The need to offer a speedy delivery (inventory velocity) of your products to your respective distributors cannot be overemphasised. It remains a significant parameter for strongly contributing to your company’s profitability and to the improvement of cash generation as well as to ensuring your customers’ retention and loyalty.
Companies have got to develop ways to manage and speed up their ordering process and ensure fast and prompt receipt of raw and packing materials to be able to produce and offer speedy delivery of their inventory to their respective customers.
Leading companies around the world have been working on ways to substantially reducing the order-to-delivery cycle process. By achieving this would not only reduce the inventory cycle for their products, but most importantly will enable their customers (wholesalers – retailers) to minimise level of safety stocks kept in their premises.
How do companies can achieve such?
One way is by monitoring and managing their Inventory Velocity (IV) for their Stock Keeping Units (SKUs). We define Inventory Velocity as the speed at which the inventory is cycled in a given period of time for each particular SKU. In simple terms, it is how many times the inventory turns over in a certain period of time.
Inventory Velocity is a way to measure & improve Inventory Turns.
Inventory Turns (IT) is calculated as:
IT = Cost of Goods Sold / Average Inventory on Hand
In the process of building, developing and improving the Inventory Velocity we acknowledge 4 Key Metrics that would make or break Inventory Velocity. These are:
1. Planning Cycle Time
This is the time interval between receiving the demand signal and releasing the order to the supplier.
(It refers to your own internal / external communications with ways to simplify them).
2. Supplier Lead Time
This is the time interval at the supplier’s end between the time of receiving the purchase order and the time of shipping the order.
(Do not assume that your supplier owns the inventory or have it readily available for you any time you will need it; he will need time to produce or assembly & deliver it).
3. Transit Timen
This is the time interval from the supplier shipment time until the time you will actually receive the order.
(It involves the Logistics dept with major emphasis on the way orders are being placed to ensure optimisation of transportation and transit time, fuel costs, clearance etc.)
4. Variability on Demand
It refers to the unpredictability in customers’ demand as well as to the irregularity in the way orders are being placed.
(You could segment your inventory accordingly:
- For reliable and constant demand put your SKU on Kanban – pull system.
- For inconsistent demand put your SKU on order-as needed basis).
In essence, inventory turns represent a guide to demonstrate how productive your sales team or your purchasing team or even your operating unit could be. Focus on how to improve your inventory velocity and you will be pleased to observe the improvement of your profitability.