What Are Inventory Turns?
Inventory turns, also known as stock turnover, is a measure of how quickly a company is able to move its stock from inventory to sales. It is calculated by dividing the cost of goods sold (COGS) by the average value of the inventory held during a specific period. By keeping track of inventory turns, companies can determine how efficiently they are managing their inventory and make adjustments accordingly.
Understanding Inventory Turns
Inventory turns measure how quickly a company is able to move its stock through its supply chain. A higher number of inventory turns indicates that the company is able to move its stock more quickly and efficiently, while a lower number suggests that the company is not managing its inventory as well. For example, if a company has an average inventory of $10,000 and its COGS is $1,000, its inventory turns is 10. This means that the company has sold 10 times the value of its average inventory during the period in question.
Calculating Inventory Turns
Inventory turns can be calculated using the following formula:
- Inventory turns = COGS ÷ Average inventory value
In this formula, COGS represents the cost of goods sold over a given period of time, and the average inventory value is the total value of the inventory held during that same period.
Improving Inventory Turns
There are a number of ways to improve inventory turns, such as:
- Accurate forecasting: Accurately forecasting future demand can help companies avoid holding onto excess inventory.
- Optimizing inventory levels: Companies should strive to keep just enough inventory on hand to meet customer demand without having too much or too little.
- Implementing just-in-time (JIT) inventory control: JIT inventory control involves ordering inventory just as it is needed, reducing the amount of inventory that needs to be stored and managed.
By utilizing these strategies, companies can improve their inventory turns and better manage their inventory.
Conclusion
Inventory turns is an important measure of a company’s ability to manage its inventory efficiently. By accurately forecasting demand, optimizing inventory levels, and implementing JIT inventory control, companies can improve their inventory turns and better manage their inventory.