Talk:Inventory turns

It is also possible to measure stock turn rates based on annual sales at retail divided by average inventory at retail. This measurement, also 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. from Mygolfretailguru 02:44, 7 June 2007 (UTC)

Note I moved the comment above to the discussion page. BernardZ 03:48, 4 July 2007 (UTC)

"...for a given period", must be one year
In order for this metric to be compared, cost of goods must always be over one year or annualized. The denominator can be average inventory or current inventory. The text says this, but the formula does not. It should not say "(Cost of goods for a given period)". The formula should say "(Annual or annualized cost of goods)". The denominator should say "Average or Current Inventory". It should be pointed out that "inventory" in this case includes raw material, work in process, and finish goods.

EXAMPLE Let's say cost of goods sold was constant over a year, say $10,000 per month. Average inventory for the first six months was $20,000 and for the second six months was $10,000.

Average inventory over the year would be $15,000

Cost of goods for the year would be $120,000 Cost of goods over each six months would be $60,000

By the formula listed the inventory turns for the year would be-

$120,000/$15,000 or 8

for the first six months it would be

$60,000/$20,000 or 3

For the second six months it would be

$60,000/$10,000 or 6.

Clearly it does not make sense for the metric to be better for the year than for the best half year. Using the annual cost of goods as the numerator the inventory turns would be 8, 6, and 12 respectively. Clearly more respresentative of what went on.

Using averages represents a smoothing of the current inventory turns. Annualizing the cost of sales in the current month and using the current inventory gives the current picture of the inventory velocity. It also diminishes the impact of sales increases of decreases over the previous year on the metric.

Care must be taken not make this metric so important that deliveries are scheduled into the following month just to make it look good. That would be a violation of lean thinking.

Inventory turns should always be used with a metric for stock-out or the materials management group may look good at the expense of those downstream.

Related Metrics-

Sometimes, inventory turns of finished goods is a metric. The metric should clearly be labeled as "Finished Goods Inventory Turns". The formula would be "(Annual or annualized cost of goods)"/"Average or Current Finished Goods Inventory".

Occasionally, "Raw Materials Inventory Turns" is used. Often the same numerator, "(Annual or annualized cost of goods)", is used. This only makes sense if material cost, as a percent of sales, is fairly constant. A better numerator would be annualize raw material purchases. In either case, this is a metric of questionable value since it is highly influence by make/buy decisions.Umusbkraz (talk) 22:23, 29 September 2008 (UTC)

Another related metric is days of inventory: 365 days per year/turns per year. —Preceding unsigned comment added by 169.128.252.104 (talk) 20:35, 21 January 2009 (UTC)