Inventory turnover rate: why is it important for your business? (2024)

CONDIVIDI SU

Inventory Turnover Rate is an essential KPI among logistics data that reflects how often stock is sold within a given timeframe, and is a critical metric for production planning, logistics operations, as well as marketing and sales. Generally speaking, a higher inventory turnover indicates better performance, meaning that stock is managed effectively and inventory is quickly converted into sales. Conversely, a low turnover rate signals there is a problem in converting stock into profit, probably due to issues at certain stages in the supply chain. In fact, if this is the case, it means the business should intervene with strategies to improve low performing areas.

 

How do you calculate Inventory Turnover Rate? 

 

The inventory turnover rate is calculated using the following formula:

Cost of products sold / average inventory 

 

 

What is a good Inventory Turnover Rate? 

Generally speaking, a good inventory turnover ratio is between 4 and 6, but it ranges depending on the industry. High inventory turnover means that your sales performance is good, and in other words that inventory is well-balanced for sales and restocking of items. Low inventory turnover indicates the opposite.

As mentioned above, there is no ideal universal rate to achieve. For example, a fashion brand will have a different turnover than a groceries store. The best practice is to calculate your inventory turnover rate and compare it with the average rate of your industry, and perhaps even surpass it.

 

How to improve inventory turnover ratio

 

Optimize inventory management

Using analytics to forecast demand or seasonal fluctuations can aid your business in ordering and planning the right amount of stock to satisfy demand, reducing chances of out of stock or excess inventory. This results in higher customer satisfaction and lower storage costs, as well as less chances of lost sales.

 

Diversify product range

Regularly review and adjust your product range to ensure it meets current market demands. Discontinue slow-moving items and introduce new products that are likely to sell more quickly.

 

Develop new marketing strategies

Developing pricing strategies or special promos for slow-moving products can help in selling excess stock more quickly, thereby increasing the overall inventory turnover. Also, diversifying product ranges by discontinuing slow-moving ones and introducing new products can be effective.

 

Speed up shipping

Optimizing order fulfillment processes by investing in WMS systems and automation is an effective strategy to reduce the time it takes for products to move from the warehouse to the customer.

 

Leverage automation and WMS Technology

An inventory management software provides real-time data on stock levels, sales trends, and stock performance, helping businesses make informed decisions. A WMS allows you to know exactly when sales are made and adjust this information in real-time. If stock is low, you will be able to receive automatic notifications for efficient restocking. 

 

Regularly review inventory performance

Conducting regular reviews of inventory performance, identifying high-turnover items and focusing on strategies to improve the movement of lower-turnover stock is essential to keep a steady ratio over time.

 

Demand forecasting

Demand forecasting is an essential tool for businesses: analysing past sales data to make future predictions can help to plan stock accordingly especially for certain periods of time, like holiday sales or peak months.

 

Identify issues in the supply chain 

A problematic inventory turnover ratio may indicate issues in the supply chain, like wrong stocking and ordering policies, if there is dead stock, low performing fulfillment network, or other weak points.

 

 

How eLogy can help

There are a lot of important strategies to improve your inventory turnover, which will allow your business to progress steadily and expand. 

At eLogy, we offer a network of courier solutions and international warehouses combined with advanced technology. Our resources are designed to improve your inventory performance and forecast trends with reliable data to help you meet customer needs worldwide.