How to calculate and optimise your stock rotation?

reduction-couts-caches-comment-digitalisation-permet-phenomene

The stock turnover ratio is a relevant indicator for assessing a company’s stock management. It indicates the frequency with which your stock is renewed, and provides valuable information about how you should manage your inventory. Here are the main points to bear in mind when calculating and interpreting it:

Calculating the Stock Turnover Ratio (STR)

The formula for calculating the stock turnover ratio is as follows:

Inventory turnover = Cost of goods sold / Average inventory

Where average stock is calculated as :

Average stock = (Opening stock Closing stock) / 2

You can also use turnover instead of cost of goods sold. Finally, the period over which you calculate this index should be adjusted according to the nature of your business and the criticality that your stock may represent.

Interpreting the rate

The result of this rate, or ratio, should be interpreted as follows:

  • A high ratio indicates that stocks are being renewed rapidly, which is generally positive.
  • A ratio of 1 or less suggests that stocks are too high.
  • A very high ratio (e.g. 10) may indicate frequent stock-outs.

As you can see, this rate reflects the frequency with which the stock of a product or good is renewed, and should help you to manage your supplies more smoothly.

Advantages of calculating the turnover rate

Calculating stock turnover rates has a number of advantages for companies looking to manage their inventories effectively. Not only can it be used to monitor and improve inventory management performance, it can also be used to optimise the operational and financial aspects of a business:

  • Evaluate inventory management performance
  • Optimise storage costs
  • Avoid out-of-stocks and overstocks
  • Identify high/low turnover products
  • Improve procurement decision-making

These benefits enable companies to maintain efficient stock management and reduce costs, with the ultimate aim of ensuring your production chain or customer satisfaction.

download our stock management template for excel

Additional calculation: inventory lead time

For a better understanding of inventory management, it may also be useful to calculate the days sales outstanding. Here’s the formula:

Leadtime (in days) = 365 / Turnover rate

This calculation provides an additional perspective on the average number of days it takes to sell an item. You can use it to fine-tune your stock management.

To illustrate this, let’s look at two practical examples:

Example 1: A company distributing electronic products

  • Cost of goods sold: €500,000
  • Opening inventory: €100,000
  • Ending inventory: €150,000

Calculation of average stock :

Average stock = (Opening stock Closing stock) / 2 = (100,000 150,000) / 2 = €125,000

Calculation of turnover rate :

Turnoverrate = Cost of goods sold / Average stock = 500 ,000 / 125,000 = 4

This company renews its stock 4 times a year, which is considered ideal for an e-commerce business.

Calculation of lead time :

Leadtime = 365 / Turnover rate = 365 / 4 = 91.25 days

This company takes an average of 91.25 days to renew its stock, which is reasonable for a sector with moderate product turnover.

Example 2: A clothing shop

  • Cost of goods sold: €200,000
  • Opening inventory: €80,000
  • Ending inventory: €100,000

Average stock = (Opening stock Closing stock) / 2 = (80,000 100,000) / 2 = €90,000

Calculation of turnover rate :

Turnoverrate = Cost of goods sold / Average stock = 200,000 / 90,000 = 2.22

Leadtime = 365 / Turnoverrate = 365 / 2.22 = 164.41 days

This shop renews its stock around 2.22 times a year, which may indicate efficient stock management but could be optimised to avoid overstocking.

It takes approximately 164.41 days to renew its stock, which may indicate less efficient stock management and a potential need for optimisation.

These examples show how the calculation of stock turnover time provides valuable additional information for evaluating and improving stock management.

Strategies for optimising stock turns

There are a number of effective strategies for optimising stock turns:

1. Improve sales forecasts

By analysing historical data and market trends, you can better anticipate future demand. By using predictive analysis tools, companies can refine their forecasts and adjust stock levels accordingly, reducing the risk of overstocking or stock-outs.

2. Optimising supplies

Implementing just-in-time distribution helps to align purchasing with actual sales. By negotiating better lead times with suppliers and ordering smaller quantities more frequently, companies can maintain optimal and flexible stock levels.

3. Efficient stock management

Regular stocktaking and real-time monitoring of inventories enable dormant or slow-moving products to be identified quickly. The use of stock management software improves the control and optimisation of inventories, guaranteeing adequate availability of products at all times.

Discover our inventory management software

4. Boosting sales

Launching targeted promotions to clear excess stock can boost sales and free up storage space. Well-planned marketing campaigns can increase orders, while pre-orders help to anticipate and adjust supplies in line with actual demand.

5. Optimising the product range

Highlighting fast-moving products and reducing or eliminating slow-moving items allows you to concentrate your efforts on the most profitable items. This improves stock efficiency and reduces the costs associated with poor-performing products.

6. Improve the service rate

Avoiding stock-outs is essential to maintain customer satisfaction and avoid losing potential sales. Proactive stock management ensures that the products requested are always available.

7. Negotiating with suppliers

Obtaining discounts on orders and negotiating return conditions for unsold goods can improve profit margins. Good relations with suppliers also mean more flexible and advantageous supply conditions.

8. Use performance indicators

Regularly monitoring the turnover rate and average storage time means thatstrategies can be adjusted in line with observed performance. These indicators help to identify areas for improvement and to make informed decisions to optimise stock management.

By implementing these different strategies, you can optimise your stock rotation rate, reduce storage costs and improve the overall performance of your stock management.

How do lead times affect stock rotation rates?

If you have a high stock turnover rate over a strategic period, then you need to keep supply lead times under control as much as possible. Long lead times reduce the frequency with which stocks are renewed, forcing companies to maintain a higher stock level to avoid stock-outs, which in turn reduces the rate of stock rotation. A larger safety stock ties up capital and increases storage costs.

In addition, longer lead times reduce the ability to adapt quickly to changes in demand, making forecasting more complex and often less accurate. Shorter lead times mean that orders can be placed more frequently and in smaller quantities, thereby encouraging faster turnaround but also reducing the logistics involved.

learn more about weproc

To optimise this rate, it is essential to negotiate shorter lead times with suppliers, adopt just-in-time distribution and improve the accuracy of demand forecasts using high-performance stock management tools. By reducing lead times, companies can improve stock rotation and, consequently, the efficiency of their supply chain.

Conclusion on stock rotation: calculation / rate / ratio

The inventory turnover rate is a key indicator for inventory management and overall business performance. Regular analysis of this indicator makes it possible to fine-tune supplies, and avoid costly overstocking or, worse still, stock-outs. A clear understanding of this rate helps to identify high and low turnover products, which facilitates strategic decisions such as promotions or deletion of item references.

Optimising the stock rotation rate reduces storage costs, improves cash flow and increases customer satisfaction through better product availability. Careful monitoring and ongoing adjustments based on this indicator increase profitability, boost competitiveness and enhance the company’s operational efficiency.

Finally, optimal stock management contributes to financial stability, enables a more efficient allocation of resources and improves responsiveness to market fluctuations. Improving stock rotation rates is therefore an essential lever for guaranteeing sustainable growth and sustained performance over the long term.

 

Want to learn more about our procurement management software Weproc? Contact us or request your free 15-minutes demo below!


5/5 - (1 vote)
Newsletter

Recevez chaque mois nos meilleurs articles ! En bonus, nous vous mettons à disposition nos nouveaux modèles de documents en avant première. 

Alors, pas mal non ?