Inventory turnover is a ratio showing how many times a company’s inventory is sold and replaced over a period.

This is usually calculated as sales divided by average inventory.  A better way to calculate it is to divide cost of goods sold by average inventory because inventory is usually recorded at cost, not market value.

So for example, if we sell $120,000 worth of product during a year and the cost of goods relating to those sales was $100,000 and the average inventory was $25,000 then the inventory turnover would be 4.  If the inventory level averaged $50,000 then the inventory turnover would be 2.

Inventory turnover is important because it is a measure of investment productivity.  A good way to evaluate that is GMROI or gross margin return on inventory investment.  In the above example, when our inventory turnover 4, the GMROI was $20,000/$25,000 or  80%.  When the inventory turnover was 2, the GMROI was $20,000/$50,000 or 40%.

It’s much better to make an 80% return than a 40% return which shows how important inventory turnover is.

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To help our client measure lead times we built what came to be called the Lead Time Matrix.

This simple tool proved to be invaluable in measuring and communicating lead times throughout the organization.  The matrix was a spreadsheet that had rows for each of the manufacturing plants and each of the columns was one of the legs in the process from plant  to US end customer.

• The legs we choose included
• plant to port
• port to ship
• on the water
• port to dc
• dc to end customer

The real benefit of this approach was that we were able to break down where the unexpected delays were occurring.  It turned out that we had a problem with batching at the plant as the shipping department wanted to make sure it had enough product before it created shipments.  This resulted in 3-4 days of delay.  We fixed this by having the shipping department start operating on a shipping plan based upon the production plan.

The second major problem was the port delays.  This was harder to address, but we where able to find about 2 days that were related to our process problems.

If you aren’t measuring lead time then you have too much lead time and excess inventory.

Try to build your own lead time matrix and find out how you can reduce lead times.

The US distribution arm of a large Japanese manufacturer was having a delivery problem.  They could not seem to consistently meet the delivery dates they had promised their customers.

To understand the causes of the problem, we performed a business process workshop to map out the process flow from plant release through the ports and through the US distribution warehouses to the end customer.  As we mapped out the process, we asked what the lead times were for each of the legs in the process.  Estimates were easily available for each of the legs and totaled about 17 days from plant to primary distribution center.

So this didn’t seem to be the source of the late delivery problem.  But we were suspicious  as there was no real hard data on the lead times, just estimates.   We had the client collect data on the next few receipts regarding date of manufacture.  Sure enough the lead times were more like 24 days from Japan to the US.

These seven extra days were just enough to drive a lot of late deliveries and amounted to about $20 million in extra inventory carried on the balance sheet.

Lead times are important and too many companies are using estimates when they should be relying on hard data.

Make sure you don’t make this mistake.

Companies are discovering how to better maintain inventory and fill orders with powerful new tools and best practices. Find out how they’re making drastic cuts like 30% less inventory look easy.When managing warehouses, companies aim to reduce costs in two major operations—maintaining inventory and filling customer orders. To make both more efficient, they are not only adopting new technology solutions but also implementing “best practice” procedures. While the high-tech approach involves utilizing new software tools (think “collaborative visibility” and “inventory optimization”), the “best practice” tack entails arranging items in the warehouse or distribution center in the most expedient manner.

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