There are a number of measures that get used for tracking inventory performance. One of the most popular is 'stock outs'. A 'stock out' occurs when there is demand for an inventory item but there is no stock.

It is essential to measure the availability of stock, after all that is why the investment is made in the first place. However, measuring stock outs can be a limiting way to measure inventory as it only measures one dimension of inventory, that is, availability. This is limiting because one way to ensure a low number of stock outs is to over invest in inventory so that stock is always available no matter what. This is sometimes referred to as 'just in case' inventory.

What is a 'Stock Turn'?

As inventory requires a significant financial investment and that investment involves significant ongoing costs it is also important to measure the financial performance. Tracking the value of inventory is important for cash management. However, an additional financial measure that often gets overlooked is the stock turn ratio.

The 'stock turn' is calculated by dividing the annual usage of the inventory (in dollars) by the value of the inventory held (also in dollars).

For example, if a company holds $5M worth of inventory and issues $2.5M worth of that inventory in a year, the stock turn ratio is 2.5/5.0 = 0.5. That is the company 'turns over' its inventory at the rate of one half per year. Obviously, the higher the stock turn ratio the better.

What 'Stock Turns' Tells Us Stock turns measures the efficiency of the inventory investment by telling us whether we have over invested in inventory and whether we have the right mix of inventory. (Note however, that it won't tell us about specific inventory items.)

For example, if the number of stock outs is low (which is good) and the stock turn ratio is also low (which is bad) it is an indicator that there may be an over investment in inventory.

If the number of stock outs is high (which is bad) and the stock turn ratio is low (which is also bad) this indicates that we may have invested in the wrong inventory. That is, that that our money is tied up in stock that doesn't turn over and we hold too little of the stock that is in demand.

Stock Turn Targets An appropriate target for stock turns in your business will be influenced by a range of issues, some within your control and others outside of your control. For example, if you have spares that are imported from somewhere far away or you are in a remote and isolated area then you are likely to hold more safety stock and therefore have a lower stock turn. If your processes don't adequately control decision making on inventory stocking you are also likely have a low stock turn. The book Smart Inventory Solutions details the 12 reasons why companies may hold more inventory than they really need.

Using 'Stock Turns' as a Key Measure The key thing to remember when using a stock turn ratio is that it must be applied across the entire inventory. You cannot 'cherry pick' elements of inventory. The reason for this is that some inventory items will naturally have a high turn over and some will be low. The aim of the ratio is to measure the overall efficiency of the inventory investment.

In one recent case an inventory manager tried to justify the size of his inventory by pointing out that one section of inventory had a stock turn of 5 (very good in his circumstance) and that another section had a stock turn of 0.2 (very bad). The justification was that insurance spares caused the low stock turn and therefore nothing further could be done. This analysis, however, ignored a large component of inventory that could be managed down and it ignored the possibility of consignment stock for the fast movers.

'Stock turns' is also a great measure to use when you have multiple sites or locations within the one company. As an internal benchmark, stock turns readily shows which sites have better control over their inventory.

'Stock turns' is an essential measure of inventory performance because it measures the inventory efficiency. When used in conjunction with other measures such as stock outs, the overall performance of your inventory investment can be determined.