I recently read that Apple averaged an inventory turnover ratio of 74.1 over the past year. That is more than double the nearest technology company Dell, which has a ratio of 35.6. What this means is that every five days Apple is selling every product in its inventory at all of its stores around the world. The logistics of this feat are astounding.
But just because something is right for a big business like Apple doesn’t mean that it’s right for everyone. Don’t get me wrong, having a really high ratio in the 30s or 70s is definitely a great way to cut down on storage costs and other liabilities. But it also heightens risks of shortages, supply chain disruptions, and more. Let’s talk about these and hopefully we’ll discover what the ideal inventory turnover ratio is for your business.
Shortages and Customer Loyalty
If an Apple store temporarily runs out of iPads, iPods or other products, customers aren’t likely to go buy a Kindle or Blackberry instead. Apple customers are often fiercely loyal to their favorite brand, so they’ll simply come back later or go to another high-tech retailer to find what they’re looking for.
Most companies don’t have that luxury. If a customer can’t find a certain product at one department store, they’ll probably buy it from a competitor or decide they don’t need it after all. Having a tight inventory management strategy means you have no room for error when it comes to having the right inventory level at all times. Some companies simply don’t have the resources to make that kind of strategy work, so they err on the side of caution.
Supply Chain Management
Apple CEO Tim Cook has focused so much time on improving the company’s supply chain management over the years that he has helped Apple become more nimble than any other technology company in history. They constantly have products coming in to perfectly cancel out the products that are being sold each day.
This consistent stream of orders isn’t necessarily the best practice for every business. You might prefer to buy certain products in bulk and save on shipping costs rather than having to order a larger number of small shipments. It’s a tradeoff that every business owner needs to carefully weigh. Just make sure that the products you buy in bulk are big sellers because if they’re not then it’s probably not a good deal to get a lot of them at one time, even if it seems like it at first.
Why Is Apple Successful?
Is Apple successful because of its high inventory turnover ratio or does its high inventory turnover ratio reflect its success at making products customers really want? I think it’s a bit of both. Most companies never approach Apple’s level of inventory turnover because they aren’t as committed to running as efficiently as possible. They prefer to leave themselves a little more wiggle room in case their calculations are off or in case of emergencies. There’s nothing wrong with that.
What You Should Do
You don’t have to shoot for turning over your inventory every week. Depending on your industry, you might better off trying to turn it over once a month, a few times a year, etc. Probably the best way to find out your ideal inventory turnover ratio is to use inventory management software. It can help you figure out which products are selling better than others, enabling you to adjust your ordering processes to keep optimum amounts of each product on hand.
Apple definitely uses sophisticated inventory software to handle its worldwide operations. You probably don’t need something as complex or expensive as what they have, but it is good to invest in software that you can keep using for many years to come.