Today, we delve into an essential topic for parts managers: measuring inventory turns. A thriving parts department is essential for any dealership, and this metric can give you a LOT of information about your parts department, especially when monitored regularly. Inventory turnover measures how efficiently you manage your parts inventory by determining how quickly you sell and replace stock, and calculating this ratio can provide valuable insights into your department’s overall performance to help identify potential areas of optimization.
Calculating your inventory turnover rate
Your inventory turns is a ratio that expresses how often your entire inventory is completely sold in a year (though some parts may stick on shelves longer than a year, another great reason to keep a handle on your obsolete inventory). To calculate this number, divide the Cost of Goods Sold by your Month End Close Inventory Value.
Interpreting your inventory turn rate
The gold standard is somewhere between 6 to 8 inventory turns per year. A higher inventory turn rate can indicate that you are effectively managing your inventory and selling parts efficiently but be cautious of turning your inventory too much or being too conservative.
On the other hand, a lower ratio suggests inefficiency in inventory management or stagnant sales. By analyzing your inventory turn rate over time, you can gain valuable insights into your department’s growth and identify areas that require attention. Possible areas to review are excess, forced, and obsolete stock.
Optimizing your turn rate
To improve your inventory turn rate and foster growth, consider implementing the following strategies:
Streamline inventory management: Regularly review your inventory to identify slow-moving or obsolete parts. By removing or discounting these items, you can free up space and capital for more profitable stock.
Optimize stock levels: Determine optimal stock levels based on historical sales data, customer demand, and lead times. This ensures you have sufficient stock to meet demand without overstocking, thereby improving turnover.
Enhance ordering processes: Streamline your ordering processes to minimize lead times and ensure timely replenishment of stock. Efficient ordering practices prevent stockouts and enable you to meet customer demands promptly.
Analyze sales patterns: Monitor sales patterns and identify popular parts or trends. By aligning your inventory with customer preferences, you can increase sales and improve your turnover ratio.
Invest in technology: Leverage inventory management software and automation tools to streamline processes, accurately track inventory, and generate insightful reports. This enables you to make informed decisions and optimize your inventory turns.
By closely monitoring your inventory turns, you can gain valuable insights into your department’s performance, identify areas for improvement, and make data-driven decisions. By optimizing your inventory turn rate through streamlined processes and strategic actions, you can foster substantial growth and enhance overall profitability.
PartsEdge’s one-of-a-kind service helps you analyze, optimize, and improve your inventory daily. Our expert team is dedicated to helping Parts and Service Managers improve their inventory health through custom setups, phase-in settings, and more. We save managers hundreds of hours each year by streamlining DMS management, sourcing setup, and inventory optimization. Our results speak for themselves with our clients seeing an average 20% reduction in total inventory, 15%+ less idle inventory, a 50% increase in ROI, and a 20% increase in parts sales. If you’re interested in utilizing our parts power tool, contact us today!