In brief
Inventory turnover indicates how often the average stock is consumed and replaced within a period, usually a year.
Contents
What is Inventory turnover?
Inventory turnover is a key metric of inventory management. It relates the consumption or cost of materials in a period to the average stock. A high turnover rate means that little capital is tied up in stock; a low one indicates high stock levels or slow-moving items.
The usual formula is: inventory turnover = consumption at cost price ÷ average stock. The average stock is calculated from opening and closing stock or, more precisely, from monthly values. From this, the average storage period is derived: 360 or 365 days divided by the turnover rate. Example: if the valued annual consumption is three times as high as the average stock, the result is a turnover of 3 and a storage period of around 120 days.
For spare parts stores, the metric should be read with caution. Critical parts with infrequent demand naturally have a very low turnover but secure the availability of important plants. It therefore makes sense to look at part groups separately, for example consumables, wear parts and strategic spare parts.
In practice: maintenance and procurement
Before spare parts are run down because of low turnover, it should be checked which plants they safeguard and how long their replenishment lead time is. Genuine shelf warmers are often parts for machines that have already been decommissioned, which can be identified by comparing stock with the asset register.
Synonyms and abbreviations: stock turnover · inventory turns · stock turn rate · turnover rate
Frequently asked questions
How is inventory turnover calculated?
You divide the consumption in a period, valued at cost price, by the average stock in the same period. If the valued annual consumption is three times as high as the average stock, inventory turnover is 3. For individual items, you can also calculate with quantities instead of values.
What is a good inventory turnover?
There is no generally applicable target value. The metric depends heavily on the sector, product range and purpose of the store. Consumables turn over much faster than strategic spare parts held for rare failures. The comparison over time and between similar item groups within the company is what is most meaningful.
How are inventory turnover and storage period related?
The average storage period is obtained by dividing the days of the period under review by the turnover rate. With an annual turnover of 4, an item is in stock for around 90 days on average. As turnover rises, the storage period falls, and with it the capital tied up.