What are the advantages of Inventory Turnover?

Advantages of High Inventory Turnover:

Retailers want rapid inventory turnover-but not too rapid. Advantages of rapid inventory turnover include increased sales volume, less risk of obsolescence and markdowns, improved salesperson morale, mote money for market opportunities, decreased operating expenses, and increased asset turnover.

1.      Increased Sales Volume : A rapid inventory turnover increases sales volume since fresh merchandise is available to customers, and fresh merchandise sells better and faster than old, shopworn merchandise. Fresh merchandise encourages customers to visit the store more frequency because they see new things. Also, notice the produce next time you’re in a less-than-successful supermarket. Brown bananas! Since turnover is slow; the produce is old, which makes it even harder to sell.

Quick response delivery systems are inventory management systems designed to reduce retailers’ lead time for receiving merchandise. Retailers order less merchandise, more often, so merchandise supply is more closely aligned with demand. As a result, inventory turnover rises since inventory investment falls, and sales climb since the retailer is out of stock less often.

2.      Less Risk of Obsolescence and Markdowns : The value of fashion and other perishable merchandise is said to start declining as soon as it’s placed on display. When inventory is selling quickly, merchandise isn’t in the store long enough to become obsolete. As a result, markdowns are reduced and gross margins increase.

3.      Improved Salesperson Morale : With rapid inventory turnover and the fresh merchandise that results, salesperson morale stays high. No one likes to sell yesterday’s merchandise. Salespeople are excited over new merchandise, the assortment of sizes is still complete, and the merchandise isn’t shopworn. When salespeople’s morale is high, they try harder so sales increase-increasing inventory turnover even further

4.      More Money for Market Opportunities : When inventory turnover is high, money previously tied up in inventory is freed to buy more merchandise. Having money available to buy merchandise late in a fashion season can open tremendous profit opportunities. Suppose Levi Strauss overestimates demand for its seasonal products.

          It has two choices : (1) holding the inventory until next season and (2) selling it to retailers at a lower-than-normal price. If retailers have money available because of rapid turnover, they can take advantage of this special price. Retailers can pocket the additional markup or choose to maintain their high-turnover strategy by offering the special merchandise at a reduced cost to the consumer. In either case, sales and gross margin increase.

5.      Decreased Operating Expenses : An increase in turnover may mean that a lower level of inventory is supporting the same level of sales. And lower inventory means lower inventory carrying costs, which is an operating expense. For instance, if a retailer has ` 1 crore in inventory and the cost to carry the inventory-including money borrowed from a bank, insurance, and taxes-is 20 percent a year, the inventory carrying – cost is ` 20,00,000. Lowering inventory can therefore represent a significant savings.

6.      Increased Asset Turnover : Finally, since inventory is a current asset, and if assets decrease and sales stay the same or increase, then asset turnover increases. This directly affects return on assets, the key performance measure for top management.