Inventory Turn Is the Amount of Times

Inventory turn is the amount of times that the inventory is moved in a given year. The inventory turn is calculated as the cost of goods sold divided by the average inventory level (Investopedia, 2014). The inventory turn is expressed either in how many times the inventory turned over, or how many days' inventory is on hand at any given time.

In general, inventory turn is used to measure sales performance and process performance. On the sales side is the numerator, the cost of goods sold. This reflects how much inventory the company is moving. But the denominator is the process performance side of the equation. The company must determine the levels of production for each good. The better aligned these production levels are with the sales, the more control the company will have over the inventory turn. Increasing inventory turn is easier when the company is able to manage its processes better, in particular with things like being able to produce just in time for sales, and to reduce the need for high levels of finished goods inventory.

It has been found that variations in inventory turnover can explain 66% of in-firm performance and 97.2% of total variation across firms of major financial metrics (Gaur, Fisher & Raman, 2004). This means that inventory turnover is correlated with strong financial performance, either because firms with high inventory turnover are generally well-run, or because high inventory turn encourages increased profits.

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Physical location and control of inventory are issues that companies seeking to minimize their inventory levels must address. The inventory structure reflects what sort of inventory exists, and where it is located. Ideally, the most efficient operations will have a fairly small inventory level and a high inventory turnover. Production capacity, forecasting and transportation all play a role in this discussion, as the company seeks to optimize its inventory management. Physical location is important because it affects shipping times. Control of inventory reflects the firm's ability to know what it has in inventory, and how fast it can adjust inventory levels to meet changes in demand.

Control of inventory is essentially an output for capacity and inventory structure. The more capacity a company has, and the more flexibility it has with respect to the structure of the inventory, the better able it will be to control inventory levels, even in the face of unpredictable demand.

The concept of inventory structure refers to the physical warehousing. The location stock is where the product is located at the facility, and this is taken along with the input and the output to determine the inventory flow through the facility. Physical location is important because inventory structure takes into account the different facilities the company has, and how it spreads its inventory among these facilities for imminent delivery to the customer.