Inventory Turnover

Full Definition

Inventory turnover measures how many times per year a company sells through and replaces its entire inventory. The formula is Cost of Goods Sold divided by Average Inventory (beginning inventory plus ending inventory divided by 2). A company selling $100M in COGS with $25M average inventory has a 4x inventory turn—meaning it cycles through its inventory four times per year, or approximately once every 91 days. Higher turnover rates indicate more efficient inventory management: capital is tied up in inventory for shorter periods, storage costs are lower, and obsolescence risk is reduced. Optimal inventory turnover varies significantly by industry. Grocery retailers might target 25-30x turns (inventory replaced every 2 weeks on average for perishable products). Fashion retailers seek 4-6x turns to balance seasonal variety with markdown risk. Industrial distributors typically run 4-8x turns depending on product variety and customer service commitments. Automotive dealers carry approximately 6x annual turns. The appropriate target depends on product shelf life, supply lead time, demand variability, and the trade-off between carrying cost (which favors higher turns) and service level (which may require safety stock that reduces turns). Inventory turnover analysis gains meaning when segmented by product category, warehouse location, or customer segment. A retailer with an overall 6x turn may have 15x turns in best-selling core SKUs and 1-2x turns in specialty items that sit for extended periods. The specialty items consume disproportionate working capital, storage space, and management attention while generating minimal revenue. SKU rationalization—eliminating low-turn, low-margin items that consume resources disproportionate to their value—is a straightforward working capital improvement lever that simultaneously simplifies operations and improves overall inventory turnover.

FAQs

Relevant Executive Roles