If you need to reduce your overall inventory investment to meet your turnover goals, a good place to start is to look at the dead stock and slow-moving items that are stocked in your warehouse. If you have questions about what your particular situation, please contact us. For some companies, “good” inventory must turn 12 times a year. Please note that depending on your specific market, “good” inventory might have to turn more than 1-1/2 times a year. Other Items: Items whose stocked inventory will turn more than one and a half times per year. That is, you’ve sold the normal shelf quantity less than 1-1/2 times in the past 12 months. Slow-Moving Inventory: Inventory that has had some movement, but less than one and a half turns a year. Let’s start by dividing your inventory into three categories:ĭead Inventory: Inventory with no sales or recurring transfers during the past 12 months. Now you have to decide what products will comprise this investment. OK, you’ve developed a target inventory investment. So, the sooner we get started, the better! It may take a year or more to achieve this goal. By the time we achieve our eventual goal of five inventory turns, our target inventory investment will be $2,000,000 ($10,000,000/5 turns). The figures in the table illustrate our goal of a gradual increase in inventory turns resulting in a continuous decrease in inventory investment. Let’s look at an example which illustrates how increased stock turnover leads to lower inventory investment: This gradual increase in inventory turns is usually the result of an aggressive, but achievable, program to reduce the quantity of unneeded material in your warehouse. So, if the inventory of stocked products in your warehouse is currently turning three times annually, and your company initiated an effective inventory management program three months ago, you should try to achieve 3.1 turns next month, 3.2 turns the month after, etc. And as we will see, it will probably take three months, after you begin an effective inventory management program, to start to see results. A realistic “incremental” goal is to increase your current turnover rate by 1/10th turn per month. But these optimal goals cannot be achieved overnight. Target Inventory Turnover: Most hard-goods distributors earning gross margins between 20% and 30% would like to receive five to six inventory turns in a main warehouse, and ten to twelve turns in a branch location. Projected Annual Cost of Goods Sold from Stock Sales: What is a realistic projection of what your sales from warehouse stock will be (at cost) during the next 12 months? To calculate your target inventory investment, we use a variation of the formula used to calculate inventory turnover: This budget is referred to as the “target inventory investment.” It is critical to the success of your inventory management system, and your business in general, to develop a budget for the value of stocked inventory maintained in each warehouse. Unfortunately, few distributors maintain budgets and projections for what is probably their largest asset, inventory. If sales are lower, or expenses higher than what was projected, management will usually take corrective action to ensure that the company remains profitable.īudgets are good management tools. Each month these forecasts are compared to actual sales and expenses. Most distributors spend a lot of time developing sales projections and budgets for expenses.
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