What is a good inventory turnover ratio?
An ideal or “good” inventory turnover ratio can vary significantly depending on the industry. The type of products you sell dramatically influences the speed at which stock is replenished, depending on how essential they are, their cost and longevity. Generally, a higher inventory turnover ratio is considered better because it signifies a business is efficiently managing its inventory. For example, an inventory ratio between two and six indicates a company’s restock rates match its sales cycle—the amount of inventory is just right to meet demand.
Generally, a good inventory turnover ratio balances having enough inventory to meet customer demand while avoiding excessive carrying costs. A ratio that’s too high may result in stockouts and lost sales, while a ratio that’s too low may lead to carrying excessive inventory with associated costs.
How to improve inventory turnover ratio
If your inventory turnover ratio is low, conducting a comprehensive assessment of your inventory management processes is good practice. A likely cause for a low ratio is decreased or insufficient demand. To enhance this metric, it is crucial to implement strategies to bolster customer demand and optimize the efficiency of your inventory turnover processes.
What can you do to boost sales? Could you alter your marketing strategy to promote the company’s brand and products better? Could you explore other marketplaces to extend your reach?
Your competitors might be selling specific products more effectively. If their prices are lower, consider adjusting your pricing. If necessary, discontinue products that are performing poorly. Incorporating automation into your inventory management process is another effective way to streamline your supply chain and speed up inventory turnover. Easy access to accurate data from all your sales channels enables you to effectively receive inventory and move goods to the right place at the right time. Read more about the inventory management services SPS provides here.
Can inventory turnover ratio be too high?
Yes, if your inventory turnover ratio is too high, the company may be at risk of shortages and stockouts due to insufficient inventory.
When your inventory supply is too low, the company will experience problems whenever there is a spike in demand or an issue with the supply chain. Waiting for new stock takes time, and sales opportunities will only be recovered if the business can meet consumer demand.
Fortunately, this is a lesser problem than scaling down inventory due to a low ratio. Simply alter your ordering cycle and increase purchase amounts to balance inventory with demand to help avoid stockouts.
