The plan focuses on measuring stock turnover through key metrics, each aiding in assessing inventory efficiency and sales performance. For instance, the Stock Turnover Ratio helps determine how quickly inventory is sold and replenished, with a benchmark of 5 to 10 times annually. Improving this can result in a leaner inventory and reduced holding costs.
The Days Sales of Inventory (DSI) gives an average time to sell inventory, ideally 30 to 50 days. Efficient DSI can result from enhancing demand forecasting and streamlining supply chains, ensuring faster stock movement.
Gross Margin Return on Inventory Investment (GMROII) measures inventory profitability, with a benchmark above 2.0. Promoting high-margin products can boost this metric, optimizing returns on inventory investment.
Top 5 metrics for Stock Turnover
1. Stock Turnover Ratio
The number of times inventory is sold and replaced over a period, calculated as Cost of Goods Sold divided by Average Inventory
What good looks like for this metric: 5 to 10 times annually
How to improve this metric:- Improve inventory management practices
- Reduce lead time for supply orders
- Increase sales through promotions
- Implement Just-In-Time inventory system
- Analyse and remove slow-moving products
2. Days Sales of Inventory (DSI)
The average number of days it takes to sell inventory, calculated as 365 divided by Stock Turnover Ratio
What good looks like for this metric: 30 to 50 days
How to improve this metric:- Conduct periodic inventory reviews
- Enhance demand forecasting accuracy
- Optimise pricing strategies
- Streamline supply chain processes
- Implement vendor-managed inventory
3. Gross Margin Return on Inventory Investment (GMROII)
A measure of inventory profitability, calculated as Gross Margin divided by Average Inventory Cost
What good looks like for this metric: Above 2.0
How to improve this metric:- Negotiate better terms with suppliers
- Identify and promote high-margin products
- Reduce inventory carrying costs
- Sell off obsolete inventory
- Utilise sales data for inventory optimization
4. Inventory to Sales Ratio
The ratio of inventory held against sales made, reflecting inventory management efficiency
What good looks like for this metric: 0.12 to 0.20
How to improve this metric:- Push sales for slow-moving items
- Improve demand planning
- Regularly adjust stock levels to sales patterns
- Implement an advanced inventory tracking system
- Diversify the product line to match consumer demand
5. Backorder Rate
The percentage of orders that cannot be filled at the time of purchase, indicating potential stock deficiencies
What good looks like for this metric: 2% to 4%
How to improve this metric:- Enhance communication with suppliers
- Better demand forecasting and planning
- Increase safety stock levels for high-demand products
- Monitor and adjust reorder points
- Invest in an integrated supply chain management system
How to track Stock Turnover metrics
It's one thing to have a plan, it's another to stick to it. We hope that the examples above will help you get started with your own strategy, but we also know that it's easy to get lost in the day-to-day effort.
That's why we built Tability: to help you track your progress, keep your team aligned, and make sure you're always moving in the right direction.
Give it a try and see how it can help you bring accountability to your metrics.
