Inventory turnover rate – why is it important?

When we think of logistics, we automatically imagine large warehouse halls, and rightly so. Large space, diverse products make it challenging for any logistics operator to maintain order and fluidity in the warehouse.

One of the elements that affect inventory management is the inventory turnover rate, so in this post we will explain what it is, what information we can get from it and how to calculate it.

The inventory turnover rate tells us how long an item sits on the shop floor before it is transferred for sale, for example. It is expressed numerically and refers to a selected period, it can be a month, a quarter or a year. At this point it is important to distinguish between the two concepts of inventory turnover rate and inventory turnover cycle, which is otherwise known as inventory turnover rate in days.

The inventory turnover ratio, in thesimplest terms, describes the time it took a company to convert its inventory into products or sell them. The turnover rate in days, on the other hand, shows how many days, on average, the inventory of products is kept in stock before it goes for sale or further production. How to calculate each ratio is shown below.

How to determine the inventory turnover ratio in days for an annual period?

To determine the inventory turnover rate in days for an annual period, divide the cost of sales for the year by the average value of inventory for the year. This is shown by the following formula:

How to determine the inventory turnover rate in days?

To determine the inventory turnover rate for an annual period, divide the average value of inventory by the cost of sales, and multiply the result by the number of days in the year. This is shown by the following formula:

Now that we have explained what the inventory turnover ratio is and how it is calculated, it is necessary to move on to the analysis of the obtained results. The values obtained, not only help the company in effective inventory planning, production and sales forecasting, the calculation of the inventory turnover rate supports the logistics operator in effective warehouse management.

High inventory ratio, is it a reason to be happy?

When the turnover rate is high, we should not worry too much. A high value means that stored goods do not stay in stock for a long time, which is also associated with good sales performance. A high inventory turnover rate should be present especially in companies in the food industry, where the shelf life of products is predetermined, and storing them for too long can lead to expired products, which will bring losses to the company. An important point to note is that a high inventory turnover rate can illustrate the current market demand for certain products, and for this reason it is necessary to have a reserve stock of such products or materials so as to maintain liquidity. From the logistics operator’s point of view, a high value means that warehouse processes need to be optimized, since the time in which goods leave the warehouse is very short, and an important aspect is to maintain liquidity and order, so that order fulfillment is carried out at the highest level.

Low inventory ratio or is it a problem?

A low turnover rate, on the other hand, can mean that there are too many goods in stock relative to current demand. Such a phenomenon is associated with generating higher costs. In addition, it may suggest that the market is not currently interested in this type of product, making it necessary for companies to be vigilant so as not to “freeze” funds in products that may not be sold. A low inventory turnover rate may result in the company having to organize big sales, or the popular “airing of warehouses”, so it is important to analyze inventory on an ongoing basis, so that the company does not even have to get rid of backlogged products.

Analysis is the key to maintaining liquidity and order in the warehouse.

Definitely, the inventory turnover rate, allows better planning of product storage, that is, dividing the warehouse into zones with products with high, medium and low turnover rates. If a logistics operator has products of different values in its warehouse, a system for inventory management, i.e. the WMS system we have already mentioned many times, is indispensable.

Ongoing analysis of inventory levels and the inventory turnover rate will allow for effective inventory management. Handing over your products to a professional logistics operator will allow you to take care of every aspect that makes up the storage of goods.