What is the best way to identify high inventory carrying cost items?

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Inventory carrying cost is the total expense of holding and storing inventory over a certain period of time. It includes costs such as warehousing, insurance, taxes, depreciation, obsolescence, and opportunity cost. High inventory carrying cost can erode your profit margins and reduce your cash flow. Therefore, it is important to identify and reduce the items that contribute to high inventory carrying cost. In this article, you will learn how to use inventory analysis metrics to find out which items are costing you more than they are worth.

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Andres Estrada

NetSuite Specialist | Leading Continuous Improvement Initiatives | WMS Implementation Expert
Robério Matos

Gerente de Compras | Suprimentos | Supply Chain | Negocia??o | Planejamento | Procurement | Strategic Sourcing | Gest?o…
Danish Hasan

Top Inventory Management Voice | Manager Inventory Management and Spare Stores | Inventory Optimization | Supply Chain…

1 Inventory turnover ratio

The inventory turnover ratio measures how many times you sell and replace your inventory in a given period. It is calculated by dividing the cost of goods sold by the average inventory value. A high inventory turnover ratio indicates that you are selling your inventory quickly and efficiently, while a low ratio means that you are holding too much inventory or selling it slowly. A low inventory turnover ratio can lead to high inventory carrying cost, as you are paying more to store and maintain your inventory. To identify the items with low inventory turnover ratio, you can compare the ratio of each item or category with the industry average or your target ratio.

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Andres Estrada

NetSuite Specialist | Leading Continuous Improvement Initiatives | WMS Implementation Expert
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Un alto índice de rotación es especialmente crítico para industrias como la “moda rápida”. Las marcas de este sector necesitan vender y reemplazar su inventario rápidamente para mantenerse alineadas con las últimas tendencias y evitar conservar artículos que puedan pasar de moda. No hacerlo puede resultar en un alto costo de mantener el inventario muerto, lo que no sólo inmoviliza el capital sino que también puede generar pérdidas sustanciales a medida que estos artículos se vuelven menos valiosos con el tiempo.

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2 Days inventory outstanding

The days inventory outstanding (DIO) metric shows how long it takes you to sell your inventory on average. It is calculated by multiplying the average inventory value by 365 and dividing it by the cost of goods sold. A low DIO means that you are selling your inventory faster, while a high DIO means that you are selling your inventory slower. A high DIO can result in high inventory carrying cost, as you are tying up your capital in inventory for longer periods. To identify the items with high DIO, you can sort your inventory by DIO and look for the items that have higher DIO than your desired level.

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3 Gross margin return on investment

The gross margin return on investment (GMROI) metric measures how much profit you generate from your inventory investment. It is calculated by dividing the gross margin by the average inventory value. A high GMROI means that you are earning more profit from your inventory, while a low GMROI means that you are earning less profit from your inventory. A low GMROI can indicate high inventory carrying cost, as you are spending more on your inventory than you are making from it. To identify the items with low GMROI, you can rank your inventory by GMROI and look for the items that have lower GMROI than your benchmark.

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4 Inventory to sales ratio

The inventory to sales ratio measures the relationship between your inventory level and your sales volume. It is calculated by dividing the inventory value by the sales value. A low inventory to sales ratio means that you have enough inventory to meet your sales demand, while a high inventory to sales ratio means that you have excess inventory or insufficient sales. A high inventory to sales ratio can imply high inventory carrying cost, as you are holding more inventory than you need or selling less than you could. To identify the items with high inventory to sales ratio, you can compare the ratio of each item or category with the historical trend or the industry standard.

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5 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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Robério Matos

Gerente de Compras | Suprimentos | Supply Chain | Negocia??o | Planejamento | Procurement | Strategic Sourcing | Gest?o de Fornecedores | Gest?o de Compras | ESG
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A melhor maneira de identificar itens de estoque com alto custo é fazer a curva abc dos produtos, de maneira que possamos mensurar pre?o agregado de aquisi??o e quanto cada item individual representa o todo.

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Danish Hasan

Top Inventory Management Voice | Manager Inventory Management and Spare Stores | Inventory Optimization | Supply Chain Management | Supply Chain Analytics | Data Analysis | Power BI
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Days inventory outstanding, Inventory turnover etc are good measures to assess the effectiveness of your inventory management. However, it is important to compare your numbers with that of competitors. An apple-to-apple comparison will help in understanding whether or not your strategies are working and your overall performance. It is also important to note that monitoring inventory carrying cost is a continuous exercise rather than a one time activity.

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What is the best way to identify high inventory carrying cost items?

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5

1 Inventory turnover ratio

2 Days inventory outstanding

3 Gross margin return on investment

4 Inventory to sales ratio

5 Here’s what else to consider

Inventory Management

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What is the best way to identify high inventory carrying cost items?

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5

1 Inventory turnover ratio

2 Days inventory outstanding

3 Gross margin return on investment

4 Inventory to sales ratio

5 Here’s what else to consider

Inventory Management

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