Retail businesses have an average of 20% inventory to sales ratio. This I/S ratio compares the value of your inventory with the amount you make from selling your goods. The I/S ratio is arrived at by dividing the revenue made from overall sales by the value of the stock that’s kept. So, with a 20% I/S ratio, if you make $100 from selling your items, your stock would be valued at $20. More simply, the I/S ratio here would be five (revenue made from sales divided by value of stock). Maintaining the I/S ratio that’s best for your business is key to maximizing profit. If there’s too much stock, profits are compromised; if there’s too little stock, orders might not be filled. Optimization is the key. What are the best ways to optimize inventory? And, what are the five elements of an optimized inventory management system? Let’s find out.
If you are a businessperson, deciding the amount of inventory you should keep on hand is crucial. If your stock runs out, or if you have too much of it, the consequences could be serious. There could be financial losses and your reputation could be damaged. The only way to avoid this is by having optimum inventory on hand, or the right amount you need. This article will help you to understand what inventory optimization is and explain the five elements of an optimized inventory management system.
Inventory optimization means maintaining an optimum amount of stock, stock being defined as all the stock-keeping units (SKUs) that are being held by a business. When a company has an optimum level of stock, its working capital is being used to its best advantage.
Overstocking inventory can result in
On the other hand, understocking and stockouts can result in
Inventory optimization can eliminate these losses. Put another way, when optimal levels of inventory are maintained, resources, like physical space, labor, and capital, can be used in their most efficient ways.
As we saw earlier, it is crucial to optimize the amount of inventory you keep at all times. But in order to do this right, what should you be focusing on? Let’s look at the key areas in detail.
First, your stock policies should be clearly defined, and you should let the relevant people know about them well in advance. It isn’t helpful if the purchasing department is kept in the dark about these policies.
The inventory turnover ratio indicates the liquidity of the inventory, or the number of times the average inventory is sold during the year. It shows the efficiency and effectiveness of the company in investing its funds.
Inventory turnover time is the number of times a company replenishes its stock in a given period, generally a year. In other words, if you sell stainless steel spoons, the inventory turnover of finished product — spoons — is the number of times you sell out of spoons and replace them. The following formula shows how to calculate the inventory turnover ratio:
| Inventory turnover ratio = | Cost of goods sold |
| Average value of inventory |
where,
| Average inventory = | Opening inventory + closing inventory |
| 2 |
Cost of goods sold = Opening inventory + purchase – closing inventory
Now you know how many times a year you have to refill your inventory. The following categories of inventory are dependent on this ratio.
These three categories should be a major consideration when making purchases. Separate your stock into each one, and invest more in goods that are fast moving than those that are slow-moving.
Forecasting demand is, perhaps, the first step when it comes to good inventory management. Forecasting demand accurately is not an easy task, however. There are many aspects that have to be considered: historical sales data, customer biases, future demand, and growth. Additionally, it is crucial to take technological advances and trends into account.
How can you predict demand for your products accurately? Well, quality software can help. Cin7’s system generates reliable demand forecasting reports. Cin 7’s forecasting demand report can make your job a lot easier.
The term product life cycle is defined as the period between the product’s initial production to the time it is no longer sold. If you launch a new product, sooner or later it will stop trending and your customers will move on to something else. There are five stages to a product’s life cycle that impact your inventory management:
The life cycle of a product can be short (a few months) or long (spread over years). These life cycles have to be taken into account when forecasting demand for your product. Doing this accurately will prevent overstocking or understocking,
Your purchase department should have clear restocking instructions. Every item in the inventory should have a specific reorder point (ROP), a predetermined level of goods at which they have to be restocked. When determining this reorder point, you should consider:
Management needs to be aware of ROP to ensure stock is replaced in a timely manner. Inventory management software like Cin7 can send alerts that let you know when you reach this ROP.
If you find inventory management challenging and are intimidated by the sheer number of calculations that have to be made, here’s an easy solution: Cin7. This versatile and easy-to-use software can help you manage your inventory easily. Among the features it has to make your life easier are
The following video shows how Cin7 inventory management software can help you take your business to the next level:
One of the significant advantages of Cin7 is its inventory management app. This app lets you connect to your inventory management program from anywhere.
While inventory optimization is a crucial element of a successful business, it is also painstakingly tricky and complex. Overstocking can lead to losses, while understocking can damage your reputation. How can you overcome these dilemmas? Cin7 inventory management software turns the whole ordeal into a piece of cake.
Why wait? Contact our experts for a demo, and unlock the true potential of your inventory.
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