Following on from my last post, let’s consider the gross margin vs. inventory turns question. Remember, by “inventory turns” we mean the number of times per year that your inventory, on average, is completely sold and replenished. It’s obviously an average, because inevitably some products remain in stock for more than year. So if you received products only on the first of every month, did not purchase during the month, and had nothing left in stock at the end of each month, the number of inventory turns would be 12.
Generally, a higher inventory turn rate is a good thing (to a point). Firstly, turning over your products regularly allows you to react more nimbly to price changes. Secondly, you will generally maintain lower inventory levels, meaning you’ll have less working capital tied up in the warehouse (and potentially need less warehouse space). And thirdly, as a consequence you’ll end up with less dead stock.
Now, I frequently hear warehouse and operations people making comments about their ERP Software, like “if only the software did X or Y, we’d be more efficient at managing inventory.” And while that’s true to a degree – a good inventory management software system can be a massive aid in improving your inventory turnover – it also requires changes in business philosophy.
Which brings us back to the entrepreneur’s obsession with gross margin, and fear of missing out on sales. The two biggest preconceptions that need to change in this context are:
- “It’s a good deal at that price, let’s buy as much as we can – we’ll always find a way to sell it.”
- “I must have these products in stock – if my customer orders and I cannot ship immediately, I may lose the customer.”
Here’s a question: what are the pitfalls in the above beliefs? Please use the comments section below to make a suggestion. The best comment will be incorporated, with accreditation, into the third and final segment on this topic later this month.