Should turnover use revenue or cost?

Stock is carried at cost, so the numerator should also be at cost (cost of goods sold). Using revenue overstates turnover by the margin.

What is a good turnover?

It varies a lot by sector and product: high for fast-moving consumer goods, low for spare parts, and both are natural. Comparing your products with your own history and with the ideal turnover the plan implies is more meaningful.

How is average stock found?

Most accurately as the average of month-end stock values over the year. Using only the start and end of the period can miss seasonal stock build-up.

How to calculate inventory turnover

Inventory turnover and days-of-inventory formulas, movement classes, ideal turnover and the cost of money tied up in stock; with an example and a calculator that runs in your browser.

Inventory turnover tells how many times a year the stock is completely sold and replaced. Low turnover means money waits on the shelf; high turnover means stock turns fast. Very high turnover may also mean a higher risk of running out, so it is read together with the service level, not alone.

Formulas

turnover            = annual cost of goods sold / average stock value
days of inventory   = 365 / turnover
annual holding cost = average stock value × annual holding rate

Example

Annual cost of goods sold 6,000,000, average stock value 1,500,000, holding rate 25%.

turnover            = 6,000,000 / 1,500,000 = 4 times a year
days of inventory   = 365 / 4               = 91 days
annual holding cost = 1,500,000 × 0.25      = 375,000

Stock is replaced every three months and keeping it on the shelf costs 375,000 a year. If stock could be reduced by 20% (turnover would rise to 5), that would save 75,000 a year and free 300,000 of cash.

Movement classes

Class	Turnover	Meaning
Fast moving	6 and above	Stock is replaced every two months or more often
Normal	3 – 6	Every two to four months
Slow moving	1 – 3	Between four months and a year
Dead stock	Below 1	Stock takes more than a year to clear or does not sell at all

Ideal turnover

Whether a turnover of 4 is good depends on the product’s plan. For a product managed with a reorder point and order quantity, stock moves between the safety stock and safety stock + order quantity. Its average:

ideal average stock = safety stock + order quantity / 2
ideal turnover      = annual cost of goods sold / ideal average stock value

If the actual turnover is far below the ideal, more stock is held than the plan requires; the difference is stock that can be run down.

In VidiStock

VidiStock calculates turnover per product, category, product attribute and warehouse, with annual demand from the latest forecast run and stock value from the current balance. Every product’s ideal stock and ideal turnover come from its plan; the gap between stock value and the ideal and the annual cost of that gap are shown. The turnover trend over the latest forecast runs is tracked too. Details: Inventory turnover.