Inventory management : two indicators for improved warehouse operations
Published on 24 October 2017
Your warehouse is the thermometer of your company: it gauges the health of sales— and any fleeting spikes in temperature. That is why proper stock management and flow optimization are essential if you want to prevent stockouts and overstocks! In this context, monitoring two indicators will help you limit the risks of rising temperatures: turnover rate and coverage rate. Here’s how.
Inventory management: how to solve the conundrum?
Are you having a hard time wrapping your head around daily inventory management? Inventory is actually one of the key elements to ensuring a competitive edge. To achieve effective management, you must fully understand your storage capacity, balance your incoming/outgoing flows, and anticipate sales.
Overstocks and stockouts: situations that weigh on your finances
Finding the right balance between inventory stockout and overstock is fundamental. However, it is not always easy with many obstacles to overcome along the way: limited space in the warehouse, countless references to manage, inconsistent sales, etc.
Dormant inventory weighs down on your finances: your warehousing expenses surge and each product in stock becomes a fixed asset. Not to mention the costs of returns if you need to free up space. Low inventory levels can lead to direct costs related to stockouts (credit notes, penalty fees, etc.), which are nothing compared to the indirect costs: risk of lawsuits, loss of customers, repercussions on the production chain, etc.
Two solutions exist: monitor your flows and anticipate sales
To prevent overstocks and stockouts, flow management is essential. In addition to the risks affecting your storage capacity, poor flow management can result in an exponential rise in warehousing costs.
Second solution: anticipate your sales. Aim to predict sales based on season and your customers’ consumption habits. This will help you reach an ideal balance between inventory turnover and supply!
Two indicators worth following
How to solve the conundrum of inventory management? By using two valuable indicators: turnover rate and coverage rate. Thanks to these two measurements, no need to continue yanking your hair out: you control your outgoing flows, establish statistics based on your sales forecasts and thus ensure the smooth rotation of your inventory!
Turnover rate: the most valued performance indicator
The first of the two essential indicators for good inventory management is the turnover rate. In substance, it measures the speed at which your stock is replenished over a given amount of time. It can be calculated with the following formula:
Total demand (over period X) / Average inventory = Turnover rate
To be able to make this calculation, first you need to find out your “average inventory”. This can be calculated as follows:
(Beginning inventory + Ending inventory) / 2 = Average inventory
The formula above allows you to calculate average inventory without considering periods of growth or decline observed over a longer period of time. To include these variables, use the following formula:
Choose your unit of measure
Although the average inventory calculation formula is the same for everyone, you are free to choose your own unit of measure. Ask yourself: which indicator is the most relevant to my activity? If duration is what most interests you, then choose the time interval that suits you best (one month, six months, one year, etc). If storage problems are rare or you sell expensive products, opt for value as the unit of measure.
Always have clear visibility of inventory replenishment!
Average inventory and turnover rate give you an overall picture of your replenishment rate at any given moment. This also enables you to avoid stockouts and overstocks— and the soaring costs they come with. Furthermore, keep in mind that a high turnover rate is a sign of excellent performance!
Coverage rate: an overall view of your inventory on a daily basis
In inventory management, there is a before and an after to the ‘pull’. Unlike the traditional ‘push’-based approach, which involves having a large number of products in stock and crossing your fingers it is depleted, a ‘pull’-based approach relies on just-in-time flows. In short: you centralize your products as much as possible and push them towards the right shops based on sales performance.
The problem, however, is restocking a shop that has depleted all its inventory: the time wasted (and potentially loss of customers) can be astronomical. To avoid this situation, it’s best to keep an eye on your coverage rate.
Provide full coverage for your needs!
As long as you have covered your needs for a given time period with a well-studied supply method, you can manage just-in-time flow without worrying about stockouts. In this context, you should be able to calculate your coverage rate with the following formula:
Average inventory/ Average demand = Coverage rate
When properly calculated, this figure allows you to improve your supply chain, with the right amount of the right products in stock at the right time, thus providing better coverage for the demand.
Prevention is better than the cure
If you supply a large number of shops located around your country (or the world) and you have opted for a just-in-time model, calculating the coverage rate is an excellent way to secure your supply chain. As such, you can evaluate the need based on the average demand and supply the right amount for maximum efficiency!