Managing Your Inventory: The less money you have tied up in inventory in order to fill your distribution channels, the more money you will have to do all the other things a company needs done. Here’s how you can manage your inventory to your best advantage.
With any distribution business, the less money you have tied up in inventory in order to fill your distribution channels, the more money you will have to do all the other things a company needs done — marketing, advertising, research and development, acquisitions, expansions, and so on. You need to turn your inventories as often as possible during the year in order to free up that working capital to do other things.
The “official” calculation to figure out how you are turning inventory, is to first find out the Cost of Goods Sold (COGS) for the past 12 months. Then take the current inventory and divide it by the Cost of Goods Sold and you get the number of times you have turned inventory.
There is a fine line between a high number of turns and running out of product because your inventory is too close to what you are selling AND having too much inventory compared to your sales- When you get your inventory to the correct levels then you have achieved Just-in-Time Inventory. There is a critical mass point where the amount of inventory on hand will earn the best return. For example, if you had $1 million in inventory, and you only had sales of $100,000 in a month, you would have too much inventory and not make the turns. On the other hand, if you had $10,000 in inventory and $100,000 in sales, you would be buying too often and losing out on inventory turns. The ideal point is to turn inventory 5-6 times, and it is possible to turn it 10-12 times as many companies do. There are many factors which influence inventory turns, including how quickly you can replenish.
For the full article “Inventory Turns” by George Matyjewicz click here