In distribution-centric organisations, inventory levels are perceived as a critical measure of the system’s health (inventory relative to sales). The traditional measure is Inventory Turns = Annual (or monthly) Sales/Inventory on hand (on a particular day).In companies that implement a ‘pull’ based replenishment solution, items under replenishment at stocking locations are maintained within buffer norms. The norm level is distributed equally in three zones - Red, Yellow and Green, with Red being the bottom 33% of the stock level, 33%-66% is Yellow, and the last band of Green is from 66%-100%. Upon depletion (consumption) of the buffer stock, the items are replenished in quantities equal to the depletion (consumption). The norms are increased only when there are continuous penetrations into the Red zone, while they are decreased only when the stock levels remain in the Green zone for a long period. The increases are in line with 1/3rd of the current buffer norm. This mechanism of changing norm levels is called Dynamic Buffer Management (DBM).Companies report the terminal inventory at the end of a period - a month, a quarter or a year. This measure is also used to evaluate and appraise managers. The higher the terminal Inventory Turns reported, the more effective the management is perceived to be. Let us examine how managers can report good numbers:  • Finished goods (FG): The sales team manages the organisation’s environment so that a large chunk of sales occurs near month/quarter/year-end. In some cases, as much as 40% of the total sales are achieved at the period-end peak. This flushing out of the FG stock reflects a very healthy (low inventory and high turns) performance. • Raw materials (RM): Entry of RMs into the plant is controlled by issuing instructions to suppliers to keep the material ready and deliver on the first day of the next month. This ensures that RM’s period-end inventory is low. The same material arriving 2-3 days later gives the illusion that the plant is operating on low Inventory Turns. • Work-in-progress (WIP): The plants produce to meet the high sales requirement mentioned in the first point above and act accordingly for RM inventory, thus ensuring that the WIP in the plant is minimal when the stock is taken for reporting purposes. It is quite evident what the combined effect of points 1, 2 and 3 above is; however, more importantly, such a practice does not affect cash flow, which is one of the objectives of having higher Inventory Turns.<h2> </h2><h2>What are the negative ramifications of actions which are seemingly so good from the reports?</h2>In a distribution environment, a key enabler of sales is availability. When inventories are depressed at the period-end, the availability of high runners suffers from any incremental sales increase. Because inventory is easier to measure and review than lost sales, pushing for higher Inventory Turns takes precedence over lost sales.This practice of managing Inventory Turns with terminal Inventory Turns has other significant ramifications. In plants, RM shortages (created by holding off supplies at month-end) can lead to significant rescheduling. Rescheduling leads to deterioration of on-time delivery performance. It also leads to a subsequent increase in WIP and production lead times, and consequently a decrease in plant output, potentially resulting in a loss of throughput.Similarly, in the case of distribution, the behaviour leads to increased unavailability at specific locations. This unavailability leads to lost sales and lost customers. In non-negligible cases, it can also lead to permanent loss of customers. Moreover, it creates the impression of lower stock levels at this location and could lead to either expediting supplies or increasing buffer norms.Other significant problems can be present in managing a supply chain based on such measures of inventory days:  If actual inventory remains the same and sales drop, the number of days of inventory goes up, which creates an impression as if the inventory has actually gone up, but it is the same (the warehouse has the same no of crates as before!!). The managers swing into panic mode, which may create further jeopardy for future sales. The sales figures used for days of inventory are actually a trailing average of the past, and future sales are a different reality. By using Inventory Turns for decision-making, the managers assume that the past reflects what the future will be… which is again an erroneous assumption. Sales may drop or rise for reasons unrelated to past sales – so taking decisions on days of inventory can actually be erroneous! It is like rear-view mirror driving.The most critical question is whether we can achieve permanent, sustainable improvements in Inventory Turns with these practices. Companies want a permanent and sustainable reduction in Inventory Turns. They want a concrete process to make this happen, not the cosmetic approach described above. So, how do top managers ensure there is a systematic and continuous process to reduce Inventory Turns, and that the change is permanent and sustainable?<h2> </h2><h2>Introducing Norm Turns!</h2>What is Norm Turns? It is analogous to Inventory Turns, but with reference to buffer norm levels rather than actual inventory levels. Thus, the formula is Norm Turns = Annual Sales/Sum of all Buffer Norms.The sum of all buffer norms exists as an absolute entity, independent of the system’s stock levels; it changes only when the norms are changed. Thus, to achieve lower Norm Turns, managers have to lower the norm levels of many items rather than take cosmetic actions to adjust inventory figures.Norm levels are determined as (peak demand during the replenishment period x replenishment time x a safety factor for demand and replenishment time variability).The standard operating procedures in a ‘pull’ based replenishment environment like this, allow a reduction in the norm only if the stock levels are Green for a prescribed period, say, two replenishment periods. Since the stock position at any link in the supply chain is a function of supply service level and consumption, this can happen only if:<ol><li>Replenishment time is decreased, or</li><li>Demand has decreased.</li></ol>No company would decrease the demand. Hence, the parameters for decreasing buffer norms are only replenishment time and the safety factor. If the replenishment time is reduced, then: <ul><li>The norm level can be decreased by a factor of the reduction in replenishment time.</li><li>The safety factor can be reduced as the demand variability over a shorter period is lower.</li></ul>The effects mentioned above result in a reduction in norm levels, which in turn increases Norm Turns!Since the replenishment SOP ensures that supplies are always topped up to the max of Green level (no IRD), an increase in Norm Turns ensures an increase in Inventory Turns! The inventory levels maintained are now within a lower level of the buffer norm.This takes the managers’ attention away from the cosmetics of inventory management for the sake of reporting to actual improvements in the system, which will be evident in reduced norms.To conclude the key to improving Norm Turns is to decrease replenishment time.  The replenishment time can be decreased by:  •    Improving the availability at the source points, such as the plant warehouse, the regional warehouses or the supplier’s FG warehouses. Poor availability increases the time interval between two supplies for an SKU. •    Decreasing transportation time: Innovative work on transportation routes, modes, and the transporter’s contract can reduce the transportation time. •    Increasing replenishment frequency can be achieved through innovative and efficient route and transportation planning, as well as transporter contracts. The frequency can also be increased with an increase in sales. An increase in sales will lead to more volumes/trucks being dispatched. Sales can increase with greater product range, market reach, and marketing activities.In the case of RM, an increase in replenishment frequency can be achieved by decreasing the supplier’s supply batch sizes, having a FG warehouse at the supplier, etc.Decrease order lead time by building systems that enable daily consumption reporting.Importantly, all the above can only be achieved by taking up improvement projects and ensuring the improvement achieved is permanent. This is POOGI (Process Of Ongoing Improvement) - identifying areas of improvement and ensuring a permanent change.If and only if the above actions are accomplished will the Norm Turns increase, and thereby, the Inventory Turns permanently and productively.To summarise, the critical aspects for a sustainable increase in Inventory Turns are:  •    Decrease in Replenishment Time •    Dynamic Buffer Management •    POOGI  The vehicle to achieve the sustainable improvement in Inventory Turns is Norm Turns.

Key Takeaways

In distribution-centric organisations, inventory levels are often perceived as a critical measure of the system's health (inventory relative to sales). However, norm turns - not inventory turns - are the right indicators. Find out why.

From Inventory Turns to Norm Turns

Problem: Inventory Turns are often manipulated through cosmetic actions, such as timing sales, raw material deliveries, or production to report better numbers at month-end. This misrepresents system health, harms availability, disrupts operations, and leads to poor decision-making based on outdated or misleading data. Solution: Shift focus from Inventory Turns to Norm Turns - a ratio of sales to buffer norms under dynamic buffer management. Reduce norms sustainably by decreasing replenishment time, increasing replenishment frequency, improving availability at source points, and enabling better demand visibility through daily consumption reporting. Benefits: This approach ensures genuine, permanent improvements in inventory efficiency, improves product availability, enhances operational flow, reduces lead times, and enables better decision-making. It fosters a healthier supply chain while aligning inventory practices with true system performance.

<h4>From Inventory Turns to Norm Turns</h4>

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Learn how reducing replenishment time, 'Norm Turns', and Dynamic Buffer Management (DBM) drive permanent supply chain and inventory turn improvements.