How do you calculate stock turnover?

Stock-outs and shrinkage are constant concerns for stock managers and store managers. The balance is all the more difficult to strike because it has to be guaranteed for all product categories. But it's necessary to satisfy your customers and avoid waste and unnecessary storage costs. One of the most common ways of organising the flow of goods is through stock rotation. We explain why in this article and show you how to calculate it.

What is the stock rotation rate used for?

The stock turnover rate is an important KPI for retailers, because it is a way of controlling their stocks.

It shows the number of times stock has run out over a given period, usually over the course of a year. It also shows when this happened. This helps you to place orders with the right quantity of references.

But it's also essential for keeping an eye on the health of your business. It shows

• Whether demand for the products on offer is high, and therefore whether the offer is attractive;
• Whether stocks are well managed.

How is stock turnover calculated?

The stock rotation calculation is as follows:

1. Add up your initial stock and your final stock.
2. Divide this number by two, which gives you the average stock.
3. Add the initial stock (following the inventory) and what you bought in addition during the desired period, then subtract the final stock (also based on the inventory): you have the "cost of goods sold" (COGS).
4. Divide the COGS by the average stock.
5. Finally, multiply this result by 365 to obtain the inventory turnover time.

You should never forget to consider the variability over the year and the influence of any promotions you may be running.

How should the results obtained be interpreted?

With regard to the stock turnover rate itself, if the figure is high, it means that your products are in demand, that your stock management is effective and that your sales are working. But if it's the opposite, you'll need to investigate what's not working.

This could be :

• A problem with your sales method or pricing;
• Neglected market research;
• Unfavourable market conditions
• Poor quality of goods;
• Or organizational difficulties in the warehouse.

On the other hand, if the turnover rate is too high, it could mean that you are running out of stock too often, or that you are in danger of doing so. The KPI therefore enables you to think about setting up the optimum stock for a given product category.

It is also interesting to compare it with previous years to see how demand for goods has changed. But it's also essential to take into account the specifics of your sector. If you are in the food sector, the turnover rate is higher than in luxury goods, for example.

To give you an idea of the variations, here is a table with estimates of the average turnover rate by sector:

Other indicators to take into account

This stock turnover rate must be accompanied by other measures to refine your study and verify the performance of your business. Otherwise you run the risk of falsifying your calculations. This is the case for the following indicators.

Out-of-stock rate

This is determined as follows: (number of orders not filled due to stock shortages/total number of orders) x 100. It is used to assess the frequency of stock shortages. If they are too frequent, this reduces customer loyalty and you risk losing money. In this case, you need to increase stocks.

Stock coverage

Stock cover is the number of days of consumption remaining to meet customer demand. It is calculated by dividing the volume of stock by the average consumption over the chosen period.

Stock return rate

The stock return rate is calculated by dividing the number of products returned or brought back by the total number of items sold, then multiplying this quotient by 100, to give you an idea of the extent of customer returns. You then need to understand the reasons: problems with the products, preparation errors, delivery difficulties, etc.

Known and unknown shrinkage

The average stock loss is the difference between the actual inventory and what is indicated in your software. If it is high, you may be dealing with theft and therefore unknown shrinkage, which may be due to theft. Don't hesitate to use advanced monitoring software like Veesion's.

Optimum stock

The optimum stock for each reference is estimated by multiplying the number of orders by the goods turnover rate. It is then adjusted over time according to changes in demand.

The ABC method

The stock turnover rate also makes it possible to classify products in order to organize them in the stockroom. This is generally done using the ABC method. What does this method involve? Each product is placed in a group according to demand and Pareto's law:

• A: the products with the best turnover are the ones you need to deal with first and which are stored in the most accessible places in the warehouse. They usually represent 80% of the total value of product sales.
• B: This category corresponds to the 30% of items that account for 15% of sales. For these, there is less control and you can base your decisions on minimum stock levels. They should be placed in an intermediate zone.
• C: These are the majority of SKUs, i.e. 50%, representing 5% of sales. They sell less and can therefore be relegated to the background. Nonetheless, they are still worth keeping an eye on, as the question of maintaining them arises.

How can you improve your stock rotation rate?

Once you have identified where the problem(s) lie, solutions need to be put in place to improve your stock rotation rate.

• Match demand with stock levels;
• Carry out a full market study, or have one carried out, and deduce the changes in demand from this. You can then adjust your stock accordingly.
• Discuss with your suppliers the possibility of reducing delivery times. This will enable you to stock less and satisfy your customers.
• Perfect your marketing strategies to highlight your products and match supply and demand.
• Optimise your promotional periods to boost sales and empty certain stocks.
• Check your stock in real time to see if there is any theft, whether shoplifting or by employees. To do this, use video surveillance systems for supermarkets, for example, or RFID tags that enable items to be tracked in real time.

In conclusion, the stock rotation rate KPI is essential for understanding your company's performance and, as a result, improving the organisation of your stock, reducing logistics costs and optimising stocks. Along with the other stock management indicators, it also enables you to find solutions for reducing customer returns, classifying items in the warehouse, choosing the optimum stock or even reducing theft with software for monitoring suspicious gestures such as Veesion's.