What Does It Mean?
Stock turnover measures how much of your inventory you can sell in a given time period. The KPI can be measured in weeks, months, or years, and is useful for evaluating supply chain efficiency as well as identifying areas for cost savings.
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Why Does It Matter?
As a retailer, it can be tempting to keep every product stocked all the time. While it’s an attractive proposition, it also means that you can rack up significant costs if your inventory isn’t being converted to sales effectively. Inventory turnover can help you determine if you’re ordering the right amounts of products, and how quickly you are moving it. A low stock turn is a sign that you’re not selling enough, while a higher number may indicate you’re not stocking enough products.
How Do You Measure the KPI?
To measure your stock turnover ratio, you need two major components: the total cost of all the goods you’ve sold over your desired timeframe and the average inventory for the same period. To determine your stock turn, simply divide the cost of goods sold by the average inventory.
A higher number means you’re likely under-stocking your products and running out constantly, while the inverse might imply that you’re buying too much inventory and losing money on dead stock.
What Sources Would You Use to Measure the KPI?
To get a reliable measure of your inventory turnover, you can take data from many of your retail analytics tools. This includes standard inventory data including cost of products, number of goods purchased, and the cost of the inventory you’ve sold over the specified period.
Give Me an Example…
Let’s say you are a smaller retailer and are quickly becoming more popular. Your products are flying off the shelves, but you notice that you seem to constantly be out of products before your scheduled re-ordering period.
By calculating your stock turnover ratio, you can determine whether it’s a factor of your newfound popularity and increased demand, or if you’re simply not buying enough inventory to keep up with existing sales. Your inventory turnover can help you find the right balance of inventory orders to stay fully stocked without wasting capital on products that aren’t selling.
What Benchmark/Indicators Should I Use?
- Total cost of goods sold
- Total goods sold
- Cost of inventory
- Average inventory
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