In the last article, we learned the importance of inventory management by realising the misconceptions about a lab inventory that affects performance. In this article, we will focus on the important parameters that you must jot down to evaluate the health or efficiency of inventory management for better outcomes for your lab.
The first parameter to track is the inventory turnover ratio. This is not at all a new concept. The majority of manufacturing companies use this parameter religiously to improve business performance. So, we will discuss how it can be applied in inventory management and mainly how it helps you.
Inventory Turnover Ratio
Inventory turnover ratio is the ratio of total sales to the cost of goods. In the diagnostics business, it is basically revenue from tests divided by the cost of the stock required to perform these tests. In simple language, it tells you - for every rupee spent on stock, how much money you made from selling the tests (that utilised the same stock).
Inventory turnover ratio = total revenue by selling the test/cost of stock required to perform the test
Tracking Inventory Turnover Ratio
Let’s take multiple case scenarios - how they can be tracked with just one parameter inventory turnover ratio. This is where we will discuss how multiple issues that labs face in inventory management can be covered by this single ratio.
- Wastage due to expiry
- Wastage due to leakages
- Wastage due to device inefficiency
The above ones are the major challenges in managing inventory efficiently. Now we will see how these things affect the inventory turnover ratio. Mainly, how one parameter can be a tracker for three major problems in your inventory.
Note: 100/70 in case 1
These tell u if your m-o-m ratio is decreasing, there is a problem with the system regarding expiry, leakage or device inefficiency
You can see in the above example when there are no losses, then the inventory ratio is 2.00 which tells, you earned Rs.2 for every Rs.1 spent on stock. And in other cases, the inventory turnover ratio reduced from 2.00 to 1.43.
So by tracking just one parameter ‘inventory turnover ratio’ you can conclude whether you are improving on the inventory front or not
The second advantage is, if you have multiple lab locations, this parameter helps compare inventory performance across all your lab locations. If one lab is performing really well with this parameter it can help other labs to adopt the method, knowledge and approach that this lab is utilising to do better.
The above picture is an example of the same. The graph shows a comparison view of a lab having different centres in Mumbai, Pune and Delhi. The trends show the inventory turnover ratio for each centre for high-level analysis and decision making.
Advantages of Inventory Turnover Ratio
In nutshell below are the advantages of the inventory turnover ratio
- You know on a month on month basis how much money you made for every rupee spent on stock. As per the above example, the best month was March where for Rs.1 spent on stock, you made Rs.4
- You have to follow the Inventory turnover ratio for tracking the health of inventory. That means, your team has to maximise this ratio in order to increase margin and be more competitive in the market
- Compare labs at multiple locations to see which is performing better and which needs to be reconsidered with similar methods and knowledge.
Hope you are clear with the first parameter and familiar with its importance. If you have any questions, please drop them in the comments.
We will be talking about the second parameter in our next article.