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The Importance of Inventory Turnover in Operations
For retailers, wholesalers, and supply chain managers, monitoring inventory performance is essential for maintaining liquidity. Inventory turnover measures how many times a business sells and replaces its stock over a given period, typically a year.
A high inventory turnover ratio indicates that products are selling quickly, minimizing capital tied up in warehouses. Conversely, a low turnover ratio suggests slow sales, weak market demand, or poor inventory buying strategies.
To calculate the inventory turnover ratio, divide the Cost of Goods Sold (COGS) by the average inventory level. COGS represents the wholesale cost of products sold, which is used instead of retail revenue to avoid price markup distortions.