Does a Company Want High or Low Inventory Turnover?
Companies that have low inventory turnover are not moving product through the marketplace quickly. Companies that have high inventory turnover have excellent sales, and are moving inventory quickly. Ultimately, the turnover rate with the highest return is the best rate for any business. At least this is the case when a company is not achieving high inventory as a consequence of missing out on the discounts they could receive for ordering inventory in larger quantities.
Determining the best-case scenario for a business requires knowledge of the market and of how the market responds to the given offering.
Market demand has a major influence on turnover rates. High-demand products turn over quickly, and in many cases, they maintain the expected margins. Low-demand products turn over slowly. Low-demand products can still maintain great margins, and competition is often lower, as well.
A small market is not necessarily a bad market.
Low turnover is not desired for products that have low margins because if a company must make a large number of sales to turn a profit, low turnover ensures they will not be able to do this. Low turnover is perfectly normal, though, and it is acceptable for specialty items that have high margins and high retail prices.
Ideally, a company will turn over the maximum number of items possible in a given market. Selling a highly specialized medical instrument is likely to have low turnover with high profitability, whereas selling a simple phone case accessory, will require a high turnover rate on tight, competitive margins to make a profit.
Understanding the way the market for a product behaves will help you to determine whether or not a low turnover is a good or bad thing for a business.
Typically, high turnover rates are a healthy sign of a strong market and are a great sales strategy. However, high turnover does have a dark side. Reducing prices to the point that the margins are extremely low, which is often the strategy used to drive higher turnover rates, will negatively affect your profit on each sale.
It will also affect the market as a whole as competitors may be forced to reduce their rates to compete with you. In time, the market will become conditioned to the lower rates.
Ultimately, high turnover, at little to no margin, is not good for anyone except the consumer. Eventually, the negative effects may even reach the consumer, as businesses reduce manufacturing quality to remain solvent and stay above water.
The ideal turnover rate returns the highest profit margin - the amount earned on each unit sold.
A company that's maximizing turnover rates without sacrificing its margins is growing and driving revenue. A company with high turnover and ever-decreasing margins is not sustainable. A company with low-turnover rates and low-margins is not a great scenario, either.
Strive for high-turnover at a high-profit margin, with a sustainable business model to maximize long-term viability and profitability.