Repair parts and accessories allow customers to maintain their purchase for many years to best utilise their investment. In the case of cars, forklifts and construction equipment the investments can be large and maintaining the usefulness of the item is essential i.e. What determines how much inventory to hold? Why does a company hold any inventory at all? AvailabilityĪn OEM provides aftermarket spare parts inventory to support the longevity of a products lifecycle following sale. Components of Inventory TurnsĪssuming for a moment that the demand variable within the turn calculation (COGS) is unchanging allows us to consider only factors within the control of the inventory planning team – Average Inventory Value. Admirably, this is often a bold, continuous improvement target linked to staff objectives as a means to increase business efficiency and maximise ROI. However, with a little digging on how the target figure was derived, the answer is invariably through benchmarking against the closest competitors within the company’s specific industry. The fallacy is in thinking that a competitor’s turn value alone has any value whatsoever. Whilst the inventory turn calculation is a function of just sales and inventory value, the reality is that many more variables impact the turn number that are not evident when benchmarking. In my experience, it is common when talking with business leaders about inventory metrics for companies to have an inventory turn target. What you consider a “good” turn number will depend on your industry. The tech industry famously has very high turns, with the likes of Dell, Apple and Samsung reporting annual turns around 100, that are often converted into measures of 3,4,5 DAYS. However, in the world of spare parts logistics for the aftermarket where high stock availability for 100’s of 1,000’s of SKU’s is essential, those kind of numbers are for annual turns. In fact, companies producing industrial equipment for mining and construction might have an annual turn less than 1. This simple ratio demonstrates the efficiency of a business by highlighting its ability to manage stock levels relative to demand, and as a function of sales, monitor that effectiveness over time as demand changes. Whilst there are several ways to measure turns, for the purpose of this piece, I will use the universal calculation:Īnnual Cost of Goods Sold (COGS) / Average Inventory Value (AIV) The most common measure, along with parts availability, is inventory turnover, and being common across companies makes it an obvious choice for benchmark comparisons. Over the years, I have spoken with many different companies across multiple industries about inventory management and ways to measure and to improve business performance.
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