Imperial Steel Winnipeg

Inventory: When is it Too Much?

supply-chain-management-concepRegardless of the industry you belong to, you may have had problems managing your inventory. A majority of automotive and agriculture industries fail to keep track of their inventory. In fact these industries are unable to determine when too much is enough. Having excess inventory is never a good thing and the same can be said about being understocked. This begs the question, how much is exactly enough then? If you wish to find out, read on.

Looking at the Bigger Picture
Even though your business is performing well and the economy is doing better than before, you will need to ask yourself whether you are carrying an optimal amount of inventory. Being over and understocked can have its pros and cons. When you do not have sufficient inventory, you end up missing out on sales. However, if you choose to keep more stock than normal, you risk getting your money tied up in it. There are countless other factors that need to be looked at in order to reach a thorough conclusion.

Keeping Track of Inventory using the Inventory Turnover Rate
One of the best ways of determining optimal levels of inventory is by calculating the inventory turnover rate. This is accomplished by dividing the COGS (Cost of Goods Sold) by the average cost of the inventory, which is currently available.

For example, a company supplying steel iron has COGS of no more than $30,000 in the first year and kept no more than $2000 inventory on hand, after dividing the two it will result in a turnover rate of 15%. This actually means that the stock on hand has been sold 15 times over in the year alone. A lower turnover rate indicates that the business is overstocking, whereas a higher one suggests the contrary.

Estimate Ideal Inventory Levels Using Industry Averages
If a business is still unable to estimate its ideal inventory levels, then they can do so by using industry averages. It is not as complicated as it may seem and can prove to be quite effective in the long run. If for instance, the industry average turnover rate is 20%, then it will be used to divide the steel products supplier’s COGS ($30,000/20), which results in an ideal turnover rate of $1500. This information can be used by the business to optimize its stock to move closer to the $1500 turnover rate the next year.

That being said, now that you know more about the pros and cons of being over and understocked, you will do whatever it takes to ensure you have an optimal levels of inventory on hand. But most importantly, you know now how to calculate the ideal levels of inventory required by your business in order to function flawlessly and without any problems whatsoever.