{"id":28670,"date":"2023-05-12T14:24:03","date_gmt":"2023-05-12T13:24:03","guid":{"rendered":"https:\/\/localhost:10003\/inventory-turnover-ratio\/"},"modified":"2024-07-26T16:08:10","modified_gmt":"2024-07-26T15:08:10","slug":"inventory-turnover-ratio","status":"publish","type":"post","link":"https:\/\/www.ecommercefulfilment.com\/en_US\/resources\/inventory-management\/inventory-turnover-ratio\/","title":{"rendered":"What Is My Inventory Turnover Ratio &amp; What Does It Mean?"},"content":{"rendered":"\n<p>Inventory turnover ratio is an important metric to track for any retail business, whether you&#8217;re a traditional brick-and-mortar store or an online eCommerce brand. Today, we&#8217;re going to take a look at what inventory turnover is, how to calculate it, how to analyse your calculations, and how to improve.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\"><p class=\"ez-toc-title\" style=\"cursor:inherit\">In this article<\/p>\n<\/div><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/resources\/inventory-management\/inventory-turnover-ratio\/#inventory-turnover-ratio-definition\" >Inventory turnover ratio definition<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/resources\/inventory-management\/inventory-turnover-ratio\/#how-to-calculate-inventory-turnover-ratio\" >How to calculate inventory turnover ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/resources\/inventory-management\/inventory-turnover-ratio\/#analysing-your-inventory-turnover-ratio\" >Analysing your inventory turnover ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/resources\/inventory-management\/inventory-turnover-ratio\/#how-to-improve-a-low-inventory-turnover-rate\" >How to improve a low inventory turnover rate<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/resources\/inventory-management\/inventory-turnover-ratio\/#improve-inventory-management-with-j-j\" >Improve inventory management with J&amp;J<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"inventory-turnover-ratio-definition\"><\/span>Inventory turnover ratio definition<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Inventory turnover is calculated through a ratio that shows how many times inventory has been sold and replaced over a specific period of time.<\/p>\n\n\n\n<p>Essentially, it\u2019s a measurement of how fast a company sells their stock, with high inventory turnover generally pointing towards a thriving business, with low inventory turnover usually, but not always, indicating a struggling business.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The importance of inventory turnover ratio<\/h3>\n\n\n\n<p>The inventory turnover ratio is a vital calculation to evaluate business health and improve key processes in sales, inventory management, financial planning, and more.<\/p>\n\n\n\n<p>With a good understanding of inventory turnover, you can make much better decisions around budgets, <a href=\"\/en_US\/demand-planning\/\">forecasting demand<\/a>, and supply chain management.<\/p>\n\n\n\n<p>It\u2019s something your customers are bound to notice too, as understanding inventory turnover means you can better avoid stockouts and <a href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/backorder-meaning\/\">backorders<\/a>, and create a better customer experience.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"how-to-calculate-inventory-turnover-ratio\"><\/span>How to calculate inventory turnover ratio<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>To work out the inventory turnover ratio, you\u2019ll first need to calculate COGS (cost of goods sold) over the period you want to cover.<\/p>\n\n\n\n<p>COGS is defined as the costs associated with sourcing and fulfilling your goods, including the cost of raw materials, shipping costs, storage costs, labour costs, and more.<\/p>\n\n\n\n<p>Once you have identified the COGS, calculate your average inventory value using the following formula:<\/p>\n\n\n\n<p><strong>Beginning inventory + ending inventory \/ 2]<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Formula for inventory turnover ratio<\/h3>\n\n\n\n<p>With COGS and average inventory value identified, you can use the numbers in the following formula:<\/p>\n\n\n\n<p><strong>Inventory turnover = COGS \/ Average inventory value<\/strong><\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Example<\/h4>\n\n\n\n<p>Let\u2019s imagine that you\u2019re an established business with a COGS calculated at \u00a3800,000, and your average inventory value was \u00a3400,000. With these figures, your inventory turnover ratio would be 2:<\/p>\n\n\n\n<p><strong>Inventory turnover = \u00a3800,000 \/ \u00a3400,000<\/strong><\/p>\n\n\n\n<p><strong>Inventory turnover ratio = 2<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"analysing-your-inventory-turnover-ratio\"><\/span>Analysing your inventory turnover ratio<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>When looking at your inventory turnover ratio, the ideal number will depend on your industry. In some industries, an inventory turnover ratio between 2 and 4 is optimal, whereas in others an inventory ratio between 5 and 10 might be more ideal.<\/p>\n\n\n\n<p>We\u2019d recommend doing a bit of research into your industry to see whether you\u2019re in the ideal range.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">High inventory turnover rate<\/h3>\n\n\n\n<p>A high inventory turnover rate is generally seen as a good thing. After all, the higher your inventory turnover, the more sales you\u2019re getting. That said, there are some disadvantages to a high inventory turnover rate if your inventory management isn\u2019t optimized properly.<\/p>\n\n\n\n<p>Let\u2019s take a look at the advantages and disadvantages of a high inventory turnover:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Advantages<\/h4>\n\n\n\n<p><strong>Lower storage costs &#8211;<\/strong> By selling goods quickly, you\u2019re lowering the storage costs associated with each inventory turn.<br><strong>Increased cash flow &#8211;<\/strong> A steady stream of cash means that you\u2019ll have more cash on hand for marketing, product development, and other essential business activities.<br><strong>Less wastage &#8211;<\/strong> Products that move quickly have less chance to go out of date or become obsolete.<br><strong>Ability to capitalize on trends &#8211;<\/strong> Fast sales mean you can better respond to customer demand and market trends.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Disadvantages<\/h4>\n\n\n\n<p><strong>Potential <a href=\"\/en_US\/resources\/inventory-management\/stockout-costs\/\">stockouts<\/a> &#8211;<\/strong> If products are flying off the shelf, you may struggle to replenish inventory quick enough to meet demand.<br><strong>Lower safety stock &#8211;<\/strong> Similar to the above, it can be difficult to have adequate buffer safety stock in place when sales are high.<br><strong>Greater risk from supply chain issues &#8211;<\/strong> High inventory turnover puts more pressure on the efficiency of your supply chain.<br><strong>Less flexibility on bundles and bulk orders &#8211;<\/strong> With a high inventory turnover, you will have less stock on hand to fulfil larger orders and bundle discounts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Low inventory turnover rate<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">Advantages<\/h4>\n\n\n\n<p><strong>Lower chance of stockouts &#8211;<\/strong> With fewer products being shipped, you product availability should be much higher.<br><strong>More flexibility with suppliers &#8211;<\/strong> With lower inventory turnover, you can use long lead times to your advantage, and negotiate better rates with suppliers.<br><strong>Ample safety stock &#8211;<\/strong> It\u2019s much easier to have lots of buffer stock in place when demand is low.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Disadvantages<\/h4>\n\n\n\n<p><strong>Higher storage costs &#8211;<\/strong> You\u2019ll generally need to keep inventory in storage longer, leading to higher storage costs over time.<br><strong>Capital tied up in inventory &#8211;<\/strong> Low turnover means less cash flow, resulting in less money available for other business activities.<br><strong>More wastage and risk of obsolescence &#8211;<\/strong> Failing to sell products quickly can result in degradation or out-of-date goods which need to be wasted.<br><strong>Less inventory data to analyse &#8211;<\/strong> Good inventory management is all about data, and the less sales you have, the less data you\u2019ll be able to gain insight from.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"how-to-improve-a-low-inventory-turnover-rate\"><\/span>How to improve a low inventory turnover rate<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are many ways to solve a low turnover rate, some of which involve considerate investment. However, low turnover can often be solved by addressing existing inventory issues, requiring time and thought, rather than cash.<\/p>\n\n\n\n<p>Here are some common ways to improve a low turnover rate:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Experiment with new marketing channels<\/h3>\n\n\n\n<p>There are an enormous number of ways to market your business in the 21st century, both offline and online. While a low turnover rate doesn\u2019t necessarily mean an absence of marketing, it could mean that your marketing efforts aren\u2019t as effective as they could be.<\/p>\n\n\n\n<p>Look at what your more successful competitors are doing on social media for inspiration. Experiment with new email campaigns, and consider whether your website is optimized for SEO. This can all be done with little to no investment, if you take time to learn best practices.<\/p>\n\n\n\n<p>Marketing is often trial and error, and with some testing, you\u2019ll soon find a channel and strategy that results in more sales, and increases your turnover rate.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Inventory analysis<\/h3>\n\n\n\n<p>Inventory analysis can be difficult if you have a large number of SKUs and low sales. However, one useful technique you can use is ABC analysis, which involves looking at historical data to determine which SKUs you should prioritize in your marketing and sales strategies.<\/p>\n\n\n\n<p>Through ABC analysis, you can clearly identify fast and slow-moving lines, and make a judgement on the SKUs you should prioritize, as well as on the ones you may be better off retiring.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Consider pricing<\/h3>\n\n\n\n<p>If you aren\u2019t selling as much as you\u2019d like, it\u2019s important to consider your value proposition. The best place to start is by looking at your competitors\u2019 prices. If yours are vastly higher with no good reason, then you\u2019re going to struggle to make the sales you want.<\/p>\n\n\n\n<p>It\u2019s not all about undercutting your competitors, though. While you can look to reduce pricing by optimising other areas of the supply chain and passing on the discount, you can also consider further ways to add value to your customers.<\/p>\n\n\n\n<p>This might be through loyalty programs, free gifts, great customer service, competitions, and more. Give customers more reasons to want to shop with you.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"improve-inventory-management-with-j-j\"><\/span>Improve inventory management with J&amp;J<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>At J&amp;J, we can help you fix a low turnover rate by giving you back the time you need to do just that. We are an <a href=\"https:\/\/www.ecommercefulfilment.com\/en_US\/what-is-a-3pl\/\">industry leader in the 3PL space<\/a>, offering lightning-fast and 99.9% accurate fulfillment services.<\/p>\n\n\n\n<p>We store, pick, pack, and ship your products anywhere in the world, and even take care of returns too. This frees up your in-house resources to focus on selling, optimising inventory, improving your supply chain, developing amazing marketing strategies, and much more!<\/p>\n\n\n\n<p>Also included is our award-winning inventory management platform, <a href=\"\/en_US\/fulfillment-software\/order-management-system\/\">ControlPort<\/a>\u2122, which automatically highlights areas of inventory management closely related to inventory turnover, providing you with the insights you need to make improvements.<\/p>\n\n\n\n<p>For more information, give us a call on <a href=\"tel:01604968820\">+44 (0)1604 968 820<\/a> or fill in this <a href=\"#requestQuote\">online contact form.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Inventory turnover ratio is an important metric to track for any retail business, whether you&#8217;re a traditional brick-and-mortar store or an online eCommerce brand. Today, we&#8217;re going to take a look at what inventory turnover is, how to calculate it,&#8230;<\/p>\n","protected":false},"author":9,"featured_media":28591,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_lmt_disableupdate":"yes","_lmt_disable":"","footnotes":""},"categories":[383],"tags":[],"class_list":["post-28670","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-inventory-management"],"acf":[],"modified_by":"James Dillon","featured_image_src":"https:\/\/www.ecommercefulfilment.com\/wp-content\/uploads\/2023\/05\/turnover-ratio-1@2x.png","featured_image_src_square":"https:\/\/www.ecommercefulfilment.com\/wp-content\/uploads\/2023\/05\/turnover-ratio-1@2x.png","author_info":{"display_name":"J&amp;J Global Fulfilment","author_link":"https:\/\/www.ecommercefulfilment.com\/author\/james-and-james\/"},"_links":{"self":[{"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/posts\/28670","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/comments?post=28670"}],"version-history":[{"count":0,"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/posts\/28670\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/media\/28591"}],"wp:attachment":[{"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/media?parent=28670"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/categories?post=28670"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.ecommercefulfilment.com\/wp-json\/wp\/v2\/tags?post=28670"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}