Inventory turns

We will demonstrate in this section that improvement in some selected supply chain metrics also results in improvements in some important financial metrics of the firm, which should, of course, be closely correlated with its overall business performance. To illustrate this relationship, let us consider several interrelated inventory measures—inventory turns, days of inventory, and inventory capital— and how they affect some important financial measures—return on assets, working capital, and cash-to-cash cycle. 

Inventory turns is a measure of how quickly inventory is turned over from production to sales, specifically 

For example, if the annual sales is 1200 units and the average inventory is 100 units, then the inventory turns would be 1200/100 = 12. In other words, on the average, goods are stored in inventory for one month before they are sold. Companies prefer a higher value for inventory turns so that products reach the end customer as soon as possible after production, and, from a 

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Does the inventory management system optimize inventory turns over time and assure stock rotation ... 

Total Inventory Turn Rate (Turns/Year)... 

Inventory Collect information on inventory turns and levels, fill rates, safety stock levels, and ABC analysis. By having this information, the savings of consohdating facilities can be determined. Also collect which, and how much, stock is slow moving or seasonal to help determine if it should be centralized in one location or whether public warehouse space should be used. Get future inventory goals. 

Adaptability Maintenance storeroom facilities, operations emd personnel must become more adaptable. The pace of the storeroom will continue to increase r uction of lead times, shorter equipment lives, increased inventory turns, more SKUs, and more customer demands require that storeroom adaptability be present to satisfy customers. 

There are four broad categories of benchmarks that provide the most valuable insight into the performance of a company business results, cycle time, quality assurance, and asset. Business results are typically financial ratios, cycle time deals with task completion, quality assurance deeds with customer-related measures, and asset benchmarks range from inventory turns to human asset measures (Schwartz, 1998). 

There are several separate performance measures, almost a different one used by each donor. Some donors focus on the bottom line of getting the job done, others focus on specific efficiency measures (e.g., percent truck utilization, inventory turns, fraction of women and children receiving assistance). Often the recipient country has to spend an inordinate amount of time generating reports for each separate donor. While competing performance measures may be part of receiving aid, it does constrain funds usage effectively at the recipient location. 

Companies also find, as they mature, that it is difficult to get the complement of metrics necessary to view the supply chain as a system. There are six metrics in supply chain management that are tightly woven with intrinsic trade-offs. These metrics are asset utilization, days of inventory (or inventory turns), forecast accuracy, customer service (on-time delivery of orders shipped complete), cost of goods, and revenue growth. 

Velocity. Changes in supply chain cycles for lead times, order-to-delivery cycles, inventory turns, time-to-market for products. 

Grand Union, a New Jersey-based grocery retailer with more than 1(X) stores and three DCs, improved inventory turns by close to 80% and achieved 99% service levels. This significantly improved sales by eliminating out-of-stock conditions and dramatically reduced warehousing costs. 

Oshawa Foods, a 6 billion Canadian food distributor and retailer, had tremendous success with Pillsbury, Quaker and H.J. Heinz with inventory turns improving from 3 to 9 times, while achieving customer service levels of 99%. 

Standard metrics are reviewed, discussed and cover Order Pill Rate, Porecast Accuracy, Inventory Turns (volume and dollar), Pimctional costs vs. budget. 

Push customers There is a comparison between planned parameters used to forecast demand like product coverage, price to retail and to consumers, market share, inventory turns, etc. vs. actual performance in the market. 

Logistics warehouse utilization, days of inventory, inventory turns, and warehouse cost per unit, delivery cost per unit, delivery capacity utilization, etc. 

Commercial demand forecast accuracy, sales variability, inventory turns. 

Asset velocity Inventory turns. Cash flow velocity (also referred to as cash conversion cycle)... 

Inventory turns The number of times each year that the inventory turns over. It can be in units, but is more often in dollars. It is computed by dividing the average inventory level into the annual cost, or quantity, of goods sold. 

Thus for Dell, with inventory turns equal to 100, the days of inventory will be 365/100 = 3.65 days. In other words, Dell carries less than 4 days of inventory, on average. However, Dell requires its suppliers to carry 10 days of inventory (Dell, 2004). 

Using Equations 1.1 through 1.4, we can state that increasing the inventory turns will impact the other inventory measures as follows (assuming the same annual demand) ... 

Working capital is the difference between a company s short-term assets (e.g., cash, inventories, accounts receivable) and its short-term liabilities (e.g., accounts payable, interest payments, and short-term debt). Thus, working capital—particularly the portion reflected by cash—represents the amount of flexible funds available to the company to invest in R D and other projects. Increasing inventory turns, therefore, can shift working capital toward cash, thereby freeing up funds for immediate use in profit-generating activities and projects. 

Cash-to-cash cycle refers to fhe difference in the length of time it takes for a company s accounts receivable to be converted into cash inflows and the length of fime if fakes for fhe company s accounts payable to be converted into cash outflows. Historically it was often the case that a company paid for its raw materials, production and distribution of its products on a cycle that was shorter than the cycle by which it received payments from its customers after sales. Thus, for mosf companies, the cash-to-cash cycle has historically been positive. Companies would, however, like to decrease their cash-to-cash cycle in order to improve their profitability. For example, when a company increases its inventory turns, the finished goods reach the end... 

In summary, there is a direct and significant relationship between supply chain inventory metrics and a company s financial metrics. An increase in inventory turns has a cascading effect on the other inventory and financial measures as follows ... 

Recall that while inventory is part of working capital, so is cash. Thus, if an increase in inventory turns reduces inventory capital by shifting it to cash, there is no net change in assets or working capital. 

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