Definitions

turns over

Inventory turns

In business management, inventory turns often referred to as stockturn,stock turns, turns, and stock turnover.

This measures the number of times invested in goods to be sold or used over in a year.

mbox{Inventory Turns} = frac{Cost of Goods Sold (over a given period)}{Average Inventory(for the period)}

An item whose inventory is sold (turns over) once a year has higher holding cost than one that turns over twice, or three times, or more in that time. The purpose of increasing inventory turns is to reduce inventory for three reasons.

  • Increasing inventory turns reduces holding cost. The organization spends less money on rent, utilities, insurance, theft and other costs of maintaining a stock of good to be sold.
  • Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant.
  • Items that turn over more quickly increase responsiveness to changes in customer requirements while allowing the replacement of obsolete items. Which is a major concern in fashion industries.

However high turns may indicate that the inventory is too low. This often can result in stock shortages.

Note

Some computer programs measure the stock turns of an item using the actual number sold.

mbox{Inventory Turns} = frac{Number of Units Sold (over a given period)}{Average Number of Units (For the period)}

In practice this tends to be confusing and can give misleading results if averaged out over a department.

Also sometimes we measure stock turn rates based on annual sales at retail divided by average inventory at retail. This measurement, is sometimes available in computer systems, is based on the value that your customer perceives product (actual selling price which may include markdowns) and the value of your inventory. These computer systems can devalue inventory as markdowns occur even before they are sold. One valid reason for using retail for these calculations is that if a $100 retail-priced item (that was $50 at cost) is now only worth $80, then the retailer would find it difficult to pay $50 for an item only worth $80 to customers.

Retail-calculated stock turns rates tend to be lower than those calculated at cost.

The important issue is that any organization should be consistent in the formula that it uses.

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