The easiest way to increase capital turnover rate
For many trading companies, the reality is that they have far too high inventory levels and too low a capital turnover rate. It may be an ambition to reach a high level of service with high availability, but it means that working capital is tied up in inventory instead of being used for something more productive such as marketing and sales activities.
Capital turnover rate is a key figure and one of several important metrics for trading companies. Other examples include service level, inventory value, forecasts and inventory turnover rate. Capital turnover rate is a business measure that shows how efficiently a company uses its capital in relation to turnover.
The higher the capital turnover rate, the less capital is tied up in the business. Reducing inventory is often described as the simplest way to increase capital turnover rate, and thereby reduce tied up capital. Although the use of KPIs is becoming more and more common, there are many companies that can improve how they define and apply them in their daily work.
Common causes of excess inventory and reduced capital turnover rate
One might ask what it is that causes many companies to build up too large inventories. Overstock has several negative effects beyond tying up capital. The risk of obsolescence increases, along with operating costs. It is also important to distinguish between overstock and safety stock.
In the event of overstock, inventory levels exceed forecasted demand in an uncontrolled way. Safety stock, on the other hand, is a planned stock buffer on top of the forecast which is planned and intentional.
There are sveral reasons why trading companies have far too high inventory levels. One is incorrect or insufficiently precise demand forecasts. This is often due to companies lacking suitable forecasting tools and relying on Excel or business systems that do not support statistical forecasting.
Another reason is that seasonal variations are not taken into account or that buyers do not consider the life cycle of products in their forecasts. When demand suddenly drops, the effect can quickly become an overstock of products that cannot be sold.
A company that has a high service level ambition can easily end up in a situation where too much is bought and they end up building overstock in parts of the assortment. Then there may also be buyers who focus heavily on achieving a low purchase price. Large purchases can reduce the price per item, but the cost of overstock is often significantly higher than the initial savings.
IMI provides full control over the key figures and quickly increases the capital turnover rate
Once the reasons behind overstocking are understood, the next step is to reduce inventory and improve working capital efficiency. A good start is to review how demand forecasts can be improved. This requires statistical models that take demand patterns and seasonal variations into account.
With a tool that automatically updates forecasts using algorithms and AI or machine learning, inventory levels can be reduced more quickly. IMI’s inventory management system is one such tool. Companies that have automated their purchasing and inventory processes with IMI’s system have been able to quickly both reduce inventory levels and increase capital turnover rate.
In order to gain full control over important key figures, it is necessary to successfully implement the use of the key figures in an organisation. That’s why IMI’s systems include an interactive analysis tool which helps our customers reach their defined targets.
For a purchaser using IMI’s solution, it becomes easier to control purchasing and make adjustments based on up-to-date data. An important advantage is also that IMI’s systems eliminate the problems that often arise with individual purchasing decisions. Instead, everyone works towards the same targets using shared information.
IMI’s system has been around for many years and the tool has been continuously developed. New functions have made it possible to sort, group and break down key figures on A items, product categories, brands and suppliers.
The level of service for all or parts of the range can be followed both in the present and in the past. For companies where a reduced inventory is a priority, the dashboard in IMI’s solution quickly informs you of how much the inventory can be reduced in a couple of years’ time if the inventory control is based on the parameters that apply today. The result is improved control of capital turnover rate over time.
At IMI, we actively help our customers increase their capital turnover rate using our inventory management solutions.
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