Factors Affecting Inventory Turns

Inventory turns refers to the number of times a product reseller turns over its inventory during a given year. The inventory turnover ratio is a common metric used to assess efficiency; the calculation is costs of goods sold divided by the average inventory balance during the year. High inventory turnover is generally positive for resellers, as it helps with price and profit maximization.

A key driver of inventory turnover is customer demand generated through effective promotional efforts. Advertising, public relations and personal selling are common methods used to persuade customers to buy. Slow or declining sales may mean your promotion or sales effectiveness is inefficient. In some cases, better training sales representatives can increase in-store conversion rates, especially with big-ticket purchases.

Inventory turnover is optimized when you have an effective store layout that offers eye appeal and easy access to high-priced and high-demand goods. Jewelry stores, for instance, often place more expensive pieces at the front of a store so customers pass by. Placement of products that are sought after by customers but difficult to locate in stores inhibits the ability of customers to buy even when willing.

While high turnover usually is regarded as a positive, it also could result from inaccurate buying. If your merchandise buyer doesn't plan for enough inventory to meet demand, your store may turn over its inventory but have stockouts. This is when customers want products that aren't available. This not only affects inventory turns, but it also is problematic from a customer service and retention standpoint.

Pricing affects sales volume. Companies that look to maximize profits on each sale often set higher price points and try to emphasize the value of products and services. Others go for a low price or value strategy to attract a larger customer base. Higher volume means you sell through inventory more often, but marking down excess inventory isn't good for your inventory turnover ratio because your cost of goods sold is high compared to your price points. In fact, some markdowns set a price below cost to clear out inventory.