Inventory Turn

Inventory (Stock) Turn is the most usual measure of the efficiency of inventory
control. It is the number of times within a period, usually one year, that the average
inventory is sold.

Normally, higher stock turn rates are associated with products that sell at a lower gross margin percentage,for example, groceries. Conversely, a higher turn has to be associated with a low margin; otherwise, the retailer will not stay in business. Department stores are an example of this lower turn, higher margin model. Inventory turn is calculated based on the retailers accounting method. Many retailers use the Retail Method of Accounting, otherwise known as the Retail Inventory Method. In this approach, inventory value is maintained and reported at retail or selling price and converted back to cost when the balance sheet is prepared.

Turn can be calculated as follows:

Cost Method
Cost of Goods Sold = Inventory turn
Average Inventory At Cost

Retail Method
Inventory turn = Sales
Average Inventory At Retail

At its simplest, improving inventory turn involves increasing sales, reducing inventory, or a combination of both. However, few things are as simple as first seen. A retailer can boost sales, but will need to reduce, or control the amount of inventory needed to drive the sales. If the sales increase is matched by a like growth in inventory, the desired result will not be achieved.

Office Max                      Office                Depot
Turn in 1995                      3.0                       3.1
Turn in 2000                     3.4                       7.2
Sales 2000                      $ 4,636m            $ 11,154m
Inventory at Cost           $ 671m               $ 922m
Inventory at Retail         $ 884m              $ 922m

In the chart above two leading office supply companies are compared. The performance of Office Depot clearly shows that increasing turn can be done without hurting revenue growth. Five years later, Office Depot did 2.4 times the sales on 1.4 times the inventory. Other factors need to be considered when planning a desired turn level. Average turns vary by retail sector, and should be used as a barometer when plans are made. It is possible to turn too fast. Excessive turn can result in lower customer service levels due to higher out of stocks for the consumer. Studies have shown that consumers confronted with continuous out of stocks will soon shop elsewhere. Turning too slow can also damage a retailer by requiring extensive amounts of capital to finance bloated inventories. Slower turning products frequently require markdown funds to clear older, unwanted inventory. Excessive inventory investment has contributed to many retailers demise.

The following table based on a review of leading US retailers, shows the average turns by retail segment.

Automotive Supply                       2.50
Book Stores                                     2.15
Consumer Stores                           16.00
Department Stores                        3.50
Drug Stores                                     5.40
Fashion Specialty                           6.50
Home Decor                                    3.35
Home Improvement                     4.00
Jewelry                                            1.30
Mass Mechandisers                       4.50
Music / Entertainment                 2.65
Off Price                                          4.30
Office Supplies                                5.50
Pet Supply                                       6.67
Shoes                                               4.20
Sporting Goods / Leisure              2.60
Supermarket                                  10.00
Toys                                                 2.00
Warehouse Club                             8.50