How to improve inventory turnover: 9 ways that do not hurt service

Inventory turnover tells you how many times a year your stock is sold and replaced. Higher turnover means the same sales with less cash tied up in stock, as long as customers still get what they order. Here are nine ways to raise it without hurting service.

First, measure it the same way every time

Inventory turnover = cost of goods sold ÷ average inventory at cost

With $6 million of cost of goods sold a year and $1.5 million of average inventory, turnover is 4. Stock sits about 365 ÷ 4 = 91 days on average. Use the same formula and the same months every time you measure, and read what counts as a good inventory turnover ratio before setting a target. The inventory turnover calculator does the arithmetic.

What an improvement is worth

At the same $6 million of cost of goods sold, going from 4 turns to 5 cuts average inventory from $1.5 million to $1.2 million. That frees $300,000 of cash, and at a 25% yearly carrying cost it saves about $75,000 a year.

Nine ways to improve inventory turnover

• Measure by item and category, not only in total. A healthy total can hide a slow category. Rank items with ABC/XYZ classification and look at turnover for each class.
• Clear the dead stock. Items with no sales in 6 to 12 months drag the whole ratio down. Our guide to finding dead stock shows how to list it and what to do with it.
• Stop reordering what has stopped selling. Dead stock comes back when reorder points stay switched on for items whose demand has gone.
• Right-size order quantities. Large lots raise average inventory. Check each order quantity, and push back on minimums that cost more than they save: see EOQ vs MOQ.
• Set safety stock item by item. A blanket “four weeks” is too much for steady items. The safety stock formula sizes it from each item’s own variability.
• Shorten and steady lead times. Every day of lead time is a day of stock in the pipeline, and an unreliable supplier forces extra buffer. A supplier scorecard shows who to work with.
• Improve the forecast, and remove its bias. A forecast that is always a little high builds stock quietly. Measure it with the forecast accuracy formula.
• Order your A items more often. Smaller, more frequent orders on your highest-value items lower average stock where it matters most.
• Keep the stock records right. Wrong on-hand figures lead to buying stock you already have. Count your highest-value items most often.

What not to do

• Cut stock across the board. Turnover rises for a month, then stockouts and rush orders cost more than the cash saved.
• Time purchases around the measurement date. It flatters the number without changing the business.
• Chase a benchmark from another industry. A distributor and a machine shop should not have the same target.

Watch your fill rate as turnover rises: see fill rate vs service level. If customers start to wait, you have gone too far. For the warning signs of running short, read how to prevent stockouts.

Doing it for every item

Most of these changes are item-level settings: order quantities, safety stock, reorder points and which items to stop buying. In a spreadsheet that is slow work. Inventory planning software recalculates them from your own history, and inventory optimization consulting can help when you need hands-on support.

Frequently asked questions

What is a good inventory turnover ratio?

It depends on the industry and the item. Compare yourself with last year and compare categories within your business, rather than chasing a single benchmark.

Does a higher turnover always mean better?

No. Turnover that rises because you keep running out is not an improvement. Track it next to your fill rate or service level.

How quickly can turnover improve?

Clearing dead stock shows up within a few months. Changes to order quantities and safety stock take one or two full order cycles to show in the average.