Inventory Control Step 5: Set an Inventory Turn Goal

Set inventory turn goalsAs a business owner, your whole livelihood is based around goals. You probably wouldn’t be running a business right now if you didn’t have them. So why wouldn’t you have concrete goals for your inventory?

Sheets says a problem he often sees is that dealers don’t take a goal-oriented approach to what they want to get out of their inventory.

If you have expectations for how much of your inventory you want to sell in a year, then shouldn’t you have expectations for how much money you want tied up in inventory and how you’re going to turn it into a profit as quickly as possible? Keeping your inventory lean can cause you to see a tremendous difference in your bottom line. But it takes some discipline. You need to set goals for how you’re keeping your items moving so it’s not money tied up on your shelf. You need to have an inventory turn goal.

An inventory turn is defined as the number of times inventory is replenished in a year; generally calculated by dividing the average inventory level (or current inventory level) into the annual inventory usage (annual cost of goods sold).

It’s common for dealers to have an inventory turn of 1 or 2, but Sheets believes you should set 4 as a goal. If you have an inventory turn goal of 4, then only 25% of your inventory should be on your shelf at one time. If your inventory turn is typically 2, that means you would already have 25% more in your bank account rather than stocked up on your shelf.

Although 4 may seem high to you, it never hurts to shoot high. That’s why it’s a goal. It is important, however, to choose a turn number that does make sense for your business. One thing to remember, if you decide to shoot higher than 4, you may run the risk of running into stock-out problems. So take some time and come up with an aggressive level that makes sense for your business.

With a turn goal in place, it’s now time to monitor your quantities so this goal has a chance of being attained.

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