Using Stock Turn to Optimise your Inventory Management

4 min read

Tags: Blog, Inventory management, Technology

Daniel Martinsson   23 July 2018


Logistik im Warenlager - Arbeiter mit Hubwagen und Gabelstapler am Hochregal

Index

  1. The Dilemma of too much Data
  2. What’s important and what’s optional?
  3. KPI Definition: Stock Turn
  4. What’s the best stock turn rate?

The Dilemma of too much Data

Measuring inventory Key Performance Indicators (KPIs) is imperative to control your inventory and warehouse performance, but oftentimes companies end up collecting more data than they actually use. Plus, collecting and laboriously processing data becomes a hindrance to the daily work of the employees in the purchasing and storage departments, ultimately pushing inventory optimisation – which is the goal of data collection and analysis in the first place – into the background. Companies need to determine which inventory KPIs are truly important to their companies and which are only marginally relevant.

Performance & Challenges for SMBs

Today, comprehensive data collection is easier than ever before. For example, in a large part of merchandise management, new data is being read via RFID chips in warehouses. However, this promotes saving and processing more data than necessary. The result is KPI dashboards with GUIs that are cluttered with reports, input fields, and buttons. Depending on the role of the end user, they will only need a few of those, and this data complexity leads to mistakes.

What’s important and what’s optional?

Every company uses the data needed for operational processes in a way that’s tailored to its own requirements; the optimal setup changes from company to company. But even within one supply chain, different companies (think: suppliers or customers) are tracking different data with different parameters – and sharing it with the rest of the supply chain. Data that’s being transferred between different parts of the supply chain can be misinterpreted by different systems. That’s why it’s very important to receive and send the “correct” data, which will save time and money.

Diskussion zu Bestandskennzahlen zwischen zwei MitarbeiternThe best way of receiving correct data is by communicating with suppliers and customers to agree on consistent data formats. Pessimists will state that data that could be important in the future might get overlooked, but this is where quality management and ISO certification come into play. They establish which inventory management data is important and how it should be processed and stored. Data collection is also based on what KPIs a company wants to track and improve upon. For many businesses looking to improve their inventory management, this includes the KPI stock turn.

KPI Definition: Stock Turn

As indicated by the name, stock turn demonstrates how often the stock level of a certain SKU is completely sold or used in the warehouse or, rather, how often outflows through sales or extraction can be recorded during a specified timeframe. Stock turn is important because it lays the foundation for the purchasing strategy of an item and helps you determine demand trends for items. Determining timeframes during which the stock turn is measured depends on additional factors and key performance indicators.

What’s the formula for calculating stock turn?

There are a few formulae available for calculating stock turn; we’re only showing you a select few here. In this example, the SKU or inventory value or cost of sales can be used as the basis for calculating stock turn. That way, one can either calculate the frequency of achieved sales, the number of articles in stock or the average ratio of revenue and inventory. These are the corresponding formulae:

Stock Turn Formula 1

Stock Turn Formula 2

To find the average inventory, the most basic formula is:

Average Inventory formula for stock turn

Or some companies just use their Ending Inventory as their Average Inventory.

What’s the best stock turn rate?

While it depends on the kinds of goods and the industry that a company is in, typically companies seek to have a high stock turn. One reason is that the higher the stock turn, the less capital there is tied up in the warehouse. A high stock turn also means that SKUs are being sold or used, which typically means that your forecasting is accurate.

supply chain managers addressing stock turnHowever, it’s important to keep other KPIs in mind when analyzing stock turn. If you have a high stock turn but also a low customer service level, it could mean that you are not stocking enough of each SKU to cover your demand. In this case, it would be better to invest in more SKUs to bring your stock turn down and boost your customer service level.

For companies with low stock turn and carrying too many SKUs, it’s important to lower your stock turn so that you don’t waste money on additional SKUs and carrying/warehouse costs. One way the turnover rate can be increased is by lowering the number of SKUs when you’re reordering. Some companies find that they have low stock turn on certain slow-moving items; it’s still important to keep enough of these items on hand so that any demand can be fulfilled.

Stock turn as a KPI for your business helps you identify where you are doing well and where you could use help with demand forecasting for items. When you combine the results from stock turn with other KPIs such as customer service level, service index, or sales value, you paint a full picture of how well your inventory management processes are operating and gain insight into how you can improve your business.

To learn more about what KPIs you can measure and track in your warehouse to improve your inventory management, take a look at the 5 KPIs that EazyStock tracks in our white paper:

 

Guide to EazyStock's KPIs