Most companies continuously wants to improve purchasing cost, quality, order to delivery lead times, inventory turnover and delivery precision. It can be easy to improve one of the indicators leading to a sub optimization, so when optimizing it is important to measure all in order to balance your activities leading to overall total cost reduction and improved customer satisfaction. In this article we will discuss how to improve ITO: inventory turn over.

inventory turn over

The inventory turn over ratio is normally defined as cost of goods sold/average inventory and it shows how many times a company’s inventory is sold and replaced over a period. The ITO should be compared with other companies in the industry.

The reason why a company’s inventory increase is of course that they buy more stock than they can sell. It is important to find the root causes of the problem(s) to make long term improvement implementations. Normally the root causes can be found by analysing:

  • Safety stock optimization
  • Order points
  • Inventory structure: is the inventory raw material, work in progress or finished goods?
  • Replenishment lead times for the major products
  • Management of obsolete stock
  • The sales and operation planning process
  • Supplier lead times
  • Global vs local sourcing
  • Competitive bidding vs supplier partnerships

A company can often achieve some quick wins:

  • Renegotiate supplier lead times with key suppliers
  • Adjusting order points
  • Adjusting safety stocks
  • Sell or scrap obsolete material
  • Reviewing the service level and differentiate to different customers/products

Long term and sustainable results often lies in changing the company culture, some examples:

  • Common and visible objectives
  • Changes in behaviours and organisations
  • IT systems
  • Process improvements, e.g: production, planning, procurements, sales

Common pitfalls

  • Sub optimizations by wrong KPIs: some companies measures the wrong KPIs which might lead to sub optimizations, e.g: you have a very high ITO but pay too much for purchased material or miss customer orders due to lack of material
  • Only implementing new IT systems and think they will solve it for you. IT systems should support your business, not control it.
  • Having a “one size fits all” strategy towards your customers. It is very difficult to have the same service level and flexibility towards all your customers and products without building a very high inventory.