Inventory Turns and Out of Stock/Backorder

I just took Working Capital Management by Joseph Ori at Proformative learning (https://www.proformative.com/courses/). Great course! It go me thinking, and the issue wasn't covered (you can only cover so much in 60 minutes), so I thought I'd see what the general opinion is.... It's been a rule of thumb (or at least what I was taught way back when) that Inventory Turns that are too high are not necessarily a good condition to be in. The reasoning was that it may put you in an out-of-stock condition (backorder). Back then (and I believe this may be the case in extremis now a days) if you are BO'd, you go elsewhere. In other words, no customer loyalty and Out of Stock is loss of sale. So, here goes the question. What number of Inventory Turns (how many days of inventory) should you shoot for? Is it a number driven in toto or by group/item? Do you believe its industry bound or across the board?

Answers

Bob Scarborough CEO • April 28, 2014

My two bits:
1) Industry matters - both for customer expectations and production requirements
2) Cycle time matters - how fast can you build the product
3) Market alternatives matter - can your product be easily replaced with
alternatives from competitors
4) Customer mix and product volume also matter. Consider a matrix based on two variables - customer base breadth and product volume. A high volume product with a broad customer base is reviewed differently than a narrow customer base or a lower volume product.
5) Channel matters as well - do you sell through distributors, do you sell direct, what is the mix, what is the customer expectation.

Some companies include a lost sales analysis as part of their inventory planning. This is a bit of art as well as science - and may require a bit of extra data collection - but can prove beneficial for top line augmentation as well as inventory management.

J. Lee Powell Director, Continuous Improvement, North America • August 23, 2014

My best approach for determining a starting point for inventory turns is to benchmark off of your industry or competition. Regardless of what level you start out with, what you want to show is a continued increase in inventory turns year-to-year. From the site standpoint I would base my calculations off a Plan-for-Every-Part level of supply and ensure Pull and Kanban were in place to optimize the levels of inventory and the flow.

Thanks.

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