Scaling a manufacturing business requires investments in high-quality equipment, well-trained staff, and automation to increase production and outperform your competition. While investing in high-end machines and automation tools like ERP software can be expensive. But it is definitely a wise investment that will help to improve the inventory turnover ratio.
You may set a stage to enable and support the growth and profitable success of your company. But it also requires the right systems, processes, technology, staff, and partners. Besides, to meet your business goals, you must maintain ideal inventory management and gain an exemplary inventory turnover ratio that matches your business size.
As a manufacturer, it’s critical to understand the nitty-gritty of inventory management. Managing your inventory is not only about raw materials and sellable goods you need at any time. But also about the rate in which your inventory enters and leaves the workshop. Now, what is the inventory turnover ratio? It’s the quantity you sell in relation to the average inventory you hold.
Inventory turnover ratio is an essential metric of your business performance and success. You can make well-informed decisions based on the real-time and accurate data you can have using an inventory tracker software. You can easily figure out
- How much inventory should you keep at a time?
- How much will suffice your business need?
- Is your manufacturing cost estimations market competitive?
- Are you producing and delivering the orders fast enough?
All these questions require reasonable answers because these are the core of your production flow that largely depends on seamless inventory management. Your inventory turnover ratio depends on what products you manufacture and the size of business.
Defining Inventory Turnover Ratio:
As the name implies, the inventory turnover ratio refers to how many times a manufacturing company sells its average inventory (not the maximum inventory number) in a given time period. It means the average value of your inventory sold over this period. It includes the cost of raw materials and direct labor expense as you calculate the total cost of the sold items. For example, if you have a constant stock of 100 sellable items and you sell 500 items in a month. Then it means you would have turned over the available inventory five times.
Significance of Inventory Turnover Ratio:
You cannot measure the financial success of your business based on sales revenue alone. For the reason that, with sales revenue worth millions of dollars and expenses exceeding this value will land you into financial trouble. This is why it’s important to know your overall costs at all times, including the inventory turnover ratio.
Inventory turnover ratio is a key metric to measure your manufacturing efficiency because it calculates the amount of inventory you sell as a percentage of your overall inventory.
In simple words, it states how much your company sells as a ratio of what sellable goods you have in your stock. Moreover, this is the ratio that tells how many times you restock the goods in a certain period – such as monthly or yearly.
Well, it greatly depends on an inventory management strategy that will help you in mass-producing the finished goods every day. But this is best used by the large enterprises that can afford to manufacture and maintain a high average inventory. Because they have enough funds to offset the required production and inventory management costs besides selling a lot of products without delay.
However, scaling manufactures normally rely on a few products with a higher margin. Manufacturing the high-end products with custom features means they might be using expensive raw materials and therefore they cannot keep tons of stock in-waiting. It could make them lose massive finances and that may also be without realizing. This is where inventory turnover ratio steps in to inform you about the inefficiency of your shop floor and production lines.
Efficient workshops mean you will be having lower inventory levels, but maintaining high sales. And, for this, the best practice is to keep your inventory turnover ratio at an ideal level by adopting the Make to Order (MTO) production model. In this way, you can save a huge amount that you may need to spend otherwise to maintain floor space and warehouse. Also, you can ensure more complete and satisfactory customer service.
How Inventory Turnover Ratio Can Be Improved?
For profitable business success, it is essential to increase the ratio of your inventory turnover.
Here’s how you can do it.
Effective Pricing:
Value your products high enough for higher turnover resulting in increased revenue generation. You need to accurately place monetary values on your raw materials, staff, and production processes. Undervaluing your manufactured goods means you may have to sell them at low cost. If this is so, you may be having a high turnover but not the net profit.
At the same time, you must avoid pricing out all potential clients. Find a middle ground where you can retain the customers and improve overall profitability by the same token. So, make sure your pricing is a reasonable reflection of what you offer.
Improved Time Management:
You need to manage manufacturing waste; be it related to production time, money, or resources. Utilize every minute of your shop floor to its full extent. Optimize the time required to produce finished goods in a typical working day.
Implement an ERP system to increase the efficiency of your shop floor and production line. Eventually, the materials and goods you have in storage or transit will soon turn into revenue – increasing your inventory turnover.
Optimized Supply Chain:
Remove all the weak spots in your supply chain and logistics, so that you do not need to wait for weeks for a supply order to come into your manufacturing plant. Any delayed delivery of supply into your shop floor may increase the lead times, in turn, it will decrease your production throughput.
It’s not a good practice to buy items in bulk unless you are a big enterprise with a lot of funds for inventory management or the purchased items require low storage capacity like MRO. With supply chain optimization, your raw materials, components and finished goods will not wait around. Else they will only increase your average inventory without increasing sales.
Lastly, cut down on overhead costs and find new sales channels for more selling and hence increasing your inventory demand. Another way to raise your inventory turnover ratio is not to stock the items, but to use a Make to Order strategy. In this way, you can keep limited stock and only what you need and hence, increase your inventory turnover ratio.
