Ok, I grew up in the 60’s (well very late 60’s) and 70’s. There was a song by the Byrds called Turn, Turn, Turn… Which has almost nothing to do with today’s post, except I liked the title and we are going to talk about the concept of Inventory Turns (ah, makes sense now, right) So it is one of the most commonly used terms in manufacturing management and should be understood by every retailer in America. To calculate your Inventory Turns (turnover) on an annual basis, divide the annual cost of sales (you are doing you COGS right, see our last post entitled, “IT’S CALLED COST OF GOODS SOLD FOR A REASON!!” for more details on that) by your Average Inventory Level. This produces a number. For example, if I had cost of sales of $1,000,000 and my Average inventory was $250k, I turned my inventory 4 times.
Is that good or bad? The answer depends on what you are selling. If you are selling milk, not good. If you are selling Redwood trees, could be OK. The point is the faster the turns, the harder you inventory is working for you. If you are in a seasonal business, consider looking at turns by department or even at at item level. For example, if you are a garden center, knowing your turns on your 6 pack of annuals will ensure you order enough to cover your season, but on the other hand, you don’t want to over order chemicals. Understanding how items or departments turn is fundamental to running a successful retail store.
In our future articles, we will cover some specific measures of making sure your inventory works as hard as you. Oh and it goes without saying that you want to make sure your Point of Sale system provides actionable reporting, such as a turns report. More on that in the future as well.