Increasing Inventory Turns
Posted on: March 29, 2012 | By: SuperUser Account | Microsoft Dynamics AX/365
This is the first of a 3 part series on 1) Increasing Inventory Turns, 2) Reducing Inventory and 3) Improving Service Levels.
The industry term “Inventory Turns” means the number of times inventory is consumed (used or sold) over some period of time. Most of the time, turns are measured per year. For a manufacturing business, it’s important to look at how quickly raw materials, work in process and finished goods are turning over.
Academically, Inventory Turns can either be measured on a unit or dollar basis. Unit-wise, Turns equals units sold divided by average units on-hand over a given period. Dollars-wise, Turns equals Cost of Goods Sold divided by Average Inventory over the same period. Finally, some organizations find it better to use retail sales numbers over average retail inventory. It is important for your organization to look at these three methods to determine what makes the most sense to your company.
In addition, it’s important for a business to understand its true cost of inventory, and of holding inventory, since this will drive the appropriate level of time, effort and financial resources before running into the law of diminishing returns. For example, perishable items requiring refrigeration have relatively high carrying costs. Manufacturing or distribution centers sitting on expensive real estate locations also have high storage costs. Finally, the local labor cost also factors into these total costs. All of these elements, along with utilities, insurance, etc., comprise the holding cost, and increasing turns helps reduce this holding cost.
The common thread when considering inventory turns is to move the inventory as quickly as possible. This is easier said than done. Inventory turns are driven by demand. Demand comes in the form of customer sales and distribution orders when considering finished goods. It comes from production orders for WIP and raw materials. Current inventory and planned production factor in, as does the forecast.
One way to maximize turns is to only purchase or produce the inventory item once it’s needed. Of course, that leads to poor service levels, lost sales, lost customers and a failed business when taken to the extreme unless lead times can be eliminated. So, the trick with maximizing inventory turns is to optimize given the above mentioned factors of demand and supply.
It is clear that inventory turns has a direct impact on inventory cost and sales service levels. The three are inter-dependent. Depending on the inventory management model you choose, you will likely need the following data on an Item Number level:
• Item Number
• ABC Code
• Lead Time
• Standard Cost
• Current Safety Stock
• Current Min
• Current Max
• Current Fill Rate
You will also need the following data for each of the last 12 months by Item Number:
• Ending Inventory Balance
• Sales Quantity
• Purchase Quantity
With this data, you can complete a Pareto Analysis and Mean Absolute Deviation to determine proper stocking levels for each Item Number. You can then build a simulation based on historical sales to see what the actual inventory improvement would be, and theoretically, the resulting service level. This can be accomplished with a combination of your ERP and Excel or Access, depending on your ERP’s version and level of deployment.
This is an exercise most, if not all companies, should consider doing.
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