Turns, Turns, Turns Part II
Make your vendors work for you and free up cash at the same time. Here's how.
By Robert Ain
In the December issue, I talked about dealer inventory turnover rates, and equated them with the month's supply of product on hand.
To recap, a true measure of success is how well a company uses its assets (return on equity). If you lower your inventory, you'll free up dollars that can be invested in other parts of your business—more trucks, more installers, an additional location, other income-producing investments.
How well do large businesses manage their inventory? Let's take a look.
These large consumer products dealers have the following inventory turnover rates and gross profit margin percentages (all numbers are based on the last four quarters of the latest published financial numbers available at the time of this writing):
Dealer Inventory Turnover Gross Profit Margin
Wal-Mart 7.33 23.76%
Best Buy 6.17 23.78%
Circuit City 4.50 24.70%
Tweeter 4.25 39.45%
Tiffany's 0.98 55.26%
Note: Not all gross margin numbers are created equal. Discounts one dealer might use to offset ads and promotional costs might be used by another as a cost of goods reduction.
The turnover leader here is Wal-Mart. Why? Here's an example from a November 13, 2005, New York Times article: "More than a third of all DVDs (and more than 50 percent of some titles) are sold at Wal-Mart stores…Part of the genius of Wal-Mart's distribution system is its ability to keep track of every detail; Wal-Mart computers know exactly where every individual unit is, in which store, at any given time. This lets the chain maintain inventory at optimum levels—neither too much on hand, nor too little." Wal-Mart controls its inventory and keeps it at optimum levels. It's a very well-run business operation with great turns and great use of its assets.