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Essentially, optimized inventory management means having the right stock, at the right time, in the right place, and in the right quantity, to generate maximum sales, with maximum profits and maximum cash flow.
Therefore, tracking certain metrics makes it easier to identify areas for improvement in inventory-related operations.
Let’s see the key metrics:
Stock rotation.
This measures the number of times that the stock of a business or a product is renewed during a certain business cycle. Turnover is a good indicator of the quality of stock management.
It gives us information on the number of times we have recovered the investment in the product, in the period analyzed.
According to inventory management companies, turnover is key to business viability when operating on low margins, such as a food superstore. Other businesses, such as the textile sector, may work with lower rotations.
Turnover can be calculated by the cost prices of the merchandise or by the number of units. The formula to calculate turnover would be: Turnover = Sales for the period/Average Stock for the period.
The two ways to improve stock turnover are to increase the sales figure and reduce the amount of stock.
The optimal situation would be to sell as many as possible with the fewest items in stock. To increase the turnover figure, you have different options:
- Develop a purchase process according to the Just in Time model that we have already seen.
- Know your customer well and get the orders right. The greater your knowledge of your customer and the commercial environment in which your business is developed, the more accurate your orders will be.
Coverage.
The coverage indicates the period of time that the business can continue to sell the product, without incorporating new quantities.
It is so damaging to have an excess of stock, that it forces you to lower the price to give it an exit and thus reduce your margins, such as not having enough merchandise to satisfy demand, which is known as “out of stock”, and means leaving to sell more product and even lose customers, not being able to satisfy their needs.
This ratio is influenced by a series of variables that make it unstable:
The seasonality of sales: The sale of some items is affected by the period of the year, it would be the case of ice cream. This means that the sales accuracy must take into account this seasonality.
Complementary and substitute articles: The sale of some articles depends on the stock of other complementary articles, a little coverage of these articles will affect the sale of complementary articles. On the contrary, substitute articles increase their sales figures when the article that the customer was looking for is missing.
Promotions: The price reduction increases sales, which must be taken into account when adjusting the coverage calculation. The coverage formula would be: Stock coverage (period) = Current Stock/Last Sale x periods.
A coverage figure higher than the time remaining in the campaign, informs us of the risk of ending up with an excess of merchandise that is difficult to sell, therefore, you should consider the possibility of lowering the price of that item before it is too late.
If, on the contrary, the coverage is less than the remaining period of the campaign, new orders will have to be placed. For inventory management services, you can consult inventory management firms and get better results in a very short time period.