DMS knowledgebase

Explain inventory turns in detail.

The common calculation of inventory turn is Annual Cost of Sales divided by Average Inventory. I like the average inventory to be a rolling average of the inventory balance of the past three months. That prevents the calculation from being impacted by monthly swings in inventory levels, such as being out-of-stock or posting a big inventory receipt just prior to month-end.

Inventory Turn is a good measure of the health of your inventory replenishment process. The results of making improvement in the replenishment process are reduced inventory, and therefore increased inventory turns.

Inventory Turn can be increased by:
a. Increasing sales while holding inventory constant; or
b. Reducing inventory required to support a constant level of sales.

You should work to increase inventory turns to the point that inventory reductions begin to affect customer service (line fill rate) performance.

Would you advocate planners forecasting their own product lines of responsibility, as opposed to one or more forecasters in a separate group?

My answer depends how much internal collaboration (forecast information provided by sales, marketing and product management personnel) and external collaboration (customer provided forecast information) you have designed into your sales forecasting process. If your company has worked at developing a collaborative forecasting process, it is more likely that the forecast will be managed by a separate forecasting organization.

Also, I see that it is more common for manufacturing companies to have separate forecasting functions and planning functions. It is more common in distribution and retail environments for the inventory planner to have both forecasting and planning responsibilities.

Why is adjusting the forecast not a good tool for managing inventory?

The sales forecast should be your best estimate of customer demand. If you expect customer demand to decline, respond by reducing the forecast. However, don’t reduce the forecast simply because you happen to have too much inventory. It is the function of the inventory planning process to maintain inventory at the appropriate levels. Inventory levels are managed by a combination of factors, including: forecast review, setting the level of safety stock by ABC classification, maintaining accurate product lead times, setting replenishment order quantities or lot sizes, expediting / de-expediting open replenishment orders and defining the order frequency periods.

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