Inventory Turnover
How many times inventory is fully sold and replaced in a year. Turnover = COGS / average inventory value. Benchmark: 4-12x depending on category. Higher = efficient inventory. Lower = tied-up capital.
In practice
Inventory turnover is the 'pulse' of inventory management. Turnover of 2x means holding 6 months of average inventory. Turnover of 12x means holding 1 month. The higher it is, the less capital is tied up, the better cash flow, and the lower the risk of depreciation.
Common misconception
'Higher turnover is always better.' Turnover that's too high (above 24x) means holding less than 2 weeks of inventory — high stockout risk. The balance: high turnover that doesn't cause stockouts.
How to fix it
Low turnover? (1) Identify SKUs with turnover under 4x — 'stale' inventory, (2) Run a clearance sale, (3) Lower reorder quantity on these products, (4) Consider dropping them from the catalog. Turnover too high plus stockouts? Increase safety stock.
Example
Home goods store: average turnover 6x. SKU analysis: 40 SKUs with turnover under 2x = $23,600 in tied-up inventory. Clearance sale + halted reordering: freed up $18,000 in cash flow. Turnover rose to 8.5x.
Priority
Calculate inventory turnover by SKU category quarterly. SKUs with turnover under 3x are an active problem. Benchmarks by category: apparel 4-6x, electronics 8-12x, food 20-30x.
Related terms
Keep learning. Metrics that touch the same area:
- Cash FlowFinanceThe movement of cash in the business. 'Profitable on paper, broke in the bank' — a common problem in growing stores.
- Safety StockLogisticsExtra inventory held beyond what average demand requires — protects against demand fluctuations, lead-time delays, and forecasting errors. Safety Stock = Z × √Lead Time × Demand STD.
- 3PL – Third Party LogisticsLogisticsAn external company for storage, picking, packing, and shipping. The store owner sends inventory to the 3PL, receives orders, and the 3PL handles fulfillment.
- Last Mile DeliveryLogisticsThe final leg of shipping — from the logistics center to the customer's door. 53% of shipping costs.
- Reverse LogisticsLogisticsManaging product returns: collection, inspection, sorting, restocking, or recycling. Costs 2-3x regular shipping.
- CarrierLogisticsA company that performs shipping: DHL, UPS, USPS, FedEx. Each has different pricing, speed, coverage, and reliability.
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