Inventory Turnover
Definition
A ratio measuring how many times inventory is sold and replaced over a period, typically a year. It is calculated as cost of goods sold divided by average inventory value.
In Practice
Inventory turnover is the headline metric for how hard your inventory is working. A turnover of 6 means the average dollar of stock is converted to sales six times a year; higher turns generally mean less cash tied up and lower risk of obsolescence, while very high turns can signal thin buffers and stockout exposure.
Planners use turnover to benchmark categories, sites, and suppliers, and to spot drift: falling turns often reveal creeping excess inventory or slowing demand before it shows up as write-offs. Turnover targets should differ by segment, since fast-moving A items and long-tail C items behave very differently.
Example: a retailer with 24 million dollars in annual COGS and 4 million dollars in average inventory turns stock 6 times per year, equivalent to about 61 days of supply. A drop to 4 turns would flag roughly 2 million dollars of extra inventory to investigate.
Related Calculators
Related Terms
The average number of days inventory sits before being sold, calculated as average inventory divided by cost of goods sold, multiplied by 365. Also called days inventory outstanding.
Days of SupplyThe number of days current inventory will last at the expected rate of demand, calculated as on-hand quantity divided by average daily usage. It expresses stock levels in time rather than units or dollars.
Excess InventoryStock held above what is needed to meet forecast demand plus planned buffers over a defined horizon. It is inventory that current plans cannot justify, even if the item itself still sells.
Inventory Carrying CostThe total annual cost of holding inventory, including capital, storage, insurance, taxes, shrinkage, and obsolescence, usually expressed as a percentage of average inventory value. Typical rates run 15 to 30 percent per year.