If you could generate the same profit with fewer dollars invested in inventory, would you do it? Of course you would, but the real answer to this lies in knowing two important metrics. The first is inventory turnover, generally referred to as ‘stock turn’. Most people will know this metric for their own business but few can tell you how it compares with other businesses in the industry.
Inventory turnover or stock turn can be measured on inventory groups and categories, individual products, top 20% of sales, or even bottom 20% (which can tell a story in itself) and any variation thereof.
The second important metric is GMROI. This is gross margin return on investment and is measure of the gross margin relative to the dollars invested in inventory. ERP software like Clear Enterprise makes it easy to calculate GMROI as a percentage or a dollar multiple.
Getting back to stock turn, most inventory depreciates over time, sometimes as much as 60% or more per annum. The reality is that if a product sits in inventory for an extended period, your market clearly does not value that product as you do. If stock turn is too low this can lead to excessive sell-offs at low margin or below cost.
The key to maximising stock turn is by analysing stock movement in minute detail with a package like Clear Enterprise. (Clear Enterprise is ERP software with powerful inventory management facilities designed for fast growing companies).
Another way to help in maximising return on inventory is to think of inventory in terms of “weeks of supply”. If the goal of inventory management is to have on hand only enough products to meet the demand, some more factors come into play. It is crucial to also account for safety stock levels based on forward sales, late supplier deliveries and short term sales variables.
An important aspect in weeks of supply is the level of planned or forward sales. Depending on the size of your organisation there are various forecasting methods for working out forward sales. Whichever method you use it must include careful analysis of current trends and past sales patterns and volumes.
In Clear Enterprise a ‘weeks of supply’ metric can be reported on using forecasting and inventory tools. Using the weeks of supply metric helps you determine inventory levels based on planned sales with a fine degree of precision.
Clear Enterprise can report on forward weeks of supply based on categories or groups of products and individual items on a continuous basis. Resulting figures can be displayed in a dashboard or exported to Microsoft Excel™ and Crystal™ reports.