Some products sell so quickly, they put your inventory managers in danger of stock outs. Others are so hard to move that they become costly overstocks. Yet, for the majority of products in the food and beverage industry, inventory turnover is somewhere in the middle. This leads many companies to seek better methods of demand forecasting, price strategization, and inventory management, so that products with middle-ground turnover ratios can be just as profitable as the best-sellers.
Consider these key factors affecting inventory turnover ratio when determining the ideal inventory management system for your business.
4 key components of inventory turnover
To correctly interpret a turnover ratio and make the appropriate improvements to the workflow, businesses should understand the factors that change how inventory actually turns over in their industry. Though these components were researched in the context of the food and beverage industry, most industries have comparable factors that change how their inventory works throughout the year.
Supplier reliability
A business’s ability to maintain an ideal inventory turnover rate often depends on its suppliers’ reliability. Particularly in food and beverage, a key supplier missing a deadline could mean failing to meet crucial demands or shutting down an entire product production, until key components have been delivered.
Whether the supplier itself or changes in global supply flow are to blame, your whole supply chain is at risk when this relationship breaks down. Food and beverage businesses need to decide whether local or imported suppliers will meet their sourcing needs more efficiently and whether multiple supplier relationships should be established to create a failsafe in the supply chain, if something goes wrong.
Product lead time
In the food and beverage industry, product lead time, the time between an order being received and a product being delivered, can include the production of the product, as well as required storage time before the delivery can be made. Many things have to go right to keep lead times down, which is almost always beneficial.
Shorter lead times mean reduced storage costs for your warehouses, a more efficient workflow, and a better customer service reputation. Some exceptions to this rule could include very high-end products, which customers do not expect to have short lead times.
Inventory management
How inventory is managed directly affects a business’s turnover ratio. Efficiently replacing inventory in response to sales requires real-time stock numbers, accurate demand forecasting, and effective warehousing strategies.
Inventory management software can automate many of the labor-intensive tasks of inventory management such as barcoding, inventory counts, and demand tracking to improve a business’s workflow, saving costly manual labor for more important tasks.
Unforeseen changes
The global economy impacts demand, shortages, costs, and more. Unforeseen changes can leave a company understocked or overstocked. Even inclement weather can affect suppliers, leading to inventory shortages or stock outs, reducing customer satisfaction and changing a business’s inventory turnover rate.
While planning for the unforeseen may seem difficult, automated inventory management can respond more quickly to changes in supply and demand than manual methods, allowing businesses to correct their inventories more quickly and reduce the costs of failing to match the current demand.