Sometimes, a company may assess product demand using pre-orders as a measure to optimise its supply. This may involve using a variety of mediums, such as newspapers, commercial advertisement space and social media. A high inventory turnover ratio suggests a good balance between inventory and demand, but it may also suggest that a company's production output can't meet the demand, resulting in consumers looking for alternatives.Ī business may consider increasing the demand for its products by using marketing and advertising strategies to raise awareness of its product offerings. If there's a low inventory turnover ratio, it suggests that a business has an oversupply of inventory and not enough demand to sell it. It allows them to make changes to how much they can sell in a given market and how much marketing they require to increase demand. Related: What Is Business Operations? (With Components and Tips) Assesses sales and marketing strategyĪ marketing or sales team can use the inventory turnover ratio to adjust their strategies. A business may also use the inventory turnover ratio to negotiate costs of raw materials, production and distribution with vendors and suppliers.

This may involve using promotional offers for specific seasons, holidays and festivals to increase turnover and providing discounts on items that have lower demand. They may compare the pricing strategies with those of competitors and find ways to price the product to drive demand and market share. The inventory turnover ratio also provides the necessary information for a business to review how they price its products. It also provides a business with information to make forecasts in the market and how its performance may look in a specific time frame, while also knowing what products consumers want. This can help a company maximise profits, increase its market share or find ideal ways to do so. Related: What Is Logistics Management? (Definition and Importance) Evaluates business performanceīusiness professionals may review the company's performance in the market by using the inventory turnover ratio to find a balance between production and meeting consumer demand. Automation may result in more efficient restocking of inventory, with frequent but smaller orders which help in meeting market demand. They may also consider automating the process of inventory management using software to obtain real-time updates that enable making quicker decisions. This provides a benchmark they can use to further optimise the inventory about market demands and the strategies they use to achieve a higher inventory turnover ratio. They may consider removing such products by stopping production and selling them at a discount to create space for other in-demand products.Ī team may also consider comparing the company's inventory turnover ratios to those of the industry. It also informs a business or production team about the products that aren't selling well. Knowing whether the products are meeting consumer demand results can help the team stock inventory adequately and profitably. It tells them which goods sell well and if they're fulfilling consumer needs, which leads to repeat business. Inventory turnover ratios can help a business team understand the market's demands. Here are the reasons why inventory turnover is important: Manages product demand Why is determining inventory turnover important? A company may consider reviewing its sales and marketing strategy to create demand in a market. A low turnover ratio may suggest low consumer interest or awareness of the product. This enables them to optimise their inventory, preventing both oversupply and undersupply.Ī high turnover ratio shows a high number of products sold, implying high demand, while a low turnover ratio shows low sales and low demand.

Professionals in the production or logistic field may use the inventory turnover ratio to make informed decisions regarding the production and pricing of a company's goods. Some organisations may calculate inventory turnover monthly, quarterly or annually. To calculate this ratio, you can use a formula adjusting for the specific time periods. The answer to the question 'What is inventory turnover?' is it's a ratio that shows how well a business can sell its inventory and replenish the stock of products for a specific period. In this article, we answer the question 'What is inventory turnover?', discuss why it's important, share the steps to calculate investor turnover rate and provide example calculations.

If you work in a business or logistics career, knowing how to calculate the inventory turnover ratio can help you maximise a company's efficiency. A business may periodically evaluate its inventory turnover ratio to get an understanding of its product's sales performance and meet the market demand. An important aspect of running a successful business operation is managing the inventory.

Define inventory turnover