Understanding Inventory Turnover

Inventory turnover is a ratio that measures how many times a company has sold and replaced its inventory during a given period. It's a key indicator of inventory management efficiency and product demand.

The Inventory Turnover Formula

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Where:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Days Sales of Inventory (DSI)

DSI measures how many days it takes to sell through inventory:

Days Sales of Inventory = 365 / Inventory Turnover Ratio

What COGS Includes

• Direct materials cost
• Direct labor costs
• Manufacturing overhead
• Freight-in costs
• Does NOT include selling, general, or administrative expenses

Interpreting Inventory Turnover

• High Turnover (8+): Strong sales or insufficient inventory - could mean lost sales opportunities
• Good Turnover (4-8): Healthy balance between sales and inventory
• Low Turnover (2-4): Slow-moving inventory or overstocking
• Very Low (<2): Potential dead stock or poor demand

Industry Benchmarks

Optimal turnover varies significantly by industry:

• Grocery stores: 12-15 times/year
• Retail clothing: 4-6 times/year
• Auto dealers: 8-12 times/year
• Furniture stores: 3-5 times/year
• Wholesale: 6-12 times/year

Improving Inventory Turnover

• Implement demand forecasting systems
• Negotiate better supplier terms for smaller, frequent orders
• Identify and liquidate slow-moving items
• Optimize pricing strategies
• Improve marketing for slow sellers