Inventory on the Rise

At Libero we believe Inventory to Turnover Ratio (ITTR) is the most powerful metric when it comes to measuring inventory as it enables comparison of inventory levels relative to turnover over time. To only measure total inventory value is, in our experience, pretty meaningless – without knowing how turnover has moved it is impossible to ascertain whether increases or decreases in inventory are proportional to changes in turnover.

We firmly believe that all businesses should be looking to reduce their ITTR year on year. Every business wants to grow their turnover and margin year on year, so why would they not want to reduce their ITTR? We have worked with many businesses that had a broad desire to “reduce inventory”, however these businesses proceeded without first assessing their historic inventory levels in relation to turnover, which just led to a directionless quest to hit an arbitrary inventory value.

Often reducing ITTR will mean that inventory can increase, in these situations it just needs to increase at a slower rate than turnover. Likewise, where turnover is decreasing, businesses may need to accelerate their rate of inventory reduction for ITTR to keep pace. The critical point here is that it’s the relative value of inventory compared to turnover that is critical.

We have studied the historic ITTR levels of 747 manufacturing firms across the North West, North Wales and Shropshire. Collectively these firms generate £57.6BN in revenue (ranging from £1M to £4.1BN) and hold £7.3BN in inventory (ranging from £45K to £350M). As the chart below shows, collective ITTR has been on the increase over the last decade:

ITTR was generally steady between 2014 and 2020, fluctuating between 10.6% and 11.7%. It then spiked up to 12.6% in 2021 before peaking at 13.5% in 2022. There was a slight fall back to 13.2% in 2023, however current levels are still some way ahead of the historic average. Based on the results we have seen so far for 2024 there does not appear to be any significant improvement vs 2023.

Average ITTR for the 7-year period 2014-2020 was 11.3% meaning 2023 levels were 1.9% higher. If 2023 ITTR had held around 11.3% collective inventory would be £6.1BN – however the reality was collective inventory of £7.3BN, meaning the 747 firms in our sample are collectively holding £1.2BN more inventory than they should be! Given average holding costs of 25% this means £303M annually is being spent on carrying this additional inventory.

Of the 747 firms in our sample 70% have increasing ITTR – so the issue is impacting the majority of firms. If we only consider those firms with increasing ITTR the collective inventory increase is £1.9BN, at an annual holding cost of £475M. These are huge numbers and point to the fact there is an endemic problem with inventory management in the UK.

Although there are obviously “outliers” within the scope of this analysis, the general trend simply cannot be ignored.  With the economic challenges that are currently being felt all across the UK, the financial scale of ITTR on an national basis is potentially HUGE!

As a business you simply cannot afford to ignore the fact that by improving your ITTR you could be gaining a significant competitive advantage.

Libero are experts in reducing and optimising inventory in organisations of all sizes. If you would like support in reducing and optimising your inventory, to reduce holding costs and improve your cash position, get in touch with us today!