How to Increase Your Inventory Turns
First we need to understand what “Inventory Turns” means. Simply put it asks the question:
“How many times do we sell out our inventory per year?”
Now it could be for any allotted time period (month, year, quarter). Also we may not sell one type of product at all in one year, while selling other products many times over in that same year. To accommodate this we can apply this formation to calculate inventory turns:
Cost of Goods Sold / Average Inventory Value = Inventory Turns
It is advantageous to have a high inventory turns because that means it takes less inventory to satisfy the same amount of sales. For example: If your company has a Cost of Goods Sold or COGS during the past year with the current on-hand value of your inventory being 1.5 million then you could estimate your inventory turns is 4 million (6 mill COGS / 1.5 On-Hand Inventory Value). I am using current on-hand inventory value instead of Average Inventory Sold because we are assuming it is very close to the Average. This assumption helps us avoid a lot of tedious averaging that we would need to do to get an accurate COGS number.
If we can reduce the On-Hand Inventory from 1.5 million to ½ million we will save 1 million dollars of inventory. But how do we do that without running out of inventory to satisfy sales? The answer is by purchasing inventory more often and reducing lead times for obtaining product. This requires two main things to happen: First we need advanced inventory software that will make is easy to order smaller quantities more
frequently. Second we need preset pricing and reduced leads times to be guaranteed by our vendors. As a reward to the vendor they will get all of the business for the products they sell providing the meet our requirements.
Just to be clear what I mean about “advanced inventory software” let me explain. It means a paperless, automatic replenishment system with automatic integration into accounts payable. The reason for this is because the amount of paperwork work and personal efforts would be multiple by 2-3 times if we are ordering 2-3 times more often. In order to alleviate this added burden, bar codes scanners and integration of Purchase Orders and Accounts Payable invoices need to be implemented. This is accomplished by using software that employs “Lean Concepts”. These “Lean Concepts” eliminate all waste which makes high volume Lean transactions no more costly than low volume “Non-Lean” transactions.
There are many systems on the market that offer these features. Access Your Biz accounting software has a web-site dedicated to these concepts. For more information please call us at 631-259-6774.