top of page
Writer's pictureJames Taylor

Inventory Turns Are Not What You Think They Are

Imagine you’re the supply chain manager of a company that makes premium pencils. These aren’t your average, run-of-the-mill pencils; we’re talking about the Rolls-Royce of pencils, and each one costs exactly one dollar to produce. On January 1st, 2024 you kick off the year with exactly 366 pencils in inventory. Every day, you sell one pencil. You won’t produce any more pencils this year. On December 31st, your premium pencil stash hits zero. Now, here’s the million dollar—err 366 dollar—question: How many times did you turn over your inventory in 2024?

 

The Intuitive Answer: 1 Turn

It sounds simple, right? You started the year with 366 pencils, you sold 366 pencils, and you’re now pencil-less. So, you turned over your inventory once.


Nope.

 

The Correct Answer: 2 Turns

While that one-turn guess makes sense, inventory turnover is how often you sell your average inventory, not that you sold through your physical inventory. In this case, your 2024 inventory days on hand is about 183 days (half the year) and you sold that number of pencils twice. Confused yet?


This wouldn’t be a proper inventory paper without a saw tooth. Let’s add one:



You begin with 366 pencils on January 1st, and your stock gradually drops to zero by December 31st. Halfway down that long side of the triangle? That’s about July 1st and that's your average inventory for the year. Half of the year you had more inventory, and half of the year you had less inventory, than on that day. With 366 pencils starting out and zero at the end, your average inventory comes to 183 pencils.


If your average inventory is 183 pencils, and you sold 366 pencils during the year, guess what? You cycled through that average inventory two full times. While there are alternative ways to calculate inventory turns, they all work about the same way:


Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory


Sometimes you’ll see it this way so you can use two financial statements, say from the end of 2023 and the end of 2024, to calculate the average.


Inventory Turnover = Cost of Goods Sold (COGS) / (Beginning Inventory + Ending Inventory) / 2

 

What Happens in 2025?

Your CFO pulls you aside and drops: “You’ve got too much cash tied up in inventory.” (CFOs love saying stuff like that.) You respond by saying, “No problem. Starting in 2025, we’ll shift to a once-a-month production schedule.” That means on the first day of each month, you’ll make just enough pencils to meet that month’s demand—31 pencils in January; 28 in February; and so on.


So, how many inventory turns will you have in 2025?


Using our trusty saw tooth, this time with a monthly replenishment of pencils, we have twelve peaks instead of one.



Roughly you turn over your inventory 2 times the number of replenishment cycles. So, with monthly replenishment, you're looking at around 24 turns per year (2 turns for each of the 12 cycles).

 

Rule 1: The more frequently you replenish, the faster those inventory turns climb.

 

Of course, this is a simplified scenario. You’d have safety stock, and demand is rarely so linear and predictable. But at its core, inventory turns are all about the frequency of replenishment. For manufacturers—whether pencils or anything else—the key to effective replenishment is how efficiently you move through the product lineup. And to do that without inflating costs, it means minimizing changeovers and setups, with techniques like SMED (Single-Minute Exchange of Die). It’s a valuable journey worth taking.

 

Even the Experts Get It Wrong

Yes, supply chain experts get tripped up by inventory turns. In this definition from an (otherwise excellent!) 500-page book on inventory management the author writes:


“if inventory turns 12 times over the course of the year, the company will purchase or manufacture then consume its inventory 12 times...A company with 120 days maximum inventory turns its inventory 3 times a year"


The moral of the story? Don’t feel bad if you think turns is confusing. Even the pros get turned around.

 

Why Inventory Turns Matter

Faster inventory turns are linked to better customer service, lower working capital, and higher product quality. It’s the supply chain version of agility.


As a rule-of-thumb, inventory turns are slightly less than 2X the number of replenishment cycles. Why less? Because of safety stock and other factors. And once you know how turns are driven by replenishment cycles, you see how increasing those cycles per year can have a positive impact on turns and working capital.

 

Rule 2: Inventory cannot be managed by itself in a vacuum. It has a direct relationship to your manufacturing and purchasing strategies. They must work in concert.

 

If the CEO tells you, “we want to increase our turns to from 8 to 12”, you will know what it takes to get those 4 additional turns. (2 more replenishment cycles!)


At IBP2, we help companies meet their inventory turn targets with an S&OP approach that combines forecasting, manufacturing, and purchasing practices into a holistic inventory management system. We ensure that the realized inventory improvement matches your company’s goals. Together, we’ll make sure your inventory turns are on target and your business is positioned for success.

 

Footnote: Shout out to my international colleagues who use turnover to mean revenue!

81 views0 comments

Comments


bottom of page