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Inventory Turnover and Industry Average
10 months ago


Identifying bottlenecks and Promising Strategies

Inventory turnover is a useful way to track inventory levels and business profits. The inventory turnover ratio formula calculates the number of times a firm sells a product and then replaces it with another item. A business can then divide the days in a given year by the inventory turnover ratio to calculate how many days it actually takes to replenish the stocks on hand. Most firms do not consider inventory turnover when calculating their profit as they concentrate instead on end sales, which is why it's important to determine an accurate picture of the true cost of doing business. With this method you can accurately determine how well your firm is doing financially and therefore maximize your investment.

There are several ways to calculate inventory turnover, one of which is to use industry averages. However, as inventory turns over more frequently, it becomes increasingly difficult to obtain industry averages that can be used consistently as a baseline. Many studies and reports have attempted to define industry averages, but these have been largely unsuccessful. The Inventory turnover ratio formula can be extremely varied depending upon the firm, products and the environment it finds itself in.

To illustrate the point, consider two identical products being offered on the same shelf by two different firms. If inventory turnover was five percent, then there would be five days on which each item would be sold, five days on which it would be replaced and five days for it to sit on the shelf. However, this is incredibly unlikely to occur since many times it will take a firm multiple years to sell an item or for it to be replaced. Firms that have a turnover of around forty percent will sell an item a day for at least five years before it will need to be replaced.

To illustrate this a bit further, think of a collection of boxes stacked up on the conveyor belt. You know that there will be ten cogs in the average case. When counting all the boxes and finding out how many days it takes for each of them to rotate, you arrive at one hundred and twenty-three cogs. That means there are eleven days' sales per cycle, or two and a half years on average.

The above example underlines the point that the most important statistic to track is not the number of days of sales, but the number of days inventory turnover occurs. This allows a business to make decisions about inventory rotations based solely on the knowledge of how long a particular cog in the chain is held in a location. To put it another way, it provides the necessary information to determine the viability of particular marketing strategies.

In summary, identifying the average inventory turnover and understanding its relationship to the low turnover industry averages is important for any firm wishing to improve both their profits and customer satisfaction. Of course, this can only be realized through consistent monitoring of sales, replacement costs and quality control. However, these can only help to identify areas for improvement where your business needs guidance.


For more insights jump to https://www.investopedia.com/terms/i/inventoryturnover.asp

Read Further
Inventory turnover is an accurate measure showing how often a business has replaced and sold inventory in a given time period.
An inventory turnover calculator is an interactive tool used by companies who need to determine their inventory levels.