October 11, 20223 yr Q 512. What is Inventory Turns (or Inventory Turnover Ratio)? How does it help in business growth? Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday. All questions so far can be seen here - https://www.benchmarksixsigma.com/forum/lean-six-sigma-business-excellence-questions/ Please visit the forum home page at https://www.benchmarksixsigma.com/forum/ to respond to the latest question open till the next Tuesday/ Friday evening 5 PM as per Indian Standard Time. Questions launched on Tuesdays are open till Friday and questions launched on Friday are open till Tuesday. When you respond to this question, your answer will not be visible till it is reviewed. Only non-plagiarised (plagiarism below 5-10%) responses will be approved. If you have doubts about plagiarism, please check your answer with a plagiarism checker tool like https://smallseotools.com/plagiarism-checker/ before submitting. The best answer is always shown at the top among responses and the author finds honorable mention in our Business Excellence dictionary at https://www.benchmarksixsigma.com/forum/business-excellence-dictionary-glossary/ along with the related term
October 11, 20223 yr Inventory Turnover Ratio The number of times a company has sold and replenished its inventory over a specific amount of time. Inventory Turnover Ratio = Cost of goods sold / Average inventory The inventory turnover ratio is derived from a mathematical calculation where the cost of goods sold is divided by the average inventory for the same period. A higher ratio is more desirable than a low one because a high ratio tends to point to strong sales. Cost of goods sold- It is the direct costs of producing goods including raw materials to be sold by the company. Average inventory- It smooths out the amount of inventory on hand over two or more specified time periods. The formula can also be used for calculating the number of days it will take to sell the inventory on hand. It is used in inventory management to assess operational and supply chain efficiency. The concept of an inventory turnover provides a number that symbolizes a measure of units sold compared to units on hand or can say that how well a company is managing inventory and generating sales from that inventory. Its an important component of the effective supply chain management. It is especially important measurement for retailers and companies that sell physical goods. Reducing the inventory holdings can lead to reduced overhead costs and improved enterprise profitability also. Examples of Inventory Turnover Ratio 1. ABC Woods Furniture is a specialized supplier of high-end, handmade dining sets made from specialty woods. Over Q3, its busiest period the retailer posted Rs. 47,000 in COGS and Rs. 16,000 in average inventory. To find the inventory turnover ratio, we divide Rs. 47,000 by Rs. 16,000 and the inventory turnover is 3. 2. We’ll use the same company and the same scenario as above but this time compute the average inventory period; meaning how long it will take to sell the inventory currently on hand. We already know that the inventory turnover ratio is 3. For calculating how many days it will take to sell the inventory on hand at the current rate, divide 365 days in the year by 3, which equals 121.67 days. Inventory Turnover Ratio helps in business growth as: 1. Making smarter decision in varieties of areas of business i.e. pricing, manufacturing, marketing, purchasing and warehousing management. 2. Helps in increasing sales volume and stores profitability. 3. In reselling excess inventory. 4. In better forecasting.
October 12, 20223 yr Inventory turnover ratio is a financial ratio showing the number of times a company turned over its inventory in relation to its cost of goods sold in a specific period of time. Generally the annual year of the company is taken into consideration for calculation of inventory turn ratio. It can help businesses guage and aid in effective decision making on price, marketing cost, purchase of inventory. A low inventory ration would indicate weal sales or excess stock of inventory and a high inventory ration would indicate good sales however may lead to insufficient stock of inventory. The formula for Inventory Turnover Inventory Turnover = Cost of goods sold/ avg value of inventory The inventory turnover ratio measures the amount company generates sales from its stock. This helps the business identify how to increase sales or improve the marketability of certain stock or the overall inventory mix. It increases sales leading to higher profitability Higher sales will lead to fresh stock and new product offerings for the customers High customer satisfaction Increase in employee morale to enhance and boost sales Creates brand image and good reputation Enhanced customer loyalty Improves financial position of business Reduces cost of storage and warehousing Reduces other operating cost Excellent revenue and turnover
October 12, 20223 yr Inventory Turnover Ratio: What is Inventory Turnover? The inventory turnover ratio is that the number of times a business sold and then replaces its stock of raw materials during a certain period. It considers the *cost of Goods sold, relative to its average inventory for a year or in any given period. A high inventory turnover means goods are sold faster, and a coffee turnover rate indicates weak sales and excess inventories, which can be challenging for a business. The inventory turnover ratio can help businesses make better decisions on pricing, manufacturing, marketing, and buying. it's one of the operational efficiency ratios measuring how effectively a company uses its assets. *Cost of Goods Sold (COGS)? Cost of products sold is a reference to the immediate costs of producing the goods sold by a company. This sum includes the value of the materials and labor directly used to create the good. It excludes indirect expenses, like distribution costs and sales staff costs. Cost of products sold is also called to as the ‘cost of sales’ Formula to calculate Inventory Turnover: Average value of inventory is employed to offset seasonality effects. it's calculated by adding the value of inventory at the end of a period to the value of inventory at the end of the prior period and dividing the sum by 2 Example of a Inventory Turnover Calculation ABC For financial year 2022, ABC reported cost of sales of $429 billion and year-end inventory of $56.5 billion, up from $44.9 billion a year earlier. ABC’S inventory turnover ratio for the year was: $429 billion ÷ [($56.5 billion + $44.9 billion)/2], or about 8.5 Its days inventory equaled: (365 ÷ 8.75), or 42 days This showed that Walmart turned over its inventory every 42 days on the average during the year. KEY TAKEAWAYS 1. Inventory turnover measures how efficiently a corporation uses its inventory by dividing the cost of goods sold by the average inventory value during the period. 2. Inventory turnover ratios are only useful for comparing similar businesses, and are particularly important for retailers 3. A relatively low inventory turnover ratio may be a sign of weak sales or excess inventory, while a better ratio signals strong sales but may also indicate inadequate inventory stocking. Accounting policies, rapid changes in costs, and seasonal factors may distort inventory turnover comparisons. Limitations of Inventory Turnover Inventory turnover is merely useful for comparing similar companies because the ratio varies widely by industry. for instance , listed U.S. auto dealers turned over their inventory every 55 days on the average in 2021, compared with 23 days for publicly traded food store chains. A relatively high inventory turnover ratio might indicate insufficient stocking that is costing the company sales, while low inventory turnover could reflect bulk orders helping the corporate cut costs or preparations for a product launch, instead of inefficient inventory management. Because the inventory turnover ratio uses cost of sales or COGS in its numerator, the result depends crucially on the company’s accountancy policies and is sensitive to changes in costs. for instance, a price pool allocation to inventory might be recorded as an expense in future periods, affecting the typical value of inventory used in the inventory turnover ratio’s denominator. Meanwhile, if inventory turnover ratio increases because of discounts or closeouts, profitability and return on investment (ROI) might suffer. For retail businesses, this number is significant, because it provides necessary data that can help make good business decisions that can boost sales. Why It’s Important to live the Inventory Turnover Ratio Not calculating your business inventory turnover ratio may result in you missing valuable data that can help you enact your business plan effectively and achieve your goals. Below are varied reasons why you ought to calculate the inventory turnover ratio. Inventory turnover ratio may be a key performance indicator This is one of the most valuable importance of calculating the inventory turnover ratio in retail businesses. Being a key performance indicator, the inventory turnover ratio can facilitate you manage and grow your business effectively. It can show liquidity Do you intend to get a loan to manage your retail business? If yes, you ought to always calculate the inventory turnover ratio as it will how your business assets liquidity. this may be highly beneficial when making a loan application. It helps in making business decisions Making decisions which will benefit your business can be challenging as a business owner. While there are many indicators that you simply can use, the inventory turnover ratio is especially peculiar to retail businesses. It shows the stock level and turnover rates which makes making business decisions a simple task. With the inventory turnover ratio, you'll answer questions such as: What and the way many items do you have to order What products does one need to put on sale? Consequently, you'll purchase merchandise, and sell products that your customers want. However, had best to combine it with other indicators for maximum business growth. How To Improve Inventory Turnover Ratio If on calculating your inventory turnover ratio you discover it not in the specified range, then you would like to know how to improve it. Below are some ways to enhance the inventory turnover ratio for retail businesses.
October 12, 20223 yr Inventory Turns / Inventory Turnover Ratio is a financial ratio that represents the number of times an organization turned over its inventory with respect to its cost of goods sold (COGS) in a given time period (typically a fiscal year). It is calculated basis the given formula:- Inventory Turnover Ratio = COGS / Average Inventory Where Average Inventory = (Inventory Balance at the year beginning + Inventory Balance at the year end) / 2 Let us see how this is calculated with the help of an example:- XYZ Company has cost of goods sold amounting to $5M for the current fiscal year. Its inventory balance at the beginning of the fiscal year was $600,000 & at the fiscal year end amounts to $500,000. Here let us first calculate the Average Inventory = ($600,000 + $400,000) / 2 = $500,000 Now let us calculate the Inventory Turnover Ratio = $5,000,000 / $500,000 = 10, thus the value of 10 denotes that the inventory turns are 10 times for the fiscal year i.e. 10 times in a year an inventory has been converted into sales by XYZ Company. Let us now see how does the Inventory Turnover Ratio aids in business growth:- A high inventory turnover ratio is a good sign for an organization as this means that the goods are generally sold at a faster rate & a lower ratio indicates excess inventory in the ecosystem which leads to additional inventory handling & carrying cost burden for an organization. Its is a useful measure for organizations to gauge their operational efficiency by comparison of their ratios with the industry benchmark. A low inventory turns ration is also a sign of weak sales as it can indicate problem with the overall sales & marketing strategy of an organization & will channelize an organization’s effort to improve upon the same. It also signals towards the rate at which the demand is generated, thus aiding in decisions pertaining to regulating the output generation for an organization. We can also leverage the Inventory Turns Ratio to calculate the Days Sales of Inventory (DSI), which gives an idea of how long it takes for an organization to turn its inventory into sales. This is basically calculated as shown below:- Days Sales of Inventory = (Average Inventory / Cost of Goods Sold) x 365 (i.e. no of days in a fiscal year). Let us now calculate the Days Sales of Inventory for the previous example of XYZ Company:- DSI = ($500,000 / $5,000,000) x 365 = 36.5 ~ 37, which means that for XYZ Company approximately 37 days is the number of days for which the inventory is there in their system before being sold.
October 13, 20223 yr Solution Inventory turnover ratio can be defined as a financial ratio which indicates how many times a company’s inventory has been sold and replaced in each period of time. The number of days taken to sell the inventory on hand can be then be determined using the inventory turnover formula and the number of days in the period. Calculating inventory turnover can help businesses for making better decisions about pricing, production, marketing, and inventory purchases. Low sales and surplus inventories are indicators of a slow turnover ratio. Therefore, a higher ratio suggests higher sales /lack of inventory. High-volume, low-margin industries like retail and supermarkets also have the largest inventory turnover. Inventory Turnover Ratio Formula The formula for the Inventory Turnover Ratio is: Where, Cost of Goods Sold: The cost of goods sold is defined as an expense incurred from the direct production of a product. This expense will include the expenses of raw materials and labour. The cost incurred in a merchandising company is usually the actual amount of the finished product also includes any applicable shipping costs paid by a merchandiser to a manufacturer or supplier. The cost of goods sold is appropriately determines both kinds of companies by using an inventory account or list of raw materials or items acquired for production. Average Inventory: The average cost of a set of products across two or more time periods is defined as average inventory and considers the beginning inventory balance at the beginning of the financial year and the ending inventory balance at the end of the same year. The average cost of items will result in sales and is calculated by dividing these two account balances in half. Average inventory need not be determined on a yearly basis. This can also be done on monthly or quarterly basis, depending on the specific analysis used to evaluate the inventory account. How to Calculate Inventory Turnover Ratio? Firstly, how to derive the value of Cost of goods sold? Cost of goods sold is derived by reducing the profit from the revenue generated or in other words reducing profit from sales. Profit refers to gross profit because net profit includes indirect expenses that cannot be attributed to an inventory. Considering the below example, the revenue from operations is Rs. 1,20,000 and therefore the gross profit is Rs. 20,000 (Rs. 1,20,000 -1,00,000). Here, 1,00,000 (revenue – gross profit) is nothing but the value of goods sold derived by unloading the profit margin from the sales. There can also be a case where you may incur a loss on sale of inventory. Then, therein case, the value of goods sold is derived by adding the gross loss to the cost of goods sold. Now say finished goods worth of 1,20,000 was sold for Rs. 1,00,000. Here, the gross loss is Rs. 20,000. therefore, the cost of goods sold in this case should be calculated as below. Cost of products sold = Revenue from operations + Gross loss = Rs. 1,00,000 + Rs. 20,000 = Rs. 1,20,000 Average inventory and its formula Average inventory is an estimated amount of inventory which a business has on hand over a longer period and is calculated by arriving an average of stock at the start and end of the period. Formula to calculate average inventory Average inventory is calculated as Opening stock+ Closing stock / 2 For example, inventory at the start of the year is Rs. 1,25,000 and value of inventory at the top of the period the period is Rs. 1,75,000 Thus, average inventory is 1,50,000 (1,25,000 + 1,75,00/2) Example of inventory turnover ratio Cost of goods sold -4,50,000 Inventory at the beginning -1,25,000 Inventory at the end - 1,75,000 Inventory Turnover Ratio = Cost of goods sold / Average Inventory We know the cost of goods sold i.e. Rs. 4,50,000 as given in the table. Thus, the average inventory. = (Opening inventory + closing inventory / 2) = Rs. (1,25,000 + Rs. 1,75,000)/ 2 = Rs. 1,50,000 Therefore, the inventory turnover ratio will be = Rs. 4,50,000 / 1,50,000 = 3 times The result implies that the stock velocity is 3 times i.e., 3 times the stock of finished goods is been converted into sales. Importance of Inventory Turnover Ratio · Knowing how quickly inventory sells, how well it matches market demand, and therefore the way its sales compare to other products in its class category is one way to evaluate corporate performance. Because inventory turnover could also be a business’s principal source of revenue, analysts use it to gauge product effectiveness. · Higher stock turns are advantageous since they indicate product marketability and lower holding costs, like rent, utilities, insurance, theft, and other expenses associated with keeping products in stock. · one more reason to seem at inventory turnover is to compare a company to others in the same industry. Companies measure their operational efficiency by checking if the inventory turnover is on pace with, or have even exceeded, the industry standard benchmark. · Inventory turnover could also be a metric that indicates how quickly a company’s sales inventory moves. The speed is often viewed as a barometer of corporate success. Fast-moving inventory retailers tend to outperform. the upper the holding cost, the longer the company is holding the inventory. during this circumstance, customers will not return to the store. · Low turnover/sales and excess inventory are all signs of overstocking. the items given or inadequate marketing could be the cause of such a predicament. · When the ratio is high, it states the sales are robust or that inventory is low. The latter may end during a business loss. Interpretation of Inventory Turnover Ratio Good Inventory Turnover What constitutes a “good” inventory turnover will vary relying on the industry. Generally, companies which store relatively affordable products will have greater inventory turnovers. Moreover, sectors that stock costlier items—where buyers typically take longer to form a purchase decision—would have lower inventory turnovers. to figure out whether inventory turnover ratios are favourable or negative, they analyst must compare to the industry and competitors of the company. High Inventory Turnover Ratio A high inventory turnover ratio indicates that an organization has effective inventory control methods in place, also as strong sales procedures. Aiming a high inventory turnover is always a goal for businesses. After all, a high inventory turnover minimizes the number of capital invested in inventory, enhancing liquidity and financial health. therefore, maintaining a high inventory turnover decreases the danger of spoilage, damage, theft, or technological obsolescence rendering their products unsellable. However, a high inventory turnover is caused by a company’s insufficient inventory, which suggests it's missing out on prospective sales. Low Inventory Turnover Ratio It is also conceivable for a business to be at a negative or low inventory turnover ratio and suggest a scarcity of demand, an outmoded product, or a poor sales/ inventory policy, among other things. Low inventory turnover ratios will put your company at an obstacle and may lead to a variety of problems. Stock accumulation leads into expensive maintenance and handling costs. Risk of a product becoming obsolete or out of favour, within the buyer products business. Perishable Goods Businesses must make sure about inventory movement while dealing with perishable and time-sensitive items. Items like milk, eggs, trending or seasonal clothing, and magazines. The longer this stuff are kept in inventory, the additional money the company loses. Unsold inventory and lost revenues would result from an overstock of such things, especially as seasons change and stores refill with fresh, seasonal inventory. Obsolete inventory is mentioned as dead stock and is unsold inventory.
October 13, 20223 yr Inventory Turnover: the amount of time that passes from the day an item is purchased by a company until it is sold is referred to as an Inventory turnover. the company sold the stock that it purchased, less any items lost to damage or shrinkage is the one complete turnover of inventory Many successful companies have usually several inventory turnovers per year, and varies industry to industry and product category. Ex: Consumer packaged goods have high turnover, whereas the high-end luxury goods, viz., luxury handbags, typically sold few units per year. The following factors have an impact on the inventory management challenges like., turnover which includes changing customer demand, poor planning of supply chain and overstocking. Alternatively, inventory turnover can also be used at an aggregated level by bundle disparate items. Example: the geographic location of retail outlets. 80/20 rule when it comes to inventory the Pareto, principle applies to a lot of areas in business. it means 80% of company’s sales revenues are likely generated by 20% of the SKU’s. To Optimization Inventory Turnover there are 5 Techniques To optimize inventory management, the primary way is to apply inventory turnover ratios in a practical manner. Following are the 5 techniques Streamline the supply chain: Lowest price suppliers may not be the best choice. In the market demand if the product is seeing a surge, it is guaranteed delivery times for vital components which are of more important. To stream line the supply chain inefficiencies to be eradicate that will benefit sales, profits and overall margins. Adjust your pricing strategy: To realize the larger margins which are in higher demand and to freely capitalised by moving the old inventory by adjusting the price. If the stock is dead stock and can’t be sell are to be considered as zero value and to take the tax deduction by donating the stock to charity and other way is to offload through a second channel. Change ranking in industry: More market share can be grasped and increase the ranking within the industry by managing the inventory strategically by checking the inventory turnovers and inline with rest of the industries and with a better strategic position emerging trends in inventory ratios by positioning on competitive items. Improve forecasting: To make inventory forecast more accurate the sales numbers and inventory reports need deep data. With this data can suggest ways to change the product mix in a creative way in moving the inventory slow with a higher potential margin. Automate purchase orders: By automation we can reduce the cost and increase efficiencies. If these are linked with an order management system which facilitates reordering of inventory which sells good so that the stock is always in by which we net even more. To generate purchase orders automatically using an inventory system for buyers to review by which the results will better and minimum errors. Inventory Management Software’s can Improve Inventory Turnover.
October 14, 20223 yr Inventory Turnover The inventory turnover ratio is a financial matrix that tells you how many times throughout a period of time the company converted its inventories in cash for the business. In fact, that can be calculated either by dividing the sales by average inventory or by dividing the cost of inventory. Average Inventory Example :- Inventory Turnover Ratio Ratio of wallmart is calculated below By comparing the inventory turnover ratios of Walmart and Target, both companies operate mainly in the retail industry, here we can see that Walmart sells its inventory 8.26x over a period of one year compared to Target’s 5.54x. It shows that Walmart can more efficiently sell the inventory it buys. In addition, it may show that Walmart is not spending excess on inventory purchases and is not incurring high storage and holding costs compared to Target. Interpretation of Inventory Turnover Ratio Inventory turn ratio is an efficacy ratio that’s measures how effectively company can control or manage inventory . It’s good to achieve a high ratio. Higher turn reduce the storage and other holding cost. The fundamental is compare the ratios between companies operating in same industry and not for companies operating in different industries. The benchmark value depending on the type business or industry. Low turnover reflects company sales are poor , company use to keep to much inventory or implies poor inventory management. Unsold inventory may lead significant risk in term of blockage of money, dead stock or obsolescence , market fluctuation. Inventory can help to determine the liquidity , In current scenario retail industries not keeping in any inventory eg Amazon . They always think no place for anything wherever find the place keep the material.
October 14, 20223 yr Inventory turns is the measure of the number of times inventory is used in a given time frame. The rate at which inventory is used, sold or replaced is Inventory Turnover Ratio. Inventory in stock and be always available, is preferred from a management stand point but for only those who overlook the working capital / cost invested in purchasing, storage and safety of the inventory. From financial perspective, manufacturer would want the inventory to be used for finished product at the earliest and the finished product be sold out in the market, improving the cash flow cycle will allow them to make another investment. Faster the inventory is put to use, less are chances of incurring extra warehouse / storage cost, loss due to staleness or theft or breakage. Extra inventory has an inverse relationship on the profit margins and to worsen the situation pressure on increasing sales cost may leave no market for the product. Inventory Turns can be put to a ratio by using a formula, as below: = Cost of goods sold or Cost of raw material / Average Inventory · Cost of goods sold = Units sold * Unit Selling Price · Inventory Cost = Average Unit in stock during period * Cost per unit Higher the ratio better it is. Higher ratio signifies that the sales is faster in comparison to average inventory cost. While it depends on the framework or Operations management decision of keeping the stock but most of the matured industry will keep Inventory Turns be around 5 to 10. Dependent on sales number, inventory to be consumed between 1-2 months. A smaller inventory ratio (2-4) or reduced turnover ratio will recommend that either sales team are able to place the product correctly in the market or may be the product is no more a customer choice. Inventory Management over a period of time has provided some best practice strategy – Pull, Push and JIT strategy. While Pull and Push gets a self explanation, ask for inventory when u need and move the product inventory from one stage to another, Just In Time is most advanced form of inventory management, it requires precision and most accurate calculation of lead / takt time, the goods are received from supplier only when the sales order is confirmed and the product needs to be manufactured in time. The objective is to reduce the inventory holding cost and maximize the Turns. JIT is most effective when the cost of maintaining inventory is high and the production model is optimized to deliver the product right in time to the customer. There are some techniques and to name few of the most popular - Consignment, ABC Inventory Management, Material requirement planning. Basis Management decision and need base, ideal technique supports optimizing Inventory Turns. If put to right use, Inventory Turnover is an excellent ratio to make Management Decision. Calculating Inventory Turns over a period, guides the management to know if the product sales is in line with the production pipeline. Higher Turnover means inventory will not be on hold and finished goods has an immediate market. Market Trend Analysis Sales Forecast and Inventory Turns have a tight bounding, If the sales prediction number is on increase trend for future, management can plan how much inventory will be needed. This will ensure that inventory shortage, sourcing or blockage is taken care of. Managing Inventory Keeping the right inventory is line with sales, makes sure that the Company saves associated cost, more working capital for other priority. In turn, Customer gets fresh product and better quality. Management can decide on the Selling price and may take advantage over competition. Improved Margins and manage price stability Stakeholder can evaluate Manufacturing unit efficiency and reward / comment back on the product managers competency. Afterall all owners would want to reduce the inventory level without impacting Sales. Evaluate Management Efficiency Using Inventory Turnover for making decisions has its own risk, especially when in uncertain market, VUCA world, The numbers can be manipulated and lead to an incorrect submission. This average formula, somehow do not highlight the slow-moving inventory parts and hence may restrict the management to better performance. Plus, most importantly, what if the inventory is reducing or is less of? There may be short term appreciation for High Inventory and might be company miss the opportunity of optimizing Sales due to restricted finished good supply. Management is well aware of the fact that if the inventory is periodic or dependent on various influencing availability factors, they may have to pay more on buying small portions or during high demand. “Less off and More off” – both have challenges and keeping the right balance is the key to success.
October 14, 20223 yr Very detailed answers to this question. The best answer has bee provided by Anjali Nair. Answers from Ashish Kumar Sharma, Dimple Tiwari, M V Ramana are also a must read!
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