When it comes to improving inventory turnover rates in small business inventory management, it all amounts to enacting some simple and straightforward approaches to increasing your odds of moving more product. Now, I am not implying that managing inventory is easy. There is nothing at all easy about trying to increase turnover rates and reducing the costs of inventory. After all, inventory is a constant reminder of a company's cost of capital. It's expensive to hold and retain inventory for long periods and it's often difficult to find that middle ground between too much or too little stock. However, there are some things that companies do that hampers their ability to better manage their inventory. So, what are the approaches to improving inventory turnover?
1. Ensure Commonality of Parts:
There is one inherent rule of ensuring a high inventory turnover rate, and that is to make sure your company has as many customers to purchase that inventory as possible. Sounds pretty easy doesn’t it? Well, this is perhaps the easiest rule to implement and it’s one a number of companies simply ignore. It’s imperative that the parts you hold in inventory have multiple customer outlets.
The higher the number of customers who’ll buy that inventory, the easier it is to make sure it’s sold. Come up with an inventory grading system for your most common parts. It's about minimizing your company's risk and trying to mitigate the instances of having obsolete and outdated inventory because your company didn't have enough customers. The grading system could look something like this.
- Tier 1 products have 15 or more potential customers
- Tier 2 products have 8 to14 potential customers
- Tier 3 products have 4 to 7 potential customers
To make this successful, decide upon a minimum number of customers needed to hold inventory of product. You don’t have to do this will all your inventory, but the more product lines you do it with, the less likely they’ll remain in inventory for extended periods. More customers buying that inventory means you’ll be able to increase your inventory turnover rates.
2. Liquidate Slow Moving Inventory
A number of companies become attached to the original value of their inventory. Most can’t come to terms with the need to liquidate or sell that inventory for a lower value than its original cost. For some reason, there’s an attachment to the inventory. Perhaps it’s because inventory is an asset and therefore has a value to it. However, there is one inherent rule of inventory management; the longer inventory is held, the more expensive it becomes and the lower the value of that asset.
3. Avoid Holding Inventory Without Agreements
The mistake a number of companies make is when they are confronted with a customer who wants them to hold custom made parts that can only be sold to that particular customer. The only way this should happen is if the customer is willing to sign a contractual agreement on supply.
Companies often get confused with the potential of the immediate sale versus the long-term consequences of holding inventory. If that customer leaves, what happens to the inventory? In most cases, it becomes a complete loss. If the parts are that important to the customer, and they are that hard to find, then there’s simply no reason the customer can’t sign an agreement with clearly defined liabilities.
4. Be Cognizant of the 80-20 Rule of Inventory Management
Most of you are probably familiar with the 80-20 rule as it pertains to revenue. It states that 80% of a company’s revenue comes from the top 20% of its customers. Well, it’s the exact same in inventory management. For most companies, the 80/20 rule of inventory management states that 80% of the volume of products sold comes from the top 20% of a company’s product lines.
This goes back to the first point listed and the importance of ensuring multiple customers for common parts. Build up your top 20% and minimize the inventory held on the remaining 80% of product lines that are slow movers. Holding less of the least popular products will reduce costs and help increase your inventory turnover rates.
5. Improve Sales Forecasting & Be Aware of Seasonality
Most businesses operate in markets where customer demand fluctuates. They have busier times of year and times when orders are less frequent. The best companies are aware of this and manage inventory accordingly. However, this only happens with strong sales forecasting that takes into consideration the natural seasonality of customer demands.
Improving sales forecasting is essential to ensure that those parts placed in inventory have a high probability of sales. This means that inventory management and the company’s sales force must work together to mitigate mistakes.
The above video shows how to improve sales forecast accuracy.
Improving inventory turnover rates takes a lot of practice and hard work. For small business owners who want to improve inventory management, it involves taking some simple approaches to protecting the value of that inventory and improving the coordination between inventory management and the company’s sales team. Gradually, these approaches can be modified and improved until the incidence of dead stock is less prevalent and inventory turnover rates are higher.
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