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Inventory turns have long been used as a fundamental business performance measure. Though a revered ratio in some circles of business, it has had its share of detractors, particularly among those seeking to employ revolutionary new techniques in managing the business. The fact is, like many performance measures, inventory turns can be both misapplied and misinterpreted. Nonetheless, though not the singular measure of a company's performance, inventory turns represent a fundamental and important element in the measure of a company's performance in most environments from both a financial and operational perspective.

Some companies have deliberately structured basic ele­ments of their businesses such that they have achieved extremely high inventory turns. As a consequence, they enjoy significant business advantages not shared by many competitors. Improving the leverage of their inventory investment dollars allows these companies to be more price competitive but it also provides many less apparent advan­tages. This is because most of the mechanisms which contribute to reducing inventory investment also enable greater schedule and production flexibility. This presen­tation describes key characteristics of companies and op­erations which have achieved very high inventory turns and attempts to identify, on the basis of these successes, opportunities for turns improvement among companies struggling at much lower performance levels.

The Inventory Turns Calculation

The simplest method for calculating inventory turns is to divide the cost value of inventory usage during a year by the cost value of average inventory during that same year. If for example, item A costs $1.00 and has an annual usage of 1000 and item B costs $2.00 and has an annual usage of 1000, then the cost value of inventory usage during that year is $3,000 (($1.00 * 1000) + ($2.00 * 1000)). If during that year the average inventory of item A is 500 units and the average inventory of B is 100 units, then the cost value of average inventory during that year is $600 (($1.00 * 500) + ($2.00 * 100)). Inventory turns in this example are calculated as 5 ($3000/$600).

The most appreciated (though seldom the most significant) benefit of improving inventory turns can easily be demon­strated using this same example. If we could change the business in a manner which reduces the average level of inventory, then turns will increase. If we could reduce the average inventory from $600 to say $150, then our calcula­tion for turns becomes 20 ($3,000/$150). The immediate and obvious benefit of this performance change is a reduc­tion in the dollars of inventory required to support an identical level of usage. In this example, $450 ($600-$150) would be available for investment elsewhere.

How significant is reduced inventory investment to a company? Part of the answer to that question relates to what kind of a return is available in an alternative invest­ment. Certainly an undercapitalized or cash poor company will greatly benefit from inventory reductions. Another important qualifier with respect to the significance of reduced inventory investment is the proportion of the total investment represented by inventory. Capital equipment intensive operations, common in process industries, are less interested in inventory investment that other ele­ments of their operations.

The most important benefits of inventory turns improve­ments may relate to opportunities for improvement in quality, flexibility and customer responsiveness. Compa­nies that make major inventory reductions have usually changed fundamental business processes to do so. They often enjoy smaller lot sizes, reduced setup and change­over costs, improved cross-training, less paperwork, im­proved communication, better scheduling, etc. When con­sidered in the context of the business process improve­ments typically required to achieve significantly improved inventory turns, the extraction of inventory investment dollars may be one of the least significant benefits.

Hyperturn Elements

There is no single solution to achieving hyperturns but the following characteristics are commonly found within orga­nizations and operations that have been successful:

Environment

• There is a high-level commitment to changes within the business that foster reduced inventory investment
• People are encouraged to be empowered
• Activities are team oriented and cross-training is encouraged
• There is a commitment to execute the plan

Systems

• Planning is performed daily
• Data collection is automated
• Demand pull is employed when feasible

Supply-Side Relationships

• EDI is employed
• Schedules replace orders
• Suppliers' programs are partnership-based and in­clude education, certification, and creative procure­ment/delivery solutions

Production Planning

• MPS supports an FAS driven by customer orders
• Replenishment planning is relatively discrete
• Safety stocks are replaced with alternatives
• Increased reliance is placed upon supplier quality and delivery
Production Control
• Tactical replacements for paper and orders
• Priority and capacity control are signal driven

Material Handling

• Standardization of containers, quantities, movements
• Eliminated or automated
• Storage reduced Processes
• Reengineered for simplicity and elimination of non-value-add activities
• Set-up costs reduced
• Variability reduced
• Flexibility increased
• Processes balanced

Demand-Side Relationships

• EDI is employed
• Requirements replace forecasts
• Schedules replace orders
• Partnership-based

Distribution

• Inventory replaced with logistics capabilities

To be Continued