What to look for in a retail technology for optimizing your Inventory Turnover Ratio?
Co-Founder & CTO, Peddle Plus
A highly qualified retail technology expert with 13+ years of local and global experience in planning, developing and executing strategies for System Architecture.
in continuation to my previous article-
2. Ways you set benchmarks for category-wise inventory turnover (Explained)
Another way to optimize the inventory for your retail store is to set a benchmark against a sales target by product category. Before explaining how to set a benchmark for a particular inventory or a category, let’s first understand how the Inventory Turnover for a Retail is calculated and what are the benefits of calculating this. Because many small & medium retailers we approach for technology adaption and when we ask them about Inventory Turnover, they often say that we have heard of Sales Turnover, we have heard of Yearly revenue turnover, but what this Inventory Turnover is, and why it is required?
If your current ERP Software does not have the option to generate the IT Report category wise that can even be calculated in a very simple way manually.
So the IT Ratio is calculated to know how many times a particular Inventory or inventories in a particular category has come in and gone out over a period or how many times a particular inventory gets rotated against the total sales. For Example, if your store’s total sale for a particular period is 3 Cr (of cost value) and the average inventory maintained for that particular period is 50 Lakhs then the inventory turnover ratio would be 6 times.
So a high Inventory Turnover Ratio means high sales and low capital blocking and vice versa. (Though there are exceptions to the above standards in case of high-value items which are not bought very often e.g. Home Appliances or Luxury items). For example, if you sell 50 quantities over a period, and always have 48-50 quantities on-hand, so your IT ratio is around 1 and you have blocked too much capital in inventory since that’s higher than what’s needed to meet the market demand.
In Indian Retail, An IT ratio between 4 and 6 is usually a good sign that stocking and sales are balanced, although every retail segment is different. So this good ratio means you will neither run out of items nor have a surplus of unsold items in the store. Now you can follow 3 steps in an excel or you can generate from your ERP for a particular period (1 year is a good time to have a fair idea)
List down the current IT Ratio category wise based on the above formula or fetch it from your ERP. Add one column for setting the Target IT Ratio based on the above standards to minimize the stock value and increase the sales or vice versa. The last one is to figure out the Net Savings at Cost of Goods Sold in each category by setting up the target IT Ratio setting internal benchmark and industry benchmark too. And based on the set benchmark, you can do the reverse calculation to check for Planned Stocking and Net Savings on COGS.
Please see carefully row no 3 and 9 in red, Inventory Turnover for these two categories is on high alert, here you can compare the cost of goods sold value and average stock, the alert is the capital is hugely blocked or Sales or Promotion planning is not being executed to sell out the stock at right time.
The reason could be any, it could be that demography is not the best suit but the point here is your ERP system should give you an alert at right time to save you from such losses and optimize your store inventory.
You can try at least the following 2 hacks to improve the Inventory Turnover Ratio at first go to see whether it works or not for you. If this will not completely remove the flaws from the system immediately but I am sure it will help in the optimization process and save the direct cost and the opportunity cost to a good extent.
1. Set the right Re-Order level for each category (Your ERP system should set the reorder level based on past movement (based on sales and demand) of the product automatically or you can set it manually);
2. Improve the Supply Chain Lead Time from PO to GRN. You can set an auto alert system in your ERP to send an auto-alert to the vendor when a product nears to re-order level so your vendor is aware of when you need what so your vendor should be ready enough in advance before your PO reaches. And ordering from the vendor should also be on a fast track.
–End of “Ways you set benchmarks for category-wise inventory turnover”–
On my next article, I will explain the following methods for Inventory Optimization through your technology or ERP system.
3. Alerts to avoid stock dumping by suppliers (Will explain in upcoming article)
4. Alerts to corner the low-performing suppliers (Will explain in upcoming article)
I have tried my best to explain the above through my examples. For more understanding on how to calculate columns no 8 & 9 or on any of my articles, on demand, I can organize a FREE webinar or can schedule a FREE one-to-one call over google meet or zoom. (#Students, #Retailers, and #D2C Brands can DM me for the discussion-No strings attached).
I would love to take your valuable feedback on my articles. I am open to discussing and learning.