When you are managing a complex electronics components business you need to hold inventory to offset the manufacturing lead time that it takes to supply products. For semiconductor products that manufacturing cycle time can be 12-15 weeks — so holding enough inventory to be able to supply customers is critical. The trick is to not hold too much inventory. To make it all more complex, you need to anticipate what customer demand will be long before you can have products ready to ship.
Manufacturers build inventory and hold it in warehouses they control and in distributor partner warehouses making the problem even more complex. Sometimes you might be working with many distributors world wide so keeping control of the total inventory and optimizing the total cost makes it all a difficult problem.
Metrics to figure out what inventory is optimized and what inventory is over or under-optimized is one of the possible solutions offered in a good Revenue Cycle Management solution. Key metrics to track are:
Weeks of Sales or Inventory Turns — Inventory Turns is a measure of how fast the inventory will be sold based on the current sales rate. This requires setting a sales rate reference and then calculating how long it will take to sell the inventory sitting on the shelf.
- Sales rates change over time so several metrics can be developed to measure the turns. Sales rates are unit sales per month. It is best to look at sales rates in the recent past and how they have changed over the past year. For example:
— Unit sales per month last month.
— Unit sales per month average for last 3 months.
— Unit sales per month average for last 12 months.
— Unit sales per month change last 3 months vs same time last year.
- These metrics give you not only the sales rate but also whether it is improving or decreasing.
- Inventory turns is (current inventory) / (each of the sales rates above)
- Goals can be set to turn the inventory in about the manufacturing cycle time to optimize the amount of inventory being held
Distributors try to keep enough inventory on the shelf to supply short-term needs but depend on the manufacturer to supply product needed in the longer term.
- Tracking what inventory is stagnant or not turning is also critical so you can get it off the distributors books and encourage them to hold inventory that can facilitate turns business.
- Tracking what inventory is moving and what is not also shows which products are getting traction in the market. You might need to market the products differently or change the pricing strategy to get the inventory sold and build market share.
Using Inventory Turns to manage inventory is a good tool to optimize financial performance. NEHANET offers may ways to track inventory and inventory turns — making it simple to deliver the financial results your stakeholders expect.