MANAGEMENT + SYSTEMS

Improving inventory turns

by Jason Bader, principal, The Distribution Team

After a recent seminar, one of the participants reached out to me about his company’s inventory turn rate. After learning how to properly calculate the formula, he realised that they had been overstating their turns for a long time and were lulled into state of complacency. When he looked at the real turn numbers, the results were less than stellar. They were of great enough concern that he felt his employment might be in jeopardy if a plan for improvement was not developed. Fortunately, creating a plan is easy. Execution may be a whole other story.

gathering is flawed, rather the method of calculation by the reporting companies can vary greatly. Here is the proper equation:

L

Annual cost of goods sold from stock sales Average inventory value

Many companies overstate their inventory turns by inflating

the numerator in the equation – annual cost of goods sold from stock sales. They do this by including all sales. This may include direct ship or non-stock sales. Remember, when we are studying inventory turns, we are trying to determine how well the inventory we have invested in is performing. The faster we turn inventory, the more times we are able to collect the gross margin associated with the product. When we perform a direct ship transaction, we are not using stocking inventory we have carried in our warehouse. We are relying on the supplier’s inventory investment. This is why these transactions should be excluded from the calculation. In a similar vein, a special order of non-stock product does not rely on our stock inventory. Because we did not carry the product in our warehouse, it should not be part of our turns calculation. Don’t get me wrong, both of these types of transactions are really good for distributors. They just don’t need to be included in measuring the performance of our inventory. Then trying to improve turns, we can attack the numerator of

the equation, sell more stuff; or we can attack the denominator of the equation, stock less stuff. When working with distributors on this decision, I generally ask the question: “Where is the control?” Although we have some control over the numerator, sell more stuff, the customer generally dictates how much product they can consume. When we look at the denominator,

ike many companies, this one had been a victim of misinformation and comparison. I have always been skeptical of industry benchmarks when it comes to inventory turns. Not that the method of information

stock less stuff, the discretion rests solely in the hands of the stocking distributor. Because we have ultimate control, the denominator is where distributors can make the greatest improvement in inventory turns.

“The faster we turn inventory, the more times we are able to collect the gross margin associated with the product.”

As many of you know, I tend to rely very heavily on a reporting

tool called the hits report. It is my go-to tool for a majority of my inventory consulting engagements. As a quick reminder, the hits report analyses the number of times an SKU appears on a sales order in a calendar year. Quantity sold is not relevant to this analysis. In this report, I generally want to see these columns:

• SKU • Quantity on hand • Unit cost • Current on hand investment • Hits • Average monthly usage • Months of inventory on hand

136 Fastener + Fixing Magazine • Issue 71 September 2011

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