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Last updated on 2024年5月30日

How do you measure and optimize the inventory turnover ratio and the inventory carrying cost?

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Inventory management is a crucial aspect of production planning, as it affects the efficiency, profitability, and customer satisfaction of your business. However, managing inventory is not a simple task, as you need to balance the demand and supply of your products, while minimizing the costs and risks associated with holding too much or too little inventory. In this article, you will learn how to measure and optimize two key indicators of inventory performance: the inventory turnover ratio and the inventory carrying cost.

本文章的要点总结

Demand forecasting:

Understanding your customer demand patterns helps you strike the right balance in inventory. Use historical data and market trends to predict future sales, and adjust your stock levels accordingly to boost your inventory turnover ratio.
Collaborate with suppliers:

Forge strong relationships with your suppliers to improve lead times and reduce order costs. This collaboration can help you optimize reorder points, ensuring you have the right amount of stock without overburdening your inventory carrying cost.

本摘要由 AI 和以下专家提供支持

Shruti Chopra

Demand and supply planner ||demand…
Wilton Mota

Gerente Sênior de Logística e Supply…

1 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. It is calculated by dividing the cost of goods sold (COGS) by the average inventory value. A high ITR means that you are selling your inventory quickly and efficiently, while a low ITR means that you are holding too much inventory or facing low demand. The optimal ITR depends on your industry, product type, and market conditions, but generally, you want to aim for a higher ITR than your competitors.

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Shruti Chopra

Demand and supply planner ||demand strategist || key user for Kinaxis and Demantra cloud
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The type of industry has a key role to play in deciding the right ITR. For example in the fashion or apparel industry the ITR would be high in the beginning of a season (Autumn winter collection launched in Oct) in comparison to a company dealing in perishable good which has a tolerance for ITR due to inherent property of the product it sells ,that is perishability.

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Wilton Mota

Gerente Sênior de Logística e Supply Chain
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O índice de giro de estoque é uma medida chave para avaliar a eficiência na gest?o de estoques. Ele calcula quantas vezes o estoque é vendido e substituído durante um período específico, geralmente um ano. Para medir o índice de giro de estoque, divida o custo dos produtos vendidos pelo valor médio do estoque durante o mesmo período. Uma alta taxa de giro indica que os produtos est?o sendo vendidos rapidamente, enquanto uma baixa taxa pode indicar excesso de estoque ou baixa demanda. Para otimizar o índice de giro de estoque, é fundamental gerenciar com precis?o o nível de estoque, monitorar de perto as tendências de demanda e evitar acumular produtos obsoletos ou com baixo desempenho de vendas.

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2 Inventory carrying cost

The inventory carrying cost (ICC) is a measure of how much it costs you to store and maintain your inventory. It includes the expenses related to warehousing, handling, insurance, taxes, depreciation, obsolescence, and opportunity cost. It is calculated by multiplying the average inventory value by the annual carrying cost percentage, which varies depending on your industry and business model. A high ICC means that you are spending a lot of money on your inventory, while a low ICC means that you are minimizing your inventory expenses. The optimal ICC depends on your inventory strategy, but generally, you want to aim for a lower ICC than your competitors.

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Srikanth Sriramagiri

Cloud Supply Chain, Microsoft || Ex-Tata Aerospace
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ICC is a very important metric which companies tend to ignore. It's important to track this cost and look for opportunities to improve. It's also important to coordinate with finance on this as FIFO/LIFO and other methodologies will affect this value. From personal experience it's important to benchmark the industry value. Also, the target needs to be aligned with your inventory turns target.

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Wilton Mota

Gerente Sênior de Logística e Supply Chain
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O custo de transporte de estoque refere-se aos gastos associados ao movimento físico e logístico dos produtos dentro da cadeia de suprimentos. Isso inclui despesas com transporte, armazenamento, manuseio e seguro de estoque. Para medir o custo de transporte de estoque, é necessário calcular todos os custos relacionados ao movimento de produtos, desde aquisi??o até entrega ao cliente. Para otimizar esse custo, é crucial melhorar a eficiência operacional, reduzir tempos de ciclo, consolidar remessas sempre que possível, utilizar sistemas de gerenciamento de estoque eficazes e negociar tarifas competitivas com fornecedores de logística.

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3 How to optimize ITR and ICC

To optimize your ITR and ICC, you need to adopt an inventory management strategy that aligns with your business goals, customer expectations, and market dynamics. There are different inventory management strategies that you can choose from, such as just-in-time (JIT), economic order quantity (EOQ), safety stock, or reorder point. Each strategy has its own advantages and disadvantages, and you need to evaluate them based on your demand patterns, lead times, order costs, and holding costs. You also need to monitor your ITR and ICC regularly and adjust your inventory levels and policies accordingly.

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Srikanth Sriramagiri

Cloud Supply Chain, Microsoft || Ex-Tata Aerospace
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ITR and ICC are linked so it's important to start with a VSM to map out the key steps in inventory process. for the common inventory strategies its important to calculate key metrics like Cost, SLA, Cost of holding, Avg Inventory value etc and decide the most optimum strategy to be used

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4 How to measure ITR and ICC

To measure your ITR and ICC, you need to collect and analyze data on your inventory transactions, such as purchases, sales, returns, transfers, and adjustments. You can use various tools and methods to track and calculate your inventory data, such as spreadsheets, software, barcode scanners, or RFID tags. You also need to establish a consistent and accurate inventory valuation method, such as FIFO, LIFO, or weighted average. You should compare your ITR and ICC with your industry benchmarks and competitors' performance to identify your strengths and weaknesses.

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5 How to improve ITR and ICC

To improve your ITR and ICC, you need to implement some best practices and techniques that can help you optimize your inventory management. Forecasting demand based on historical data, market trends, and customer feedback is essential for better accuracy. Lead times and order costs can be reduced by negotiating with suppliers, consolidating orders, and choosing the best delivery methods. Additionally, managing safety stock and reorder point levels requires analyzing demand variability, service level, and stockout costs. Excess and obsolete inventory can be eliminated or reduced by conducting periodic inventory audits, applying the ABC analysis, and using the FIFO method. Furthermore, improving inventory quality and visibility involves implementing quality control measures, using standardized labels and codes, and updating inventory records in real time.

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6 Benefits of optimizing ITR and ICC

Optimizing your ITR and ICC can bring many benefits to your business, such as increasing sales and revenue by meeting customer demand, reducing inventory costs and risks, enhancing cash flow and profitability, improving customer satisfaction and loyalty, and gaining a competitive edge. These advantages stem from avoiding stockouts or overstocking, minimizing warehousing, handling, insurance, taxes, depreciation, obsolescence, and opportunity costs, freeing up working capital, delivering products on time and in good condition, and offering better products, prices, and services than rivals.

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Srikanth Sriramagiri

Cloud Supply Chain, Microsoft || Ex-Tata Aerospace
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From personal experience by optimizing ITR we are able to reduce Excess and Obsolescence costs, stockouts or overstocking and most importantly reduces working capital costs. The freed-up capital can then be invested back for returns

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Wilton Mota

Gerente Sênior de Logística e Supply Chain
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A otimiza??o do índice de giro de estoque (ITR) e do custo de transporte de estoque (ICC) traz uma série de benefícios para as empresas, incluindo redu??o de custos operacionais, aumento da eficiência na gest?o de estoque, melhoria dos prazos de entrega e satisfa??o do cliente, redu??o de desperdícios e obsolescência de estoque, e maior competitividade no mercado.

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7 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?

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Wilton Mota

Gerente Sênior de Logística e Supply Chain
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Além das estratégias mencionadas, é crucial analisar os padr?es de demanda, colaborar com fornecedores, adotar tecnologias emergentes como IoT e IA, manter comunica??o aberta entre stakeholders, capacitar a equipe e garantir uma abordagem contínua de melhoria. Monitorar regularmente o desempenho e estar aberto a ajustes s?o fundamentais para otimizar constantemente o ITR e o ICC, promovendo eficiência e competitividade na gest?o de estoque e logística. O engajamento com análises de custo-benefício e a flexibilidade para adapta??es s?o cruciais em um processo dinamico de aprimoramento.

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How do you measure and optimize the inventory turnover ratio and the inventory carrying cost?

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1 Inventory turnover ratio

2 Inventory carrying cost

3 How to optimize ITR and ICC

4 How to measure ITR and ICC

5 How to improve ITR and ICC

6 Benefits of optimizing ITR and ICC

7 Here’s what else to consider

Production Planning

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