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I need a simple, easy to follow procedure

BizOptimizerBizOptimizer subscriber Posts: 1
I need a generic, simple, easy to follow procedure for improving inventory turns.



  • nevadasculnevadascul subscriber Posts: 3 Member
    HI Biz,
    How are you defining "inventory turns?"
  • BizOptimizerBizOptimizer subscriber Posts: 1

    HI Biz, How are you defining "inventory turns?"

     Inventory turns:  CostOfGoodsSold/Inventory  (the number of times inventory turns over in a year - inventory efficiency - road to higher profits) Surely with all of the business consultants and good business people out there - someone has a good procedure?  
  • nevadasculnevadascul subscriber Posts: 3 Member
    Maybe I am misunderstanding your question.  Are you looking for a simple way to improve the number of inventory turns?  Or, are you looking for a simple formula to calculate turns. 
    The standard formula for calculating turn over is:
    Cost of Goods Sold (in a given time period) divided by the average inventory level represented in dollars for that time period.  Some companies calculate based on a six month time period.  Some on a twelve month period.  A few companies do a daily time period. 
          COGS (your purchase prise) / average dollar value of on hand inventory
    Let`s say your total cost (purchase price ) of goods for six months equals $15,000.  Your average on hand inventory dollar amount for that same period equals $5,000.  Then the formula would look something like:
         $15,000/$5,000 = 3
    that would be 3 turns in a six month period.  This is a very basic formula and does not address several issues.  One, low turn over rates in some industries can reflect a sick company that is not doing well.  In another company, a low turn over rate on say heavy equipment sales may be the norm.  Also, yearly turn over rates may not reflect seasonal changes that affect sales.
    Another basic issue to consider is profit from investment.   Is it better to purchase your product you will sell all at one time.  Or buy product in stages to sell.  Case in point, you have $15,000 to purchase do-dads for the year.  Over the next year, you will sell all the do-dads and realize a profit of $3,000.  Which option is better
    1.     Spend the entire $15,000 you have available all at one time for do-dads and realize a $3,000 profit.  Thus realizing a $3,000 profit on your original $15,000 investment for the year.
    2.     Invest $7,500 upfront and sell off all the do-dads you can buy for $7,500.  Just before you run out of stock, take $7,500 from those sales and buy more do-dads to sell.  You will still realize a $3,000 profit by the end of the year.  But, with option 2, you will realize a $3,000 on a $7,500 upfront investment.  You will also have the other $7,500 of your original $15,000 you started with in the bank or to invest in something else.
    But, as far as improving inventory turn, you can increase sales or decrease cost of goods.
    nevadascul4/26/2009 1:16 PM
  • BizOptimizerBizOptimizer subscriber Posts: 1
    Thanks for restating the formula and the better explaination.  But, what I am looking for is a procedure that a company with many products and many customers could use to implement your example of better inventory usage.   What are the steps a company with thousands of products and hundreds of customers would go through to implement the "better approach" you described.
    How do they ensure they improve turns, but don`t jeopardize delivery abilities and such.

    How - what are the steps - to go from 8 turns a year to the industry average of 15 - or better!
    I am hoping someone has one lying around that they use.  Thanks....
  • nevadasculnevadascul subscriber Posts: 3 Member
    There are no specific steps.  Inventory turn over ratio is a reflection how much a company pays for goods and of how quickly inventory moves through a company.  This can entail multiple programs.  For example, some companies are now shipping directly from the production floor directly to the customer.  This process improves the flow of goods through a company by bypassing the warehousing stage.  It also reduces cost of goods by eliminating warehousing costs and extra shipping costs.  Thus, improving the inventory turn ratio.

    I have also look at your web site.  And,  I might be wrong in assuming you are selling the information you get here on your web site.  If I am wrong, my apologies. 
  • BizOptimizerBizOptimizer subscriber Posts: 1

    There are no specific steps.  
     I have also look at your web site.  And,  I might be wrong in assuming you are selling the information you get here on your web site.  If I am wrong, my apologies. 
     No appologies required - on this and other forums the right answer is almost ALWAYS what the person responding is selling.  I understand the skepticism, and since it doesn`t pertain - I take no offense. If you look further at my website you`ll see I am trying to find ways small business can afford consulting - they can`t keep up with $200-$500/hour rates.  I am/was hoping this and other forums would provide things as simple as a procedure to improve inventory turns.  Then customer`s WOULDN`T have to pay a consultant big bucks to carry them through it. Still hopeful......      
  • nevadasculnevadascul subscriber Posts: 3 Member
    Hi again,
    Here are some ideas to improve inventory turn over ratio.  First, keep in mind that 80 percent of a company`s sales are generated off 20 percent of the company`s inventory.  In short, most items in inventory do not contribute significantly to sales.  In order to boost inventory turns, a company needs to identify the 20 percent of the inventory that affects sales.  The company then needs to stock accordingly. 
    An simple example from the auto parts business might help.  Filters, oil and other general maintenance parts move quickly because there is a high demand for such items.  Cam shafts don`t move quickly because of low demand.  So, which type of items should an auto parts store invest more inventory dollars in if they want to improve inventory turn over rate?
    Next, a company needs to identify slow moving itemS (dust collectors).  Not only do these items not contribute significantly to overall sales, they tie up inventory dollars that could be used buy fast moving inventory.  Slow moving items also add to your warehousing ( holding ) costs.  In short, the longer an item sets on the shelf, the more you pay in inventory taxes and other holding costs. 
    Slow moving items also increase your on hand inventory value.  The higher this dollar amount is, the lower your turn over ratio. 
    So, companies need to identify these items and find a way to move them out of inventory.  Two ways to do this are to return the items to the suppliers from whence they came.  Or, offer the items for sale at a reduced price.
    A real life example comes from Radio Shack.  Their franchise stores were at one time required to carry in inventory all 3500 products Radio Shack produced.  Many of these items did not move off the self (dust collectors).  That meant a lot of money tied up in inventory that did not move.  Which in turn affected the turn over ratio.  Radio Shack finally changed its policy.  The stores now only have to carry 1900 product items.  If a customer wants one of the other items, the store will order it for the customer with the understanding the part is non-returnable purchase.
    nevadascul4/26/2009 8:47 PM
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