Inventory Turnover
Thomas Mungovan (Director of Finance, VideoIQ, Inc.)
| Jul 2, 2010We're a venture-backed hi-tech manufacturing company. The question of inventory turnover frequently comes up both internally & externally.
Given that we are an early-stage company, with long procurement lead times and variable product mix, we think that the minimum inventory turnover we can achieve at this stage is 4X per year. Otherwise, we risk stocking out.
Just curious what kind of inventory turns others have at startup high-tech companies that carry inventory?
Answers
Company:
I have been at at number of inventory-carrying startups and our turns varied wildly depending on where we were in our sales life cycle and in our production cycles. This is driven by having more in the way of "batch mode" manufacturing rather than predictable, continuous manufacturing you get with more established companies and more stable products.
Just prior to a delivery we may be at 10+ turns b/c we're milking an old production run, running low on inventory, and waiting as long as possible for re-supply. Immediately after re-supply we may be at 1 turn based on trailing sales, but if you are growing rapidly that could be more like 4+ turns of forward-looking estimates (in fact, speaking of metrics, forward-looking turns is a good one for the board). So there are many ways to slice this. I always found that production volume management was one of the tougher things for my startups b/c you don't know the future. The CEO and even the Board would get involved from time-to-time b/c the dollars were so large.
If you are looking for a target, you already know the answer: the higher the better. But that's not helpful. I think you really need to determine what is right for your company's very specific place in time/market.
Company: VideoIQ, Inc.
Thanks for the input regarding optimization of inventory turns at an early-stage environment. As suspected, there is no single right answer. The issue of inventory is industry specific, and dependent on a number of other variables governed by customer/vendor preferences, availability of credit and financing and size & growth rate of the company. I think the key input (to paraphrase Keith) is that a company should be more concerned about improving the process, and not striving to achieve a number, which may or may not be an appropriate measurement of the particular company.
Company: Lyris, Inc.
Thomas, Mark's comments are spot-on -- worry less about a # and more about what can be done to improve it. As CFO for Magellan Navigation, I worried more about the overall cash cycle (calculated by adding DSO to DIO (days inventory outstanding) and subtracting DPO (from this sum days payable outstanding.) Used it to measure how quickly we turned sales into cash.
There are two basic disciplines in managing cash cycle: 1) contractual terms with vendors and customers, and 2) inventory turns.
Due to the fact that the high tech industry can be material intensive, inventory management is the most important factor in achieving cash cycle improvements. Look at each of the elements, set an improvement benchmark, hold an exec responsible for securing improvements in their area (i.e., longer DPO or other) and then report and monitor improvement from your current (yes, seasonality plays a part...)
Keith
Company: in-between
There is no simple answer. You stated that you are an early-stage company, with long procurement lead times and variable product mix. At this stage you may want to carry inventory so that you can quickly fill orders for new customers. Customer satisfaction and increasing revenues may be more important in the short run than low inventory turns. However, don't go overboard as inventory adversely affects cash flow. In addition, excess and obsolescence are always ready to bite you.