20 February 2011                www.strategosinc.com

How Much Inventory Should You Have?

Benchmarking Inventory Turnover

Inventory and the space to store it is the largest single cost for many wholesalers and distributors. The question often arises: "How much inventory should we have?" Accounting says "As little as possible" while sales says "We can never have enough to serve our customers."

In our experience, there is little correlation between overall inventory and customer service. Other factors such as purchasing policies, warehouse operations and order processing affect service far more than the inventory amount.

Ever been to a McDonald's that ran out of hamburgers? Probably not. Yet, McDonalds turns their inventory more than 96 times per year for an average on-hand supply of 3.8 days. Wendy's has a similar menu, similar service in a similar industry but only turns inventory 40 times per year.

In another example, a client operated at less than 3.0 turns per year (low for almost any industry). But, they had stockouts on 57% of their hottest selling items. High inventory did not help their customer service.

Nevertheless, comparing inventory to industry averages is a useful benchmark (at least as a start. Our new web page, "Wholesale Inventory Turn Data" shows averages in 18 broad categories. For a small fee of $8.00 you can purchase a complete dataset of more than 260 categories and subcategories. The raw data is from the U.S. Census Bureau and arranged by NAIC code. If you have a wholesale or distribution warehouse, this dataset will be useful.

Best Regards,

Quarterman Lee

For our readers in Asia: I will be presenting  a workshop on Warehouse Optimization in Beijing and Shanghai this March. If this is a topic of interest, please consider attending.