Track your inventory turns

- Inventory is an investment. It helps us make money because it allows us to meet our customers' needs quickly. But it also consumes capital, so you want to make sure that your inventory is turning over on a regular basis. Let's walk through an example that shows how to calculate your inventory turns so that you have a simple metric that can help you manage the efficiency of your supply chain. In order to calculate the inventory turns, the first thing we need to do is choose a time period. You can calculate turns weekly, monthly, or annually. For this example, I'll calculate our monthly turns. Next, we need to choose how to measure our inventory. Do we want to measure the cost of the goods, the revenue, or the quantity of items? I'm going with quantity this time because that data is often the easiest to get. Now we need three numbers. How many units did we sell during the month? How many units did we have at the beginning of the month? And how many units did we have at the end of the month? With those three numbers, we can set up the inventory turns calculation. Our turns will be the number of units sold divided by the number of units at the end of the period plus the number of units at the beginning of the period divided by two. Let's say at the beginning of the month we had 120 widgets in stock, and at the end of the month we only had 100. During the month we sold 55 widgets to customers. So our inventory turnover for the month is 55 divided by 110, or 0.5. People often ask, what's the right number of turns for my inventory? Unfortunately, that's not an easy question to answer. A higher number of turns definitely means that you're using your inventory more effeciently. But you're also more likely to have stockouts and low customer service levels. Optimizing inventory is an important job that has a big impact on the bottom line. If you don't have enough inventory, then you're letting your customers down. If you have too much inventory, you're wasting money that could be invested in other parts of the business, or that you could be returning to your shareholders. Tracking your inventory turns can tell you a lot about the efficiency of your operations, and it can help you strike the right balance in managing your supply chain.