Inventory Turnover: Definition, Functions, Formula, and How to Optimize It

A high stock turnover for sales is one of the main goals of a company. By calculating inventory turnover, companies can determine the level of stock sold within a certain period. This is very important to optimize because it has an impact on increasing company profits.

What is Inventory Turnover

Inventory Turnover is an indicator used to determine the ratio of inventory sold or used within a certain period. It is important for companies to accurately measure inventory turnover because this can help them understand warehouse management efficiency.

Inventory turnover is calculated by comparing the number of sales with the average inventory held during a period. In general, the higher the inventory turnover, the faster a company can sell or use its stock. However, turnover that is too high may also indicate the risk of stockouts, which can actually hinder warehouse management.

Functions of Inventory Turnover in Inventory Management

Inventory turnover has several important functions in a company’s warehouse management, including:

Measuring Inventory Management Efficiency

Inventory turnover can be used to measure how effective a company is in selling the goods stored in the warehouse. A high turnover rate shows that stock is sold or used quickly, and the company does not keep too many unnecessary items.

Optimizing Cash Flow

This ratio can also be used to optimize the company’s cash flow. Inventory that sits too long will certainly trigger losses, so a good turnover helps improve healthy cash flow since stock sells quickly and avoids warehouse overstocking.

Minimizing Dead Stock

Stock in certain industries has a shelf life and is prone to becoming obsolete or expired. To avoid this problem, companies can use inventory turnover to prevent dead stock and excessive accumulation of unsellable goods.

Serving as a Reference in Forecasting Stock Needs

By knowing the turnover rate, companies can analyze stock needs, forecast demand, determine reorder schedules, and decide whether certain inventory needs to be increased or reduced.

Formula for Calculating Inventory Turnover

Here is the basic inventory turnover formula widely used by companies:

Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory

From this formula, there are two key factors: Cost of Goods Sold (COGS) and Average Inventory. COGS refers to the direct costs of producing goods sold by a company within a period. Average Inventory is generally calculated as the average of beginning inventory and ending inventory during a period.

How to Optimize Inventory Turnover with an Inventory Management System

One step companies can take to optimize inventory turnover is through warehouse operation automation by implementing an Inventory Management System. This technology has several important functions, such as:

Real-Time Stock Management

An Inventory Management System can track all inventory in real time, providing visibility into stock that is sold and stored. Real-time management reduces the risks of overstocking or stockouts.

Data Analysis and Accurate Demand Forecasting

Data collected by the system can be used to analyze sales patterns and forecast stock needs. With accurate forecasting, companies can maintain inventory optimally, ensuring turnover remains stable.

Automated Stock Replenishment

An Inventory Management System usually comes with automated purchasing features, making stock replenishment easier. This reduces lead time and ensures stock levels remain optimal.

Setting Reorder Points and Minimum Inventory Levels

Implementing an Inventory Management System allows companies to set minimum stock limits or reorder points, ensuring inventory is replenished on time. Setting these limits helps achieve optimal turnover while maintaining company cash flow stability.

As one of the companies providing an Inventory Management System, Prieds offers technology that can be configured according to business needs, such as fully optimizing inventory turnover through integration between hardware and software. Various features of the Prieds Inventory Management System help businesses ensure stock levels meet market demand while avoiding costs related to storage or unsold inventory.

You can learn more about optimizing inventory turnover by consulting with our team of experts. Get a system equipped with complete features, top security, and ease of use tailored to your company’s needs with Prieds.