9 Strategies to Improve Inventory Turnover Ratio

“For the majority of industries, the good inventory turnover ratio falls between 5 to 10 indicating that you sell and restock inventory every 1-2 months.”

So, a good turnover ratio means efficient inventory management and will lead you towards improved cash flow. It is essential to keep a good turnover ratio to maintain business performance. Whereas monitoring a company’s revenue only is not enough. However, as a seller of goods, you need to understand how to manage the inventory of your business to keep evolving. 

One of the most important ratios when it comes to examining your financial health is the inventory turnover ratio. 

This blog will walk you through the inventory turnover ratio, its calculation, as well as factors influencing inventory turnover ratio followed by 9 strategies to improve it.

What is the Inventory Turnover Ratio? 

The inventory turnover ratio means the number of times the company sells or replaces the inventory in a given period. 

It is not the maximum inventory but the average one. That includes raw materials, and direct labor costs when calculating the cost of goods sold. 

How to Calculate Inventory Turnover Ratio?

The formula for calculating the Inventory Turnover Ratio is, 

ITR = Cost of Goods Sold / Average Inventory

With the Inventory Turnover formula, you will be required to draw attention from the balance sheet and hence, it is necessary to understand what the terms Cost of Goods Sold and Average Inventory means. 

Cost of Goods Sold - It is the direct cost of goods which is to be sold by the company. 

Average Inventory - The amount of inventory held multiple times.

To understand it better, let’s take an example. 

• Imagine a scenario where you operate a small electronics retail business. 
• • Now, the Cost of Goods Sold(COGS) = $500,000 
  • Inventory Value(Start of the Year) = $100,000
  • Inventory Value(End of the Year) = $50,000
  • The average inventory calculation would be, 
  • • (100,000 + 50,000) / 2 = $75,000
    • Moving on to applying the formula, 
    • ITR = Cost of Goods Sold / Average Inventory
    • $500,000 / $75,000 
    • ITR = 6.67

It means the inventory turned over about 6.67 times during the year and also indicates how efficiently the electronics are moving the stands. 

We have come across what is inventory turnover ratio and how it is calculated. 

But how can you improve your ITR? 

Let us know in the next section which will help you understand the smart strategies to improve the inventory turnover ratio. 

9 Strategies to Improve Inventory Turnover Ratio

Now, let’s focus on the strategies to enhance performance.  

Below are the 9 strategies that will help in improving the inventory turnover ratio. 

1. Implement Just-in-Time System 
   
2. Conduct Regular Inventory Audits
3. Optimize Reordering Strategies
4. Utilize Data Analytics for Demand Forecasting
5. Propose Periodic Discounts
6. Boost Supplier Relationships
7. Invest in Inventory Management Software
8. Evaluate and Adjust Pricing Strategies
9. Simplify Order Fulfillment Process

1. Implement Just-in-Time Inventory System

2. 1. Implementing a Just-in-Time system to minimize excess inventory by ordering goods reduces carrying costs and ensures a leaner, more efficient inventory.

3. Conduct Regular Inventory Audits

4. 1. Regular inventory audits will help in identifying slow-moving or obsolete items. 
   2. Companies can get rid of unnecessary inventory holding costs by promptly addressing them. 

5. Optimize Reordering Strategies

6. 1. Analyze historical data to optimize reorder points and quantities. 
   2. This ensures that stock is restocked precisely when needed, preventing stockouts or overstock situations.
   3. By understanding past performance, you can be sure that you have enough inventory for your customers without wasting money on excessive inventory. 
   4. The power lies in leveraging historical patterns to make informed decisions that resonate with current demand, paving the way for a well-balanced and responsive supply chain.

7. Utilize Data Analytics for Demand Forecasting

8. 1. Utilizing advanced analytics tools to signify demand forecasting will allow for strategic inventory planning, aligning stock levels with expected customer requirements. 
   2. This invaluable insight empowers you to plan your inventory strategically, ensuring that your stock levels perfectly match what your customers are likely to need. 

9. Propose Periodic Discounts

10. 1. Offering seasonal discounts is one of the powerful strategies to boost sales faster and reduce excessive inventory that may become obsolete.  
       

11. Boost Supplier Relationships

12. 1. Strengthening a strong relationship with suppliers will boost sales, ensure a steady supply chain, and help maintain optimal inventory levels and minimize disturbances. 
       

13. Invest in Inventory Management Software

14. 1. Modern inventory management software provides real-time insights, allowing businesses to track inventory levels, monitor sales trends, and make informed decisions to optimize turnover. 
       

15. Evaluate and Adjust Pricing Strategies

16. 1. Regularly review and adjust pricing strategies to align with market demand. Competitive pricing can stimulate sales, preventing inventory stagnation.
       

17. Simplify Order Fulfillment Process

18. 1. Efficient order fulfillment processes, including accurate picking and packing, reduce lead times. 
    2. This ensures that products move swiftly from warehouse to customer, positively impacting turnover.

In the next section, you will learn about various factors that are influencing ITR.  

Factors Influencing Inventory Turnover Ratio

Factors Influencing Inventory Turnover Ratio	Explanation
Demand Variability	Changes in customer demand affect how quickly inventory is sold. High demand means more restocking, boosting turnover.
Seasonal Trends	Industries with seasonal sales see turnover fluctuations. Planning for these trends optimizes inventory throughout the year.
Product Lifespan	Perishable or trendy products need faster turnover, while long-shelf-life items can turn at a more relaxed pace.
Industry Norms	Different industries have different turnover expectations. Benchmarking against averages provides performance context.
Supplier Relationships	Efficient suppliers contribute to a smooth supply chain, impacting product availability and turnover positively.
Lead Time for Replenishment	Longer lead times may lead to stockouts or overstocks, affecting the balance between supply and demand and turnover.
Economic Conditions	Economic downturns decrease consumer spending, impacting inventory turnover. Adapting strategies during shifts is crucial.
Pricing Strategies	Competitive pricing stimulates sales, positively impacting turnover as products move off the shelves more quickly.
Quality of Inventory Management	Efficient practices, like accurate forecasting and timely orders, directly impact the turnover ratio positively.
Technology Integration	Advanced inventory systems enhance visibility into stock levels, aiding strategic decision-making for turnover optimization.

Boosting Your Bottom Line With Bonus 

5 Inventory Turnover Optimization Techniques

👉Facilitate the Supply Chain

👉Adjust Your Pricing Strategy 

👉Check or Change Your Ranking in Your Industry

👉Enhance Forecasting

👉Automate Purchase Orders

Wrapping Up:  Gain valuable ITR insights through our Advanced Inventory Reports App 

As we have reached the bottom line of this blog, we are clear about the inventory turnover ratio, its formula, various factors that influence ITR, and 9 strategies to improve ITR. To further empower your inventory management, try our Advance Inventory Reports app. 

With our advanced inventory reports, users gain insights into crucial metrics like Turnover ratio, FSN classification, XYZ classification, and FSN-XYZ combined classification. This empowers businesses to tailor effective sales strategies for existing inventories, while also facilitating Overstock and Out of Stock analysis, along with detailed tracking of stock movements.