SKUs, this is unfortunately too time-consuming to be done on a frequent basis. Since poor-performing SKUs contribute little to the company revenues, they are understandably ignored.
Challenge # 2: management
Obviously, if your products have a shelf life, an inventory turnover that is too low can be extremely costly for expired products. A high inventory turnover can help reduce these costs because you will hold less inventory for a shorter period. This can help to improve your bottom line and make your business more competitive. As you determine your inventory turnover goals, consider the average gross margin you receive on the sale of products. Most distributors who have 20% – 30% gross margins should strive to achieve an overall turnover rate of five to six turns per year.
Characteristics and Financial Ratios of the Wholesale Retail Industry
It only gives you clues about how fast inventory is moving along your sales channel but scarcely tells you how many days it takes to replenish your stock on hand. To calculate inventory turnover, divide the total cost of goods sold (COGS) for a given period by the average inventory value. In general, a result of between 5 and 10 after completing the inventory turnover ratio formula is considered a “good” inventory turnover ratio for most businesses. You can also use the inventory turnover ratio for business forecasting, to identify market trends, and more.
Better forecasting and demand planning
Leveraging Thrive’s Thermostock product is a proven way to prevent and reduce dead stock. This can help wholesalers reduce the cost of carrying inventory and improve profitability. Wholesalers should consider disposing of excess inventory to free up warehouse space and improve inventory turnover rates. This can be achieved by liquidating excess inventory through sales or auctions or donating excess inventory to charity.
Inventory Turnover Ratio Calculation
Another purpose of examining inventory turnover is to compare a business with other businesses in the same industry. Companies gauge their operational efficiency based upon whether their inventory turnover is at par with, or surpasses, the average benchmark set per industry standards. Higher stock turns are favorable because they imply product marketability and reduced holding costs, such as rent, utilities, insurance, theft, and other costs of maintaining goods in inventory.
3) Determine the average inventory value by averaging all inventory valuations recorded during the past 12 months. Here is a simple formula that will help you calculate your inventory turns. Many warehouses may track your inventory at the pallet level – but for this calculation, we suggest using the case quantity rather than pallet quantity for the most accuracy. This article will explore the art of higher inventory turnover and provide 14 easy strategies to achieve it. He is also an educational consultant who coaches students to equip with relevant knowledge on entrepreneurship and helps them to set up small-scale and freelance businesses.