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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

Inventory Turn Rate

The inventory turn rate (ITR) is most commonly expressed as the ratio of the cost of goods sold (COGS) to the average inventory value (AIV).

ITR = COGS/AIV

For example, if a company experiences cost of goods sold of $412,000,000/year and maintains an average inventory value of $83,000,000, then its inventory turn rate is:

ITR = $412,000,000 / $83,000,000 = 4.97 turns per year

To differentiate it from retail and unit turns, we sometimes refer to the inventory turn rate as turns at cost (TAC). Turns at retail (TAR) is the ratio of annual sales to average inventory value.

TAR = Sales/AIV

In the example above, if that company had annual sales of $1,114,000,000 then its turns at retail would be

TAR = $1,114,000,000/$83,000,000 = 13.42 retail turns per year

Those first two ratios are fiscal inventory rates. Turns can also be measured physically.  We refer to the physical inventory turn rate as the unit turn rate (UTR). It is the ratio of annual units shipped (AUS) to the average inventory level (AIL) in units.

UTR = AUS/AIL

For example, if a company ships 350,000 cases per year and has an average inventory level of 73,000 cases, then its unit turn rate is

UTR = 350,000 / 73,000 = 4.79 unit turns per year

Considered in isolation, higher inventory turn rates are preferred to lower inventory turn rates. However, the inventory turn rate is a critical factor in a wide range of supply chain decisions and should be set to optimize the performance of the business and supply chain as a whole.  As a result, inventory turn rates should be evaluated within control limits or relative to targets set in conjunction with fill rates and other fiscal measures of inventory performance.

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