What is Inventory Turnover? Inventory turnover measures how many times your inventory is sold and replaced during a specific period. It's a key metric for evaluating inventory management efficiency and identifying potential issues with overstock or understock situations.
Key metrics explained:
- Inventory Turnover Ratio: Calculated as Cost of Goods Sold divided by Average Inventory. Higher ratios generally indicate better inventory management, as it means you're selling inventory more quickly.
- Days Sales of Inventory (DSI): The average number of days it takes to sell your entire inventory. Lower numbers are typically better, indicating faster-moving inventory.
- Inventory-to-Sales Ratio: The ratio of your inventory value to your total sales. A lower ratio typically indicates more efficient inventory management.
Industry benchmarks: Typical inventory turnover ratios vary significantly by industry:
- Grocery stores: 12-14 times per year (high turnover due to perishable goods)
- Retail: 4-6 times per year
- Manufacturing: 7-9 times per year
- Wholesale: 6-8 times per year
- Furniture: 3-4 times per year (lower turnover for higher-ticket items)
Tips to improve inventory turnover:
- Implement just-in-time inventory management
- Use inventory forecasting to anticipate demand
- Identify and liquidate slow-moving or obsolete inventory
- Optimize your reorder points and quantities
- Improve your sales and marketing efforts for better turnover
- Consider vendor-managed inventory for key products
- Implement inventory management software for better tracking
Note: While a high inventory turnover ratio is generally positive, extremely high turnover might indicate understocking or stockouts that could be causing lost sales. Balance is key.