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Inventory Turnover Ratio As a Supply Chain Performance Measure

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Inventory Turnover Ratio As a Supply Chain Performance Measure Serbian Serbian Journal of Management 4 (1) (2009) 41- 50 Journal of Management www.sjm06.com INVENTORY TURNOVER RATIO AS A SUPPLY CHAIN PERFORMANCE MEASURE C. Madhusudhana Raoa* and K. Prahlada Raob aDepartment of Mechanical Engineering, Siddharth Institute of Engineering & Technology, Puttur – 517583, Andhra Pradesh, India bDepartment of Mechanical Engineering, JNTU College of Engineering, Anantapur – 515004, Andhra Pradesh, India (Received 14 March 2009; accepted 27 April 2009) Abstract Inventory management is vital in supply chain performance of a firm. The inventory turnover ratio measures the number of times a company sells its inventory during the year. A high inventory turnover ratio indicated how best the firm is operating economically in selling its products. Inventory turnover is a measure of management's ability to use resources effectively and efficiently. Precise control and safeguarding of inventory is an essential task for a successful and well organized company. Business requires timely and accurate information on inventory location, movement and valuation. ERP systems provide data pertaining to receipt of goods, movement within and between locations, the sale, removal or disposition of goods, lot and serial tracking, precise valuation and status of goods remaining in inventory at any point of time. As a part of its continuous improvement program (CIP), firms can focus on inventory turn ratio as a means of improving its supply chain performance. In this context, present research is aimed to measure effect of inventory turn over ratio on supply chain performance in a leading battery manufacturing organization in India. Keywords: Inventory turn over ratio, supply chain performance, Radio Frequency Identification 1. INTRODUCTION maintaining inventories to accommodate unexpected fluctuations in demand and The success of any firm basically depends supply. In SCM, much of the recent debate on how efficiently it is controlling its has centered on the ability of the supply inventories existing in various forms at chain to be either “lean” (Womack & Jones, different stages of the operations of the firm. 1996) or “agile” (Goldman & Nagel, 1995). In a manufacturing firm there is need for Lean supply chains on one hand focus on * Corresponding author: [email protected] 42 C.Madhusudhana / SJM 4 (1) (2009) 41 - 50 doing “more with less” by reducing waste or advantage of price discounts on bulk “muda” through inventory reduction, lean purchases, geographical location of manufacturing, and a just-in-time approach. suppliers, scarcity of raw materials, expected A lean approach is said to be suitable for rise in prices, the accuracy of demand markets characterized by predictable forecast, extent of subcontracting and service demand, high volume and low requirements level of the firm. By formulation of for product variety. Agile supply chains, on strategic partnership with suppliers, adapting the other hand, are designed for flexibility, vendor managed inventory strategies emphasizing the supply chain’s ability to (Madhusudhana Rao et al., 2005), strategic respond rapidly to changes in demand, both sourcing decisions such as make or buy or in terms of volume and variety. CRM, SCM sub-contracting, developing supplier and New Product Development (NPD) relations (shared vision and objectives), identified by Shrivastava et al. (1999) reflect tracking of inventory (Ashwani Kumar, the demand and the supply side. Similarly, 2007), minimizing inventory inaccuracies Payne and Christopher (2002) argue that (record keeping errors) (Elgar Fleisch, CRM and SCM processes have to be Christian Tellkamp, 2005), customer integrated in order to “provide high levels of relationship management (CRM) and so on, product availability and variety, yet which the firm can operate with minimum levels of are low cost and reliability”. Those inventory. In this paper, an attempt is made contributions conceptualizing SCM from a to study the effect of Inventory Turnover process perspective have also stressed the Ratio (ITR) on supply chain performance in need to integrate the key business processes a leading battery manufacturing firm in within and between organizations (e.g. India. The data required to calculate Cooper et al., 1997; Lambert & Cooper, inventory turn over ratio is obtained from 2000; Mentzer et al., 2001). Firstly, the sales data, and inventory levels of raw integration of the customer into the value materials, work in process and finished creation process was proposed by Vargo and goods including those in transit and available Lusch (2004). Secondly, in line with the at ware houses/market outlets. As a part of its conceptualizations of relationship marketing continuous improvement program(CIP), by and CRM, the buying cycle acknowledges closely monitoring the inventory turn over the dynamics in customer relationships ratio, the firm can continuously improve its (Zablah et al., 2004). Thirdly, by linking the capability to rotate money as many times as activities in the demand process with those in possible in a year. the supply process, guidance to Inventory turnover is best thought of as implementing the process integration can be the number of times that an inventory "turns derived. over" or cycles through the firm in a year. Inventory turnover of 12 means the average inventory moves through the firm once per 2. LITERATURE REVIEW month. For a number of years top-class companies have been focusing on supply The volume of inventories depends on chain management and improving their procurement lead times, the firm’s competitiveness (Supply Chain Technology purchasing strategies such as taking news, March, 2002). They are able to C.Madhusudhana / SJM 4 (1) (2009) 41 - 50 43 demonstrate their success through improved of us access product information and revenue, profit margins and decreased costs. alternative suppliers. A supplier’s worst Lean is a great method to help organize work nightmare is not finding the product in stock areas, reduce WIP (Work-In-Process), and that the customer wants to buy. The results speedup material flow through the entire are both a lost business opportunity manufacturing process. Successful Lean associated with the sale of the inventory and initiatives yield lower inventory cost, higher the poor customer service associated with productivity and flexibility and faster not meeting the customer’s immediate needs. response time to the customer. ITR is also an Rapid advancements in technology and important measure of performance that communication speed, wide use of the indicates the effective utilization of financial internet as a communicative medium, and resources of the firm. The inventory factory automation embracing Ethernet and turnover ratio should be done by inventory real-time data collection suggest that now categories or by individual product. ITR is might be the time to invest in an inventory defined as the ratio of sales to average management system, or IMS (Sexton, 2004). inventory with both numerator and The following table provides some insight denominator being valued at either selling on the basics of inventory control. The price or original cost. information was complied by Timothy Van Inventory for customer use is an Mieghem of the Proaction Group. expensive investment of company money. (http://www.proactiongroup.com) Instead of investing in people, technology, or Various Causes for Inventory: other important assets that can potentially - Revisions and variance in Supply assist in growing a business faster, Chain Management Inputs companies who invest in inventory have no - Inadequate process norms return on net assets (RONA) until they sell - Non moving stocks the inventory. In many businesses, inventory - High lead times & batch quantities is turning at the lowest levels in history and - Variance in material receipt below industry averages. Studies have - Variance in consumption with actual shown that manufacturers and wholesalers versus Bill of Material have over 60 days of inventory and that - Design and type changes without retailers have over 90 days of inventory valid lead time. capital tied up. These times do not include inbound inventory in the supply chain. Real supply chain inventory is 25 % higher. This 3. THE INVENTORY TURNOVER is a very significant amount of capital tied up FORMULAE in inventory. We live in a world and culture today where we want everything now. Inventory turnover is a critical Information on alternative supply sources is performance metric to assess the easily available on the internet. Vendor effectiveness of inventory management. loyalty is fleeting. Stated another way, Because it is so extensively used as a when a customer wants to buy something, diagnostic tool, it is imperative that they want it now. “Just-in-time” inventory turnover be calculated using manufacturing and the internet has helped all appropriate and valid techniques. 44 C.Madhusudhana / SJM 4 (1) (2009) 41 - 50 Table 1. Invertory control and management function C.Madhusudhana / SJM 4 (1) (2009) 41 - 50 45 46 C.Madhusudhana / SJM 4 (1) (2009) 41 - 50 Inventory turnover is calculated using the investment: following formula: - Calculate the total value of every product in inventory (quantity on-hand times cost) every month, on the same day of the (1) month. Be sure to be consistent in using the same cost basis (average cost, last cost, replacement cost, etc.) in calculating both the When product flow varies throughout the cost of goods sold and average inventory year and inventories expand
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