Stock turn

From CEOpedia | Management online

Stock turn is the number of times the total stock is bought and sold during one period of time. It also can be calculated on a basis of a specific product or departament (M. Wrice 2002, p.246). It is measured when warehouses and distribution centres calculated it as a part of daily, weekly or monthly inventory performance report (S. Grinsted, G. Richards 2016, p. 169). It does not measure effectinveness of stock control in meeting demand - it measures efficiency in doing so economically (P. Baily, D. James, D. Jessop, D. Farmer 2005 p. 142). In other words, it measures efficiency of busienss. The number points out how many stock item was sold during the course of accounting period (R. Leach 2010, ch. 7.1). Overall stock turn is calculated as follows: cost of total annual issues divided by value of average inventory level (S. Grinsted, G. Richards 2016, p.169). In practise, different items will have different stock turns's levels. Some may not by issued at all, like non-moovers (stock turn of zero). Others may be used and replenished weekly. Thereby, considering the overall stock turn for the whole inventory is useful. Furthermore, it is also wise to consider stock turn for each item individually. Stock turn for one item can be calculated using values (istead of quantities) (S. Grinsted, G. Richards 2016, p.169). Division of items due to individual stock turn (S. Grinsted, G. Richards 2016, p.169):

  • fast moovers (the highest stock turn)
  • slow moovers (the lowest stock turn)
  • non-moovers (stock turn of zero)

Stock turn rate

According to P. Baily, D. James, D. Jessop and D. Farmer: "Stock turn rate for a high usage value item will (...) imrpove when instead of ordering threee month' supply the EOQ formula is used. Although high usage value item for quite a small propotion of the sum shown in the account for stock. Usually, EOQ policies improve yhe overall stuck-turn rate by frequent ordering of high usage value items, as well as reducing the number of orders placed by less frequent ordering of low usage value items." (2005, p.142)

Maximising stock turn

Benefits of maximsing stock turn are (M. Wrice 2002, p. 169):

  • fresh merchandise
  • sufficient depth without building of aged stock-up
  • steady cash flow as a result of no connections between capital and poorly performing merchandise
  • minimalization cost connected with procuring, holding and maintaining stock
  • stock's flow through the distribution system is smoother and faster

Examples of Stock turn

  • Stock turn is used to measure the efficiency of stock control. For example, if a company has a stock turn of five, it means that the total stock was sold and bought five times during the accounting period.
  • Another example of stock turn is in retail stores. If a store has a stock turn of three, it means that the total stock was sold three times during the accounting period. This indicates that the store has a good level of efficiency in controlling its stock.
  • Stock turn is also used to measure the efficiency of inventory management. For example, a warehouse may use stock turn to measure how quickly it can replenish its inventory. If the stock turn for a particular item is high, it means that the warehouse is replenishing its inventory quickly and efficiently.
  • Stock turn is also used to measure the effectiveness of a company's pricing strategy. For example, if a company has a high stock turn, it means that its pricing strategy is effective in encouraging customers to purchase the product. Conversely, if the stock turn is low, it indicates that the company's pricing strategy is not effective in generating sales.

Advantages of Stock turn

The stock turn measurement has many advantages. Below is the list of them:

  • It provides an indication of the rate at which inventory is being sold and replaced. It helps to determine the effectiveness of the inventory management system and identify areas of improvement. * It helps to ensure that items are not overstocked, thus avoiding unnecessary costs associated with storage, maintenance and obsolescence. * It helps in recognizing slow-moving items and gives an indication of how well the product is performing in a particular market. * It also gives an indication of how well a company is able to manage its supply chain and how efficiently it is utilizing its resources. * It gives a better understanding of the company's financial position and helps to make better decisions about future investments.

Limitations of Stock turn

Stock turn is a useful and important measure of inventory performance, however it has its weaknesses. Following are some of the limitations of stock turn:

  • Stock turn does not measure the effectiveness of stock control in meeting demand. It only measures the efficiency of stock control in an economical manner. Therefore, stock turn does not take into account customer service, delivery times or any other factors that may affect demand.
  • Stock turn is calculated on the basis of a single period of time, which may not be representative of an entire year or other longer period. Different products may have different stock turn levels, and stock turn may vary from one period to the next, so it is wise to calculate stock turn for individual items as well as for the overall inventory.
  • Stock turn does not consider the value of the items purchased. It only takes into account the cost of the items purchased, which can be misleading when higher-value items are purchased.
  • Stock turn does not consider the quality of the items purchased. It does not take into account any defects or faults in the items, which can affect the efficiency of stock control.
  • Stock turn does not consider the cost of stock-outs or other inventory related losses. It only takes into account the cost of the items purchased, not any additional costs that may arise from stock-outs or other inventory related losses.

Other approaches related to Stock turn

In addition to stock turn, there are several other approaches related to inventory management. These include:

  • Reorder Point - This is the minimum level of inventory at which a reorder must be made in order to prevent stock-outs. The reorder point is determined by the level of demand, lead time, and safety stock.
  • Economic Order Quantity - This is the optimal order size that minimizes the cost of ordering and carrying inventory. It is determined by the ordering cost, holding cost, and demand for the item.
  • ABC Analysis - This is a method of inventory categorization that divides inventory into three groups based on their value or importance to the business. The goal of ABC analysis is to optimize inventory management resources.
  • Just In Time - This is an inventory management system that is designed to reduce inventory levels by delivering the right amount of inventory, at the right time, in the right place.

Overall, these are some of the approaches to inventory management that are related to stock turn. Each approach has its own unique purpose, and can help businesses to better manage their inventory and improve their overall efficiency.


Stock turn — recommended articles
Optimum size of the order — ABC analysis — Inventory value — Fill rate — ABC method — Abc inventory classification — Reorder level — Absorbed costs — Economic batch size

References

Author: Dominika Kuraś

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