Key takeaways
  • Inventory turns = cost of goods sold divided by average inventory value. Higher generally means less capital tied up.
  • Days of inventory (365 divided by turns) is the same information in a form people can act on.
  • A healthy overall ratio routinely hides both stockouts and dead stock, because averages conceal distribution.
The number behind the number
Turns per item, not turns overall

An overall figure of six turns can be a fast-moving core range averaged with a long tail that has not moved in two years. The overall ratio looks fine while both problems, shortage and obsolescence, are present.

Calculating it

Inventory turns = cost of goods sold over a period divided by the average inventory value in that period. Use cost of goods sold rather than revenue, because inventory is valued at cost and mixing the two inflates the figure by your margin.

Days of inventory

Divide 365 by the turns figure. Six turns becomes about 61 days of stock. Most operational people find days far more intuitive than a ratio, and it makes the comparison against lead time immediate: holding 61 days of a part with a 5-day lead time is a decision worth examining.

What a good figure looks like

  • It varies enormously by sector, so external benchmarks are of limited use.
  • Your own trend is more informative than any industry figure.
  • Compare against your supply lead times: stock materially exceeding lead time needs a reason.
  • Compare against demand variability, because volatile demand legitimately requires more buffer.

What the ratio hides

  • Distribution. Segment by item class and the picture usually changes completely.
  • Obsolete stock still carried at full value, which flatters the ratio nowhere and distorts the average everywhere.
  • Stockouts, which improve turns while damaging service. Turns should always be read alongside a service measure.
  • Seasonal timing, since a year-end snapshot taken at the seasonal low overstates performance.

Improving turns without causing stockouts

Attack the tail first: obsolete and slow-moving items free capital with no service risk. Then reduce order quantities where lead times allow, since large batches bought for a price break are frequently a poor trade once holding cost and obsolescence are counted. Reducing supplier lead time is the highest-quality improvement, because it lets you hold less without accepting more risk.