5 Tips to Help You Forecast and Leverage Your Inventory Velocity Data
Your company and investors care about your inventory velocity and turnover because it directly reflects the organization’s ability to understand the market, streamline operations, and convert inventory to sales. Is your inventory data reflective of a struggling company or a successful one?
Of course, technology holds the most benefit when you have already laid a solid groundwork. To help you with that, here are 5 tips to optimize forecasting and leverage your inventory velocity data and build a focused framework for your technology to work optimally at helping you forecast and leveraging your inventory data.
What is Inventory Velocity?
Inventory velocity, also referred to as inventory turnover ratio, refers to the speed at which inventory is cycled—aka stocked and sold. Inventory “turns” is calculated as the cost of goods sold divided by the average inventory on hand. It’s the number of times inventory is purchased and sold during the entire fiscal year and thus how much stock is also left sitting in the warehouse. This number essentially states how much of your inventory you were able to go through and how quickly.
Why Improve Inventory Velocity?
A low inventory turnover ratio indicates that the company is mismanaging goods or can’t sell through their inventory, both of which don’t point to overall successful business. That’s why companies are often looking for higher inventory velocity. They want a more efficient inventory operation where products are sold quickly and inventory isn’t sitting in warehouses for too long. With strong forecasting and sales processes, a higher inventory velocity means more revenue with fewer expenses and losses.
So how can you improve forecasting and leverage your inventory velocity data?
Consider a Continuous Stock Review Model
There are two primary models used for monitoring and replenishing inventory: periodic and continuous review. For a greater inventory velocity with reduced waste, we recommend a continuous review model for most retailers.
Periodic review means that stock levels are monitored at a set time period, like the end of each month or quarter, and then managers order replacement stock accordingly. Businesses with slow inventory turnover can leverage this model well, but it’s hard to obtain a strong inventory velocity if there are time constraints in stock reviewing and ordering. There is also a greater risk of overstocking or understocking, as inventory isn’t reviewed alongside consumer demands but rather just on a set timeline. Moreover, this model typically requires holding higher inventory levels (enough to reach the next review date), which in turn requires a lot of available working capital.
Continuous review means that stock is constantly being evaluated. The inventory management system alerts managers weekly or even daily to the stock levels, and it will send notifications when it’s time to reorder. When the stock reaches this “reorder point,” the supplier or distributor will begin sending out the order; it may even go out automatically.
Continuous inventory review is an effective model because it can better adapt to the fluctuating needs of the consumer while also allowing for supplier flexibility. The only drawback is that some retailers will need to hold safety stock to avoid out-of-stock or availability issues that could impact customer service. However, safety stock can eventually be reduced—and maybe not required at all— with effective demand forecasting and supply chain communication.
Consider reducing your purchase quantity. Buy less and replenish frequently. This minimizes the risk of overstocking, quickly addresses understocking and fluctuating consumer demand, and enhances inventory velocity.
Implement Demand Forecasting Technologies
Demand forecasting is used to predict which and how many products consumers will purchase in a specific time period. This uses a baseline of data from quantitative forecasting, such as historical data sets, as well as qualitative forecastings like market forces, consumer trends, and even weather. Demand forecasting is both an art and a science that can be a challenge to balance for many retailers. If considering a continuous review model for inventory ordering, demand forecasting has to be especially streamlined to determine the ideal reorder point to avoid overstocking or understocking.
Technologies like artificial intelligence and predictive analytics reduce the possibility of human error and analyze data on a deeper level. AI can collect thousands of data points from all your systems and all your partners, while also considering external factors, to create the most accurate inventory forecast in real-time. Establishing a strong inventory system requires technologies that can leverage data quickly and effectively for the most up-to-date calculations.
Centralize Your Technology Communication
A logistics technology ecosystem is critical to reduce data discrepancies and create the most effective AI systems. Nearly 15% of inventory distortion concerns occur because internal and external management software doesn’t integrate smoothly.
Connecting devices through the Internet of Things and centralizing that data in a single hub ensures all stakeholders along the supply chain are looking at the same information and making consistent decisions. It’s also the only way to keep data accurate and consistent while enabling predictive analytics to leverage that data for high-level forecasting. Blockchain technology is another highly efficient tool for opening transparency, visibility, and communication between partners.
We also highly recommend automating processes wherever possible, especially with regards to inventory management. These systems can alert to stock levels and establish reorder periods while adjusting to demand needs accordingly. Automating these processes speeds up the inventory turnover while minimizing the risk of over- and understocking.
Eliminate the use of Safety Stock
The ultimate goal is to have inventory forecasting be so optimized that safety stock is unnecessary. That’s because safety stock is simply excess inventory that sits and waits for a problem, all while costing the company money. With improved forecasting techniques, getting rid of safety stock and old inventory will enhance the inventory turn ratio and cut losses.
If your demand forecasting isn’t yet optimized, you may need to keep safety stock for the time being. Try not to invest resources in safety stock, though, and instead invest in faster moving products and forecasting software that can enhance the overall efficacy of your inventory management.
Utilize Distributed Inventory
Distributed inventory, also called decentralized inventory, refers to the process of sending goods closer to where they’ll ultimately end up in the hands of consumers. For example, rather than housing all stock in Kansas and shipping it nationwide to consumers after they order, a company may keep some stock in Austin, NYC, and Seattle, where they have the greatest customer base. This brings the goods closer to the end consumer, so the time from order to delivery is greatly shortened. This enhances customer service while also reducing transportation and warehousing costs.
However, distributed inventory also requires strong, tech-driven inventory forecasting to truly capture your inventory velocity data. Retailers need to have a deep understanding of their customers and markets, as well as events and external factors across the country, in order for this to work effectively.
Forecasting the distribution of inventory is significantly easier with AI. By leveraging predictive analytics, companies can better meet consumers’ demands while reducing excess stock. Retailers see a high level of success and greater inventory velocity when utilizing a distributed inventory model, especially in the long-term as it helps enhance customer service and thus engender customer loyalty.
Leave it to us
Redwood Logistics can handle inventory logistics and forecasting for you. We know that inventory and warehousing can be a major strain on your business and resources. We exist to address those needs and solve these problems!
Hand us your most complex distribution and inventory predicaments, and we’ll create a flexible and customized solution. Whether you need to store, pack, or ship, we handle it all. We also have access to top-notch forecasting software to help you better capture your inventory velocity data.
Want to see what our team of professionals can do for you to help you find unique solutions to optimize all of your inventory velocity data reporting efforts. Reach out to us today and schedule a free consultation.
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