How Wholesalers Can Improve Inventory Turnover in an Era of Unpredictability and Change

Merchant wholesalers witnessed a massive jump in their sales of non-durable goods during 2021: an increase from USD 4.25 trillion to USD 5.23 trillion. This surge in sales has put immense pressure on inventories, and to meet customer demands efficiently, it’s essential for wholesalers to focus on inventory turnover. (Statista.com)

However, in more recent data, as per the US Department of Commerce, Merchant wholesalers are feeling relatively steady in their sales, with December 2022 ringing up nearly identical numbers from the previous month. Inventories, however, were slightly boosted at the end of this December, totaling $932.9 billion (monthly) – a minuscule increase but an encouraging sign for business growth moving forward.

The stock turnover ratio is a crucial metric for measuring the efficiency with which a business manages its stock; however, in an unpredictable economic environment like today’s, it can be difficult for wholesalers to ensure a high inventory turnover ratio. This blog post will discuss the measures wholesalers can take to increase their inventory turns in this era of unpredictability and change.

Taking Measures to Improve Inventory Turnover Ratios

Buying would be straightforward if it were not for unpredictability and change. Gauging upcoming market demand of a given period and knowing how long the product will take to get to you is critical for optimal inventory turnover rate. Unfortunately, inventory purchasing systems, whether an ERP or third-party supply chain planning system, fall short of managing inventory turns with unpredictable sales or supply lead times.

Where are You Vulnerable to Unpredictability in maintaining high inventory turnover ratios?

Every inventory decision is based on a guesstimate of how much you will sell in the near future to ensure an ideal inventory turnover ratio. Under-estimate and you’re left with stockouts. Over-estimate and you’re dealing with overstock and dead stock of cost of goods sold. The more accurate your forecasting is, the more profitable your inventory will be. 

The reality is that the vast majority of a wholesaler’s SKUs sell unpredictably. These low-volume items don’t generate the majority of profit but eat significantly into profits when you can’t meet surging demand or you’re burdened with dead stock. High-volume, consistent sellers that contribute significantly to your bottom line typically have decent forecasts that work well for inventory buying.

Research conducted by Thrive Technologies has revealed that up to 90 percent of a wholesaler’s dead stock comes from items that buying teams continued to purchase despite little or no sales activity. In addition, between 50-90 percent of a wholesaler’s items have 10 or fewer sales per year. This makes forecasting difficult for these items due to the lack of demand history to generate accurate predictions. Your ERP system alone can’t resolve the issue.

There are now digital supply chain planning technologies that work alongside ERP systems to improve forecasting and prevent stockouts and dead stock. They use very granular data from your ERP system with artificial intelligence to suggest optimal stocking levels for low-volume SKUs. They can also monitor unexpected changes in demand and/or lead times to alert buying teams so they can be proactive instead of reactive.

Whether you leverage digital technology alongside your ERP system, measure your forecast accuracy by quantifying the difference between forecasts and actuals. This will give you a sense of your forecasts' reliability, provide critical feedback on your exposure to unpredictable demand, and ensure optimum average inventory levels.

Analyze Supplier Lead Times

Many factors can disrupt normal supply operations, making forecasting even more difficult. In March of 2020, COVID-19 massively disrupted the world’s supply chain. By early summer of 2020, demand for many items far exceeded supply. Supply chain planning settings had to be adjusted to handle surging demand, longer lead times, and a new allocation of supplies.

Starting in late 2022, specific import sectors finally started to normalize. This means lead times in supply planning systems should be re-evaluated and adjusted again to order proper quantities at the proper times. It’s a fluid process in our ever-changing world, and it is essential for wholesale distributors not to ignore these recent changes in supplier lead times.

While a global pandemic is an extreme example, several other events trigger changes in supplier lead times and, therefore, inventory buying assumptions. This can include:

• Significant weather events or natural disasters

• World events such as war or political unrest

• Union, factory, or trucker strikes

• Labor shortages

• Material delays for supplier production

Monitor Demand and Supply Changes

The fluidity of the supply chain means that wholesale inventories must be constantly re-evaluated to ensure proper levels are being maintained. And if you’re not equipped with the right tools, it can take a lot of time to do this manually.

Your ERP system may have forecasting capabilities, but it’s not always enough. You need advanced tools that can provide visibility into changes in the demand and supply side of your inventory levels. The inventory management software and tools should allow you to adjust orders quickly based on real-time data and pivot when needed. For example, suppose a critical item is about to go out of stock due to unexpectedly high demand. In that case, you should be able to adjust your order and restock the item quickly to offset the low inventory turnover ratio.

The right tools will also enable you to monitor suppliers’ lead times and establish automatic replenishment of low-stock items to increase inventory turnover. This way, you won't have to worry about stockouts or overstock of your items, leading to waste and lost profits.

Ultimately, having visibility into your inventory's demand and supply side will make it easier for you to improve your inventory turnover and manage your wholesale distribution business more efficiently and cost-effectively. This way, you can ensure that customers receive their orders on time without stockouts or delays.

The Bottom Line: How to Improve Inventory Turnover

Distributors need to evaluate the assumptions used by their inventory-buying software constantly. Unpredictability and change impact sales and lead times daily and can be severely impacted by the abovementioned events. Wholesalers need the ability to evaluate and change their inventory buying assumptions intelligently and as efficiently as possible to prevent significant hiccups in inventory that can result in mass lost sales or overstock. 

Thrive Technologies is committed to solving supply chain issues for inventory-intensive companies without requiring expensive risky software implementations. Thrive has developed patent-pending technologies that leverage digitized inventory data and machine learning to reduce lost sales by at least 50 percent and prevent up to 90 percent of the accumulation of dead stock. Thrive’s inventory solutions are live within days, integrate closely with clients’ ERP systems, and provide unprecedented agility in managing unpredictability and change in demand and supply chains.