Does it ever come into your mind how companies efficiently convert inventories into sales? What is the Stock turnover? How do you calculate the stock turnover ratio? What is the formula for the stock turnover to analyze the stock data? How will the stock turnover ratio show the current stock counts and the need for stock up to fulfill demand/ forecasting to different businesses? Here’s what you need to know.
Before COVID, we have observed conventional forms of business working models but after COVID-19, the surge in non-retail, e-commerce, and online businesses has changed the working models. With the proliferation and expansion of already existing businesses and the development of new companies, it has become critical for each key player to manage, analyze, and calculate the stocks as per actual need. Regardless of the size, many businesses struggle with managing their inventories, storage, and logistics, which impacts their customer services and ultimately their businesses.
While inventory optimization, it is important to analyze the current stock status per individual SKU, dead stocks, demand, capacity, and forecasting. In order to achieve sustainability, the market is evolving day by day. For this reason, inventory management is a foremost process that directly impacts the performance and profitability of a business.
Stock Turnover Calculation is extensively used by businesses to optimize their inventories. Furthermore, it provides businesses with the confidence to manage their stocks accurately, ensuring profitable operations.
So let’s learn how the Stock turnover Ratio truly works!
What is the Stock Turnover Ratio?
The purpose of stock turnover ratio is to adjust stock levels as per sales trend. In fact, it shows the true picture of stock levels that determine how much ordering and the stock up is needed to meet forecast.
The correct stock is one of the prerequisites of efficiency in supply chain management. The stock Turnover ration formula can be used to determine the realistic data of an individual article per category.
The Effect of High and Low Value of Stock Turnover Formula
The financial ratio of stock turnover calculation depicts the strong annotation and status of the actual value and how it affects overall inventory. A high number of stock turnover calculations indicates that stocks are in high demand and selling quickly. The higher number of stock turnover calculations shows that businesses need to monitor stock levels and availability over some time To facilitate customer On Time In Full (OTIF).
While the low stock turnover calculation suggests that the stock is slow moving and not being sold quickly. The Old Stock/ aged stock eventually contributes to increasing the company’s cost in terms of holding costs and inventory risk costs. The low value of stock turnover is eye-opening data for businesses especially those that have stocks with specific shelf lives. Keeping a stock for so long, not only shows slow sales but eventually becomes shrinkage and will bring losses to the business.
Businesses need to calculate the stock turnover to have a clear picture of inventory status. So let’s explore, how to calculate stock turnover. Which stock turnover formula should be used?
What is the Stock Turnover Equation?
The stock turnover equation (also called stock turn ratio formula/ stock turnover ratio formula) shows the factual data where the company’s inventory stands and how it is performing stock-wise – profitable or losses. The stock turnover equation can be applied to an individual SKU or the entire assortment. The formula for the stock turnover ratio is calculated by dividing the Cost of Goods sold by the average inventory.
Cost of Goods Sold (COGS)
The Cost of Goods Sold is the direct total fixed cost involved in producing (including raw material) or buying of the goods sold by the company. It varies from company to company. If a company is manufacturing a product, the Cost of Goods Sold will be the total manufacturing cost of the product ((including raw materials) sold by a company. However, if the company is directly buying a product to resell it like in retail or e-commerce stores, the Cost of Goods Sold will be the buying/ purchasing cost.
Average Inventory
Businesses can manage cash flow more effectively by understanding average inventory, which ensures they are not overstocking or understocking. Average inventory is the cumulative count of inventory at the start and end of a period over some time.
Let’s have a look at some practical examples of how to calculate stock turnover or how to use the formula for the stock turnover ratio.
Q1. Due to the start of the winter season, and the end of the year in Q4, a Swiss company specializing in high-quality blankets, posted $48,000 in COGS and $6000 in average inventory. What will be the stock turnover Ratio?
Solution: The formula for the stock turnover ratio will be:
STR = $48000/$6000
STR = 8
Q2: Following the same company, with the same scenarios, what if a company needs to calculate the average inventory period (how much time does a company need to sell the current inventory)?
Solution: Firstly, to find out how much time will a company require to sell the in-hand inventory, divide the entire selling period, which is 365 days, by 8, which is equal to 45.625 days, using the stock turnover ratio previously used.
You can learn more about Inventory Management Fundamentals for Supply Chain by our course
Explore the different cost categories of inventory by our course
What is the Ideal Stock Turnover Ratio?
While going through the example of stock over calculation, here, a question must come into mind what is the ideal stock turnover ratio? How does a company determine what is a good or a bad value for inventory?
So, the ideal stock turnover ratio is between 5 and 10. The rapid sale of stocks indicates that a company needs to stock up in a month or two to meet demand.
The ideal turnover ratio of different companies and sectors differs depending on industry standards, product type, and business model. Firstly, companies need to identify what is the stock turnover of their businesses. Regular analysis and adjustments are essential to attaining and maintaining an ideal ratio.
Source: https://www.netsuite.com/portal/resource/articles/inventory-management/inventory-turnover-ratio
Stocktaking Procedure – The Ultimate Guide will help you learn more about one of the critical functions of the Supply Chain
How to Improve Stock Turnover Ratio Value
The low value of the stock turnover ratio shows the slow running of articles.
Effective implementation of strategies is necessary to increase the stock turnover ratio. The actual root cause of slow-running articles should be identified. It could be price, placement, lack of awareness, etc. Next, it is important to approach relevant customers, particularly for slow-running articles. Additionally, it is important to improve marketing, branding, merchandising, and promotions considering slow-running articles.
So far, we have a detailed analysis of what is stock turnover. How to calculate stock turn? What is the stock turnover ratio formula? Now, let’s dig into practical actions and tips along with best practices that help companies maintain healthy inventories and maximize profits:
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Actionable Tips
Inventory Stock Turnover is a controlled and necessary process. To maintain healthy inventory levels and maximize profitability, here are some effective and practical ways to improve stock turnover:
Practical Sales Forecast
While forecasting, it is observed that some companies do not take historical data seriously, leading to unrealistic forecasts. Above all, the entire supply chain is impacted, if the forecasting is incorrect. Forecasting should be accurate and precise, by considering historical data in consideration that will help in optimum stock turnover. Moreover, while forecasting, it is important to take into account the market trends and customer preferences.
Watch a video on our YouTube Channel to learn more about Sales and Operations Planning. Click here!
Improve Product Visibility
A well-designed effective strategy will play a vital role in improving the visibility of slow-running articles. In addition, it is important to improve the placement and visibility of products in-store and online. The impactful, persuasive marketing and merchandizing strategies will help in boosting product awareness.
Promotions
Offer targeted promotions or discounts for items that are not selling quickly. To eliminate excess stock, utilize seasonal sales strategies.
You can use Plan For Every Part Template & Guide to formulate any new or existing strategy
Best Practices
Many businesses are following integrated systems and practices that help them in improvement in financial performance and efficient inventory turnover. Take a look at the best practices used by businesses.
Stock Management
Effective stock management is essential. The identification of a specific area for every article, category, and assortment is necessary. It is important to identify and handle shrinkage stock, Return to Supplier (RTS), and damaged stock accordingly.
It is important to identify and handle areas related to shrinkage stock, RTS and damaged stock accordingly.
Inventory Audits
It is necessary to conduct inventory audits as per plan (annual/ bi-annually/ quarterly) for each category. Likewise, it will help to identify the status of systematic and physical stock.
You can get the practical tool guide for the Inventory Optimization Tool In Excel
Staff Training
Practical training should be provided on managing stock and inventory management effectively.
Concluding Thoughts
In conclusion, maintaining an optimized stock level is a crucial process. The Stock Turnover Ratio is a business solution for the optimization of inventory at the individual SKU level. The objective of stock turnover is to check the accuracy of the stock levels and stock ordering as per demand. However, both the Low and the High stock turnover values can be worrisome for businesses. To maintain an optimum level of inventory, businesses should adopt strategic stocking to gain business success in terms of profit.
Here, you can design a holistic approach with our E-book Guide – Inventory Planning Method-The Ultimate Guide
About the Author – Dr. Muddassir Ahmed
Dr. Muddassir Ahmed is the Founder & CEO of SCMDOJO. He is a global speaker, vlogger, and supply chain industry expert with 19 years of experience in the Manufacturing Industry in the UK, Europe, the Middle East, and South East Asia in various Supply Chain leadership roles. Dr. Muddassir has received a PhD in Management Science from Lancaster University Management School. Moreover, Muddassir is a Six Sigma black belt. He has founded the leading supply chain platform SCMDOJO. It enables supply chain professionals and supply chain teams to thrive by providing best-in-class knowledge content, tools, and access to experts.
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