How do you identify slow-moving inventory items?

1 What is the inventory turnover ratio?

The inventory turnover ratio (ITR) is a measure of how often you sell and replace your inventory in a given period, usually a year or a quarter. It is calculated by dividing the cost of goods sold (COGS) by the average inventory value. A higher ITR means that you are selling your inventory faster and more efficiently, while a lower ITR means that you are holding more inventory than you need or that your sales are slow. The ideal ITR depends on your industry, product type, and business model, but generally, you want to aim for a ratio that matches or exceeds your competitors and industry averages.

2 How to calculate the inventory turnover ratio?

To calculate the ITR, you need to know two numbers: the COGS and the average inventory value. The COGS is the total cost of producing or acquiring the goods that you sold in a period, including materials, labor, and overhead. You can find the COGS in your income statement or profit and loss statement. The average inventory value is the average of the inventory value at the beginning and the end of the period. You can find the inventory value in your balance sheet or inventory report. To get the average inventory value, you simply add the inventory value at the beginning and the end of the period and divide by two. Then, you divide the COGS by the average inventory value to get the ITR. For example, if your COGS for the year was $100,000 and your average inventory value was $25,000, your ITR would be 4, meaning that you sold and replaced your inventory four times in the year.

3 How to identify slow-moving inventory items using the inventory turnover ratio?

Once you have calculated your ITR, you can use it to identify which items are slow-moving in your inventory. A slow-moving item is one that has a lower ITR than the average or the target for your business. This means that it takes longer to sell and consumes more storage space and resources than other items. To find out which items are slow-moving, you can calculate the ITR for each item or category of items and compare it with the overall ITR or the benchmark for your industry. For example, if your overall ITR is 4 and your industry average is 5, but one of your items has an ITR of 2, that item is slow-moving and may need your attention.

4 How to manage slow-moving inventory items?

Managing slow-moving inventory items can help you improve your cash flow, reduce your storage costs, and avoid obsolescence and waste. To do this, you can use a variety of strategies based on the cause and nature of the problem. Discounting or bundling slow-moving items with other products is one option, but you should be careful not to damage your profit margin or brand image. You can also increase visibility and demand for slow-moving items by creating marketing campaigns or promotions, or by using customer feedback, testimonials, or reviews. Inventory optimization software or techniques like the economic order quantity (EOQ) or the reorder point (ROP) can help you determine the optimal amount and time to order inventory. Lastly, product development or innovation can make slow-moving items more appealing or relevant to customers. This could include launching new products or services that complement or replace existing ones based on market research and customer feedback.

5 How to prevent slow-moving inventory items?

Preventing slow-moving inventory items is better than managing them, as it can save you time, money, and hassle. To prevent slow-moving inventory items, you need to monitor your inventory performance regularly and proactively, using metrics such as the ITR, the days inventory outstanding (DIO), or the inventory to sales ratio (ISR). You also need to keep track of your market trends, customer preferences, and competitors' actions, and adjust your inventory accordingly. Additionally, you need to have a clear inventory policy and procedure that defines your inventory goals, roles, and responsibilities, and that ensures your inventory accuracy, quality, and security.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?