Inventory Turnover Calculator
Calculate your inventory turns based on flow rate (throughput) and average inventory levels.
What are Inventory Turns?
Inventory turnover is a critical efficiency ratio that measures how many times a company has sold and replaced its inventory during a specific period. In operations management and Little's Law applications, inventory turns are calculated as the flow rate divided by the average inventory.
Understanding the Components
- Flow Rate (Throughput): This represents the rate at which the system generates sales or processes items. In financial terms, this is typically the Cost of Goods Sold (COGS). In manufacturing, it is the rate of production.
- Average Inventory: This is the mean amount of stock held in the system during the same period. It can be measured in currency (dollars) or in physical units, provided both the flow rate and inventory use the same metric.
How to Interpret the Results
A higher inventory turnover ratio generally indicates that a business is efficient in managing its stock and generating sales. Conversely, a low turnover may suggest overstocking, obsolescence, or deficiencies in the product line or marketing effort.
Example Calculation
Imagine a retail store that has an annual Flow Rate (COGS) of 500,000 units. Throughout the year, they maintain an average of 50,000 units on their shelves.
| Metric | Value |
|---|---|
| Flow Rate | 500,000 |
| Average Inventory | 50,000 |
| Inventory Turns | 10.0 |
This means the store "turns" its entire inventory 10 times per year, or roughly once every 36.5 days.
Why Flow Rate Matters
Using flow rate instead of just sales revenue provides a more accurate picture of operational movement. Since inventory is usually recorded at cost, using the Cost of Goods Sold (the cost-based flow rate) ensures that the numerator and denominator are consistent, preventing the profit margin from skewing the efficiency metric.