What is inventory turnover (stock turn)? How a retailer's stock turn can shape supplier orders

A retailer's stock turn can reach its suppliers through its orders. A retailer turning its stock faster holds less of it against the same sales. One common way to get there is to order smaller quantities more often, and those orders land with the supplier. The ratio is simple arithmetic. What it means for your order book takes a little more care.

What is inventory turnover (stock turn)?

Inventory turnover counts how often stock is sold and replaced. Wikipedia defines it as "a measure of the number of times inventory is sold or used in a time period such as a year." The Corporate Finance Institute (CFI) says it plainly: it "is the number of times a business sells and replaces its stock of goods during a given period."

The measure has a lot of names. In Wikipedia's list: "Inventory turnover is also known as inventory turns, merchandise turnover, stockturn, stock turns, turns, and stock turnover." The UK A-level reference tutor2u uses stock turnover.

It applies to goods. tutor2u notes that "stock turnover is an irrelevant ratio for many businesses in the service sector". A business selling physical products to retailers holds stock, so the ratio applies.

How do you calculate inventory turnover?

Three lines cover it:

• Stock turn = cost of goods sold / average inventory
• Average inventory = (opening stock + closing stock) / 2
• Days of inventory = 365 / stock turn

Cost of goods sold, also called cost of sales, is what the goods sold cost the business. The accountancy body ACCA, in a technical article, gives inventory turnover as cost of sales over average inventory, and explains: "This shows how quickly inventory is sold; higher turnover reflects faster-moving inventory."

Opening plus closing stock, halved, is the simplest average. It can mislead. tutor2u points out: "Stock levels can vary during the year, often caused by seasonal demand." Wikipedia's answer is more counts: "Multiple data points, for example, the average of the monthly averages, will provide a much more representative turn figure." A seasonal business gets a truer figure from more than two stock counts.

You can also work in units. Wikipedia notes: "Some computer programs measure the stock turns of an item using the actual number sold." The formula becomes units sold in the period divided by the average number of units held.

Illustrative example: one product line, in units

The figures here are invented to show the arithmetic. One product line at a retailer sells 5,200 units in a year, about 100 a week. Stock at the start of the year is 600 units. At the end, it is 200 units.

• Average stock = (600 + 200) / 2 = 400 units
• Stock turn = 5,200 / 400 = 13 turns a year
• Days of inventory = 365 / 13 = about 28 days
• Weeks of cover = 52 / 13 = 4 weeks

Units work for one product line. Across a mixed range, units of different products do not add up to anything meaningful, so cost values are the usual basis.

Cost or sales?

Some published figures use sales instead of cost, and the two give different numbers, because "Sales are generally recorded at market value". Wikipedia's verdict: "Cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis." Whichever you use, keep the top and bottom of the fraction on the same basis, both at cost or both at selling price, and say which one you used.

How does stock turn convert to days of inventory and weeks of cover?

Days of inventory is stock turn turned upside down. Divide 365 by the turn. Wikipedia's days-in-inventory page describes the result as "an efficiency ratio which measures the average number of days a company holds its inventory before selling it". The same figure goes by inventory days, days in inventory and days inventory outstanding (DIO). CIPS, the Chartered Institute of Procurement & Supply, calls it day sales of inventory.

Weeks of cover, or stock cover, says the same thing in weeks. The bullwhip effect guide uses it in its example, where "Each business keeps one week of stock cover based on the latest week of demand it sees". From a stock turn, weeks of cover is 52 divided by the turn. That conversion is our own arithmetic, taking the year as 52 weeks. Wikipedia makes the same move in months: "So a factory with two inventory turns has six months stock on hand".

The table is plain arithmetic. No row is a benchmark, good or bad.

One distinction is worth keeping. Stock turn and days of inventory look back over past sales. Cover can also be measured forward: one supply-chain training site describes a version that "takes into account the current inventory, not the past, with future sales."

What is a good inventory turnover ratio?

There is no single good number. CFI is direct about it: "Inventory turns can vary significantly by industry." Wikipedia contrasts a supermarket with a car dealer and concludes: "As such only intra-industry comparison will be appropriate."

Even inside one sector, the figure moves. In Wikipedia's words: "Even within industry, inventory turns can vary across firms for various reasons, such as the amount of product variety, the extent of price discounts offered, and the structure of the supply chain."

So compare like with like. Set a stock turn against businesses in the same sector, and against your own figures over time. A single turn figure says little on its own.

Is a higher stock turn better?

Usually it signals faster-moving stock. tutor2u offers this as a rule of thumb: "As a general guide, the quicker a business turns over its inventories, the better." Wikipedia names the upside: "Items that turn over more quickly increase responsiveness to changes in customer requirements while allowing the replacement of obsolete items."

Both ends carry a warning. Wikipedia notes that "A low turnover rate may point to overstocking". And at the other end: "Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low." It goes on: "This often can result in stock shortages." Too high a turn can mean too little stock.

The measure has limits too. Wikipedia's inventory page notes: "The methodology applied is based on historical cost of goods sold." The figure describes a past period. It does not say what next week's orders will be.

What does a retailer's stock turn mean for its suppliers?

No source we found measures a retailer's stock turn against the size or frequency of its orders. What the sources do describe is one common way to turn stock faster on the same sales: order smaller quantities, more often.

The arithmetic comes from the economic order quantity model. With steady sales, the stock from each order averages half the order, and the number of orders in a year is annual sales divided by the order size. Smaller orders mean less stock on average, and less stock against the same sales is a higher turn.

Illustrative example: same sales, smaller orders

Take the product line from earlier: 100 units a week, 5,200 a year. Assume steady sales and 100 units of safety stock that the retailer keeps throughout.

The same 5,200 units reach the shelf. The retailer that orders a quarter as much, four times as often, holds half the stock and turns it twice as fast. The supplier receives 52 orders instead of 13. This is arithmetic under stated assumptions. It describes no real retailer.

Inventory approaches such as just in time point the same way. CIPS, in its inventory management guide, defines just in time as "where goods are ordered and received as they are needed". Its separate just in time page offers "a few suggestions to guide you to success", among them: "Create a procurement philosophy to support frequent small transactions".

Cheaper ordering makes little and often practical. As early as 1997, Lee, Padmanabhan and Whang wrote in Management Science that "EDI-based order transmission systems are a big help in reducing the ordering costs and batch size." Wikipedia's bullwhip page lists "Smaller and more frequent replenishments" among the counter-measures to order swings.

Order size is not the only lever. tutor2u lists others, including: "Rationalise the product range made or sold to reduce stock-holding requirements" and "Sell-off or dispose of slow-moving or obsolete stocks". A retailer can raise its turn by cutting lines as well as by ordering little and often.

What can a supplier do about it?

Start with lead time. In its 2019 Food Logistics Handbook for ambient suppliers, Marks and Spencer says: "Shorter lead times aid agile forecasting and support greater customer availability." The lead time guide sets out why the agreed figure matters: "Your customer holds the lead time you agreed, and the due date on each order comes from it."

Then accuracy. The same M&S handbook says: "Stock delivered needs to be accurate in quantity and delivery date". Ocado's 2024 supplier manual reads: "Suppliers are required to meet the delivery in full, on the due date and at the time specified on the order." One measure for this is OTIF, which the OTIF guide defines as "the share of a customer's orders delivered on the due date or inside the booked slot, and in the quantity ordered."

Answer each order. The purchase order guide explains: "An order response can acknowledge an order, accept it, propose changes or decline all or part of it, and each customer sets whether one is required." More orders means more responses, where the customer asks for them.

Use forecasts for what they are. In the words of the stock replenishment guide: "A forecast shared by a retailer is a plan, not an order: suppliers plan with the forecast and ship against the purchase order."

Know your own stock turn too. The inputs sit in your own systems: an ERP system "is the business software a company runs its operations on", and in a business with a warehouse management system, the ERP and the WMS "share stock and despatch data."

How Transalis fits

Smaller, more frequent orders mean more orders to receive. The EDI page says: "Transalis now offers EDI in three categories." They are Web EDI, Integrated EDI and Enterprise EDI.

• Web EDI: "A secure portal where your team sees new orders the moment they land, acknowledges them in a click, and returns invoices and despatch notes, with no software to install."
• Integrated EDI: "EDI wired directly into your ERP, accounting or warehouse system."

Transalis also sends order responses and receiving advice messages for its customers. For a supplier who would rather work in a browser, the web EDI guide covers that route.

Book a 30-minute call with a Retail Supply Chain specialist, who will walk you through EDI and how Transalis makes it simple.