An inventory turnover ratio measures how often your inventory is sold and replaced over a specific period. For warehouse managers, eCommerce business owners and inventory specialists, effectively managing this ratio is essential for controlling costs, minimising waste, and meeting customer demand.

A low inventory turnover ratio can signal excess inventory or poor sales, while higher turnovers usually indicate better sales and efficient stock management. However, a high ratio can also mean you aren’t carrying enough stock to meet demand effectively.

This is where striking a balance between adequate holdings and excessive stockpiling becomes tricky. It can be the difference between business success and failure.

This guide breaks down the inventory turnover ratio and good warehouse inventory management. We also provide actionable strategies to help improve this key area and highlight how technology like StoreFeeder's Warehouse Management System (WMS) can greatly enhance your company's inventory turnover ratio and profitability.

What Is Inventory Turnover Ratio?

The inventory turnover ratio measures how many times inventory is sold and replaced over a specific period. It's a key metric that indicates how efficiently you manage your stock.

The standard formula to calculate inventory turnover is:

Inventory Turnover Ratio (ITR) = Cost of Goods Sold (COGS) ÷ Average Inventory

Let's take a brief look at the formula components:

• Cost of Goods Sold (COGS) represents the total cost of purchasing or producing the goods sold over a given period. Expenses here typically include purchase price, transport, materials, labour, shipping, manufacturing, sales, and distribution.
• Average Inventory is the average inventory value for the period. It is calculated as follows:

‍(Beginning Inventory + Ending Inventory) ÷ 2

Here's an example of the inventory turnover formula calculation:

The cost of goods sold for the year is £500,000. The beginning inventory for the year is £90,000, and the ending inventory is £110,000.

• Average Inventory value = (90,000 + 110,000) ÷ 2 = £100,000
• Calculate Inventory Turnover Ratio: £500,000 (COGS) ÷ £100,000 (average inventory) = an ITR of 5

This means you turned your stock 5 times in 12 months.

The ideal rate differs for every business, but 5 is generally considered an acceptable inventory turnover ratio in eCommerce and for most warehouses.

Retailers typically have a higher inventory turnover ratio than manufacturers and companies selling higher-priced items to other businesses (B2B). An ideal inventory turnover ratio for manufacturing may be well below 5.

How Does Inventory Turnover Ratio Differ From Days Inventory Outstanding (DIO)?

While inventory turnover measures how many times stock is sold and replenished, Days Inventory Outstanding (DIO) measures the average number of days it takes to sell inventory.

The formula is:

DIO = (Average Inventory​ ÷ Cost of Goods Sold) × Number of days in the period

Here's an example (using the same figures as our previous illustration):

• (100,000 [average inventory] ÷ 500,000 [COGS]) x 365 (number of days in the period) = 0.2 x 365 = 73

This indicates you turn your stock on average every 73 days.

ITR and DIO are closely related indicators that complement each other, providing similar information but from different perspectives.

• The inventory turnover calculation helps you understand how many times you cycle through your inventory during a year, quarter, or other period.
• DIO translates that cycle into days to show how long, on average, your inventory sits in stock.

How you use ITR and DIO depends on your inventory models and key performance metrics. Often, both measures are prioritised to drive warehouse efficiencies and improve inventory management processes.

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What Is the Difference Between Inventory Turnover for eCommerce and Manufacturing?

As a rule, an eCommerce business has a higher inventory turnover than a manufacturing operation. An eCommerce retailer may boast an inventory ratio as high as 10, while a manufacturing company's inventory ratio could be as low as 2.

Inventory turnover ratio: eCommerce

The factors influencing eCommerce turnover ratios include:

Less storage space

• Faster online orders and sales
• Less storage space

‍Inventory turnover ratio: Manufacturing

Manufacturers' ratios are lower because:

• Manufacturing involves longer production cycles, resulting in lower stock turnover.
• The production process often requires storing higher inventory levels (raw materials and finished goods).
• Manufacturing typically relies on more complex supply chains, which can cause delays.

Why Is a Good Inventory Turnover Ratio Important?
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Good inventory turnover is a critical measure of the efficiency of your warehouse's operations.

An efficiently run warehouse with a healthy inventory turnover ratio benefits from:

• Improved working capital
• Stronger cash flows
• Reduced inventory carrying costs (e.g. storage, interest, write-offs, and opportunity costs)
• Lower stock obsolescenc

These advantages all help to boost bottom-line profitability.

On the other hand, a poor ratio may mean:

• Stockouts and potential loss of sales
• Excessive carrying costs due to an overstocked warehouse
• Wasteful use of storage space (you may even run out of space)

The right balance between inventory turnover and availability impacts your company's efficiency, profitability, and customer satisfaction levels. Achieving this crucial balance ensures you can meet customer expectations and remain competitive and financially healthy.

What Is Considered a "Good" Inventory Turnover Ratio?

Unfortunately, there is no single definition of an ideal inventory turnover ratio. A "good" average turnover ratio varies widely based on factors such as:

• Industry standards: As mentioned, there's a marked difference between manufacturing and eCommerce turnovers.
• Business model: A B2C business selling directly to consumers generally has higher product turnover than a B2B firm.
• Product type: For example, perishable products move faster than durable goods.

A good turnover may range from over 20 for a greengrocer to below 2 for a manufacturer.

Although every warehouse operation is different, a turnover ratio of 4-6 is usually a good indicator of a well-run warehouse. 4 to 6 turns a year suggest that holding costs and stock availability are well balanced. This turnover rate speaks to efficient space utilisation, managed costs, and fresh inventory that isn't in danger of obsolescence.

Can a High Turnover Ratio Ever Be Bad?

While it's crucial that your inventory turns at a healthy rate, a high turnover ratio is not always positive and can signal inventory management problems. Additionally, an excessively high turnover ratio exposes you to supply delays with several negative consequences, including:

• Frequent stockouts
• Customer frustrations (and lost business)
• Higher procurement costs as you scramble to replenish inventory
• High turnover can also indicate that your prices may be too low

The goal is a stable, efficient turnover with a buffer to mitigate stockout risks. Achieving this involves strategically aligning turnover targets and customer demand within your overall business objectives.

Strategies to Optimise Inventory Turnover
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Here are five successful strategies for optimising turnover rates, together with practical implementation tips.

1. Improve Demand Forecasting

Companies that forecast future demand accurately can enhance their inventory management significantly. Accurate projections of demand provide a healthy boost to your turnover ratio, resulting in efficient stock levels with minimal overstocking and stockouts.

Effective demand forecasting relies on leveraging data, tools, and collaborations:

• Historical data: Analyse historical sales data to identify useful patterns and insights.
• Use WMS tools: Implement a warehouse management system to track real-time data and forecast inventory demand more precisely.
• Market trends: Keeping on top of industry trends, competitor behaviours, and consumer preferences enables you to better anticipate demand shifts.
• Sales team collaboration: Information sharing and integrated insights from your sales team offer a valuable lens into future demand.

2. Adopt Just-in-Time (JIT) Inventory Practices

Just-in-Time (JIT) is a well-established model where inventory is ordered and received just before it’s needed for production or sale. The idea is swift, smart stock replenishment, reducing holding costs, storage facilities, and potential redundancy.

A seamless JIT system can be highly effective, but the approach is not without risk. Unanticipated demand or supply hitches can cause critical stock shortages, resulting in lost revenues or manufacturing bottlenecks.

To mitigate these risks and embed JIT successfully, pay attention to the following:

• Inventory management assessment: A comprehensive evaluation of your existing processes is the first step to assessing the suitability of JIT in your warehouse. This audit will identify areas where stock levels can be reduced beneficially without compromising operations.
• Strong supplier relationships: Work closely with reliable suppliers to ensure timely deliveries. Negotiating flexible delivery schedules, including shorter lead times, is a real win in this regard.
• Real-time inventory monitoring: Immediate access to accurate and real-time information on stock movements is critical. Inventory management software tracks inventory closely and provides extensive data to help you balance inventory levels.
• Staff training: Gain buy-in, reinforce the benefits of JIT, and embed best practices with comprehensive training. Bringing everyone onto the same page goes a long way to support a finely-honed JIT operation.
• Optimise production processes: Manufacturers should match production schedules with demand patterns to ensure raw materials and finished goods flow efficiently.

3. Regularly Review Slow-Moving Inventory

Reviewing slow-moving stock regularly is vital to avoid tying up capital in dead assets. Besides lowering storage costs and lifting turnover, clearing sluggish products creates space for faster-selling items.

To implement this strategy:

• Identify slow-moving items: Use inventory management tools and reports to identify stubbornly underperforming products.
• Clearance sales: Clearance sales, discounting, and promotions can be useful initiatives to liquidate slow products and attract new customers.
• Repurpose inventory: Bundle slow movers with popular products or reallocate them for alternative uses wherever possible.

4. Optimise Reorder Points

Optimising reorder points involves targeting precise reorder levels to avoid over or understocking. The aim is to run lean stock levels while maintaining adequate product availability.

To successfully adopt this strategy, focus on the following:

• Calculate reorder levels: Historical demand data, lead times, market trends, and safety buffer requirements all offer valuable insights into your optimal reorder points. Use this data to inform appropriate reorder points for your business.
• WMS alerts: Automated WMS alerts contribute significantly to streamlining your ordering and restocking processes.
• Adjust dynamically: Your reorder points shouldn't be set in stone. Review and adjust the system periodically based on changes in demand, supplier performance, or lead times.
• Buffer stock: It's a wise idea to build in a safety margin to cover business contingencies and unexpected demand swings.

5. Leverage FIFO or LIFO Systems

FIFO and LIFO are two essential pillars of warehouse and stock management.

FIFO, or First-In, First-Out, dictates that the oldest inventory is sold first, ensuring that older stock doesn’t become obsolete.

LIFO, or Last-In, First-Out, is a method whereby the newest inventory is sold first.

Both strategies can be usefully employed to streamline inventory flows and manage costs.

• FIFO supports healthy stock turnover and prevents clogging your warehouse with ageing products. Unsurprisingly, the model is favoured in industries that deal in perishable goods.
• LIFO is used to manage costs and taxable income. It is often applied during inflationary periods to match current market prices with the current cost of goods sold. The method is also used to reduce taxable income - applying a higher COGS lowers the company's gross profit (and taxable earnings).

Whichever system you favour, the following are key considerations:

• Accurate inventory management: Accurate software and systems are important to track stock age consistently and apply your chosen method.
• Team training: Warehouse teams should be educated on the chosen method to ensure the system is followed properly and consistently.
• Regularly monitoring: Review inventory ageing and financial outcomes to ensure the chosen method still aligns with business goals.

How a WMS like StoreFeeder Supports Inventory Turnover

StoreFeeder's powerful Warehouse Management System (WMS) helps thousands of warehouse operators and business owners manage and improve inventory turnovers smartly.

The impactful benefits of our WMS include:

• Smart automation: StoreFeeder's WMS empowers precise stock replenishment with automated reorder triggers, demand planning, and safety stock levels. This ensures you always have the right inventory levels without being burdened by surplus carrying costs.
• Tracking of stock quantities: Real-time visibility into both available stock (what’s listed for sale) and physical stock (what’s on the shelf) facilitates higher levels of control, not to mention better turnover rates. Use real-time tracking to minimise stockouts and fulfil orders to delight customers.
• Sales channels integrations: The system integrates with multiple sales channels (e.g. Amazon, eBay, your own website) to provide full inventory visibility. StoreFeeder also supports integration with platforms like Shopify and Etsy. Use this tool to quickly add products to new marketplaces or sales channels.
• Advanced reporting: Our multi-level reporting features provide a comprehensive overview of your inventory activities. Use these rich insights to identify trends, optimise processes, and meaningfully elevate supply chain and warehouse performance.

FAQs

What factors distort comparisons of inventory turnover ratios?

Comparing inventory turnover ratios over different periods and against competitors or industry norms is vital to understanding your business performance. However, be aware that revised accounting policies, rapid changes in costs, and seasonal factors may distort inventory turnover comparisons.

How can a poor inventory turnover ratio limit business scaling?

A poor inventory turnover ratio can tie up capital in unsold goods, reduce cash flow, and limit the ability to invest in growth opportunities, ultimately hampering scalability.

How does technology help improve inventory turnover?

Warehouse and inventory management software helps track stock levels in real time and streamline reordering processes. Technology also simplifies customer service and predicts demand patterns, improving turnover efficiency.
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Conclusion

Inventory turnover ratio is a crucial tool in modern inventory management. It is a dynamic performance indicator that should be monitored on an ongoing basis. Optimising this ratio helps you fulfil customer orders impressively while holding cost-effective stock levels.

Businesses should strive for a turnover ratio that reflects their industry standards and aligns with their inventory models and business goals. Additionally, understanding and implementing the right stock management strategies for your business can significantly enhance inventory performance.

Warehouse management systems provide essential tools to streamline and improve warehouse processes and efficiencies. StoreFeeder's feature-rich WMS solutions help drive real inventory management gains, leading to greater growth, profitability, and customer satisfaction.

Book a demo today to see our powerful tools in action.