How Many Inventory Turns Should
Charles J. Bodenstab
I am frequently asked this question of, How many turns should I be getting from my inventory. I have been very wary of responding to the question, however, since there are so many factors that influence the answer. The frequency at which you can order product, vendor lead times, vendor reliability, minimum order quantities, breadth of the line being stocked, all impact the final solution. Finally, the efficiency of the inventory management software that you are using has a profound impact.
However, I have now seen a sufficient number of companies that are using the MARS system to start to venture some guidance on this issue. In fact, I have reduced the issue to a formula that operates as follows:
Reasonable Expected Turns = 12 / (f x (OF + .2 x LT))
The breadth of the total product line being stocked. e.g. the need to stock slow movers for marketing reasons.
Larger than needed buys to take advantage of discounts.
Pallet or lot size requirements
Economic Order Size (EOQ) considerations.
Two Stage Distribution
As long as these type of considerations are at reasonable levels the factor should be around 1.5. If one or more of the considerations is very extreme, then the factor can work its way up to 2.0.
Additionally, there are two basic assumptions behind the use of this formula:
The following table illustrates the solution to this formula for a series of assumed variable levels:
Expected Inventory Turns
Using A Factor Of 1.5
This second table shows the same results for a factor setting of 2.0:
Expected Inventory Turns
Using A Factor Of 2.0
You may feel that these expectations are overly optimistic, but frankly I think that they are entirely reasonable given the assumptions. For example, note that using, a one month order frequency, a half month lead time, and a 2.0 factor, calls for 5.5 turns. This is slightly more than an average of two months supply of every item. (Months supply is simply the reciprocal of turns - or one divided by the turns.) Why do we need more than even an average of one months supply , let alone two, if we are ordering every month? (The lead time is somewhat immaterial because MARS will place most of that inventory in the pipeline.)
Section 4.2 of my book, A New Era in Inventory Management actually simulates two situations and illustrates that we should, at the theoretical level, have slightly over 12 turns for the one month order cycle and two week lead time example discussed above. (The average inventory is 58 units with a forecast of 60).
Keep in mind that one of our assumptions is that the dead stock is being aggressively flushed out of the system by various special programs. Generally this stock constitutes from 10% to 40% of the inventory and acts as a lodestone around the neck of the inventory. (e.g. when 25% of the inventory is dead it automatically reduces the turns by 25%, so a potential turn level of 6 drops to 4.5)
Additionally, do not assume that your turns must be low because you are required to stock many items that have very little turnover. Granted, this situation will have some impact, but MARS will insure that you are stocking only the bare minimum of those items. This situation of stocking slow movers does hurt, however, when the vendor minimums by item are high, relative to your sales. e.g. you only move one or two every few months, but the vendor minimum is a carton of fifty. (Frankly, these type situations raise some serious questions regarding the prudence of the stocking decision.)
The 1.5 factor does allow for some
problems that inflate the inventory such as those discussed above
if they are not rampant. Additionally, it allows for the extra
inventory needed to meet pallet or lot quantities, to take
advantage of discounts, and also to meet economic order
quantities (EOQ). You should accept a higher factor only if you
are truly dealing with additional factors beyond the norm, and I
have trouble seeing where anything beyond the 2.0 factor is