Friday, October 30, 2015

Inventory-To-Sales Ratio......ANOTHER PESKY FACT !

Inventory-To-Sales Ratio

The crucial inventory-to-sales ratio, which shows how long merchandise gets hung up before it is finally sold, has been getting worse and worse. In July last year, it was 1.17. It hit 1.22 in December. Then it spiked. In August, it rose to 1.31, the level it had reached just after the Lehman moment in 2008.

Inventories tie up cash. So inventory management is a data-driven obsession. Companies that are optimistic about sales prospects stock up. But when sales fall instead and hopes hit reality, inventories balloon and the inventories-sales ratio rises. And now it has risen to ugly levels.

When inventories get out of hand, they become a nightmare, and whittling them down often means big price cuts and write-offs, euphemistically called "inventory adjustments." Cash down the drain.

The ratio had been much higher back in the day. But computerized inventory management and ordering systems that replaced index-card systems allowed businesses to reduce their stocks while improving sales. The wholesale inventories-sales ratio declined over the decades. It reached 1.14 in October 2005. After the turmoil of the Financial Crisis, the ratio dropped to 1.13 in early 2011.

But the trend has once again reversed. And the last two times the inventory-sales ratio reached this level, all heck was breaking lose:

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