Imagine a clothing store known for the latest fashions. The owner keeps an eye on inventory to avoid dust-gathering stock. Running out of swimsuits in summer risks lost sales, while overstocking ties up cash until next year. Excess inventory can strain cash flow and hurt profitability.
This delicate balance illustrates the concept of stock turnover. Inventory turnover measures how often an item is sold and replenished. High turnover shows solid sales and efficient inventory management. Low turnover may indicate overstocking or slow sales. Slow-moving stock increases costs and negatively affects operational efficiencies. It ties up money and can cause cash flow problems.
Small and Medium Businesses (SMBs) can use inventory optimization solutions like Netstock to improve forecasting, manage suppliers, and monitor and measure inventories in real-time – ensuring you always have the stock to fulfill orders without carrying excess inventory.
Table of contents
1. Key causes of decreased inventory turnover
There are several drivers of decreased inventory turnover.
Overstocking and excess inventory
Most businesses have some excess inventories, which tie up capital and increase holding costs. Over time, surplus inventories may become obsolete or slow-moving and can get spoiled or damaged.
Excess stocks often result from inaccurate demand forecasts. Employees overbuying to avoid future shortages can also cause a surplus. In addition, suppliers may impose Minimum Order Quantities (MOQs), increasing the average stockholding.
Inventory optimization tools, like Netstock, can produce accurate forecasts using historical data, market information, and exogenous inputs like economic data, weather, and more. These systems streamline purchasing by incorporating real-time data and automating replenishment functions.
Inefficient demand forecasting
Organizational planning is based on forecasting. This forms the foundation of inventory planning. Poor forecasting can cause sub-optimal inventory levels and reduce turnover, but accurate forecasts depend on real-time data, so the system must track stock movements as they happen. The forecasts must also factor in seasonality to ensure that stock is always adequately planned.
Netstock’s demand planning tools can enhance forecasting accuracy by incorporating historical data and real-time analytics. Accurate forecasts enable optimized stock levels.
Lengthy lead times and supply chain disruptions
Long and inconsistent supplier lead times can reduce inventory turnover. Global shipping delays or reliance on distant suppliers worsen the problem. Slow replenishment times increase the average inventory level, reducing turnover as products spend longer in storage.
You can fix the problem by improving supplier management. Track supplier performance against lead time and communicate your concerns so the supplier can take corrective action. Explore nearshoring options to reduce transport lead times.
Inaccurate Bills of Material (BOM) for manufacturing
BOM inaccuracies or inefficiencies, especially with complex assemblies or product demand variations, can cause overstocked or underutilized materials.
Inaccurate BOMs will cause an Inventory turnover decrease as raw materials or work-in-progress (WIP) inventory accumulates in manufacturing areas.
Effective BOM management using tools like Netstock integrated with MRP systems ensures accurate material requirements planning and corrects stock turnover problems.
Stock mismanagement: stock-outs and poor reordering practices
Stockouts caused by mismanaged reordering points or inaccurate inventory visibility can prevent timely restocking. Inventory turnover decreases due to disrupted operations as there is insufficient stock to meet demand.
Automated reordering and real-time inventory tracking can address these issues by removing the element of human error. The software responds when the preset limits are met, placing replenishment orders according to the supplier’s lead time.
Seasonality and demand fluctuations
Failure to account for seasonal peaks and troughs is highly disruptive. You could miss a significant sales volume and profits if you run out of stock during the peak season and sit with stocks that don’t move when sales are slow.
Dynamic inventory management adjusts orders and stock levels to meet seasonal demands and ensures no excess during the off-peak season. Advanced technologies can deliver dynamic stock management, ensuring you’re always in tune with market trends.
2. Specific inventory types impacting turnover
Inventory turnover is also influenced by how inventory types are managed. Each category has its challenges, which, if mismanaged, can reduce inventory turnover and increase costs.
Raw materials and Work-in-Progress (WIP)
Poor production planning and disruptions like machine breakdowns, human resource issues, or stock shortages can lead to excessive WIP and raw material inventory and slow turnover. Production disruptions are particularly problematic as volumes are unmet and lower-level items accumulate in stock.
Finished goods
Excess finished goods due to overproduction or misaligned demand can increase storage costs and reduce turnover. Finished goods are also generally high value, including materials, labor, and variable costs. High finished goods inventory can make responding to market conditions and design changes difficult.
Advanced planning systems will ensure that your production plans match market demand.
Safety stock
Planners must avoid an inventory surplus while maintaining the desired service levels. Too much safety stock reduces turnover, but too little can cause stockouts. Planners use statistical techniques to balance safety stocks. These models factor in demand variability and lead times. Real-time inventory management systems can dynamically change safety stocks to match demand patterns.
3. How inventory optimization platforms like Netstock can help
Your business can only succeed if you have a well-oiled and efficient supply chain. Advanced technologies could give your company the edge, optimizing your inventories to achieve the delicate balance of just enough stock. Inventory optimization platforms like Netstock address the following aspects of inventory management.
- Forecasting and demand planning: Poor forecasting can cause overstocking and raise stockout risk. Costs increase, and customer satisfaction declines. Netstock uses predictive analytics to improve forecast accuracy, applying the technology to historical sales, real-time market trends, and seasonality to anticipate demand changes.
- Supplier management: Netstock tracks supplier performance, lead time variability, and delivery reliability. Actionable insights help to reduce lead time variability.
- Inventory classification: Inventory classification processes can help you to use your resources more effectively. They use ABC analysis and real-time tracking to prioritize high-value and fast-moving items, improving turnover. Netstock will dynamically change classifications in response to change.
- Automated reordering: Manual ordering is prone to errors. Netstock automates reorder point formulation. It triggers the next replenishment order before the stocks run too low and adjusts them in response to real-time sales and inventory, ensuring the stock levels support anticipated demand.
Case study: Adventure Operations reduces inventory by over 30% with Netstock
Adventure Operations, a 100% Australian-owned outdoor leisure and industrial products wholesaler, distributes its portfolio across 30 countries via retail channels. Operating from strategic hubs in Australia, New Zealand, and the USA, the company relied on error-prone spreadsheets to manage 2,500 SKUs. The company has lost critical data and time to system crashes.
Post-pandemic demand spikes led to optimistic forecasts and excess inventory.
In October 2022, Adventure Operations integrated Netstock with its ERP system, NetSuite. Netstock’s advanced inventory management features provided data visibility, accurate forecasting, and automated insights for better decision-making.
Key results:
- Excess inventory decreased by over 30% in 12 months while maintaining a 95% fill rate.
- The business transitioned to smaller, more frequent stock orders, enhancing agility.
- The monthly inventory analysis that once took two weeks was reduced to the click of a button, freeing up strategic planning time.
- Adventure Operations now uses only 55% of its 20,000-square-meter warehouse. The company generates additional revenue by renting out unused space.
Adventure Operations transformed its inventory management with Netstock, achieving significant cost savings, operational efficiencies, and a more agile approach to inventory.
4. Improve your inventory turnover with Netstock
Inventory turnover is a key driver of business success. When it’s working well, you cut costs, improve cash flow, and keep your customers happy with the right products at the right time. Plus, the capital you free up can be reinvested in other important areas of your business.
But if you’re facing issues like overstocking stock-outs, or inaccurate forecasts, it can be tough. That’s where Netstock comes in. With its advanced technology, you can turn things around, improve your inventory turnover, and get your business on track.
