The Problems with Inventory Turns

April 18, 2014
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Though inventory turns is the standard measure of inventory performance, inventory turns is limited as a metric. I’d go further to say, a good measure is one that causes the people involved to take action and therefore inventory turns is not a good measure. The first problem with turns as a measure is the question people always ask about it, what is the right number of turns? It is impossible to define the perfect number of turns. Some people say 52 turns, meaning I should turn my inventory once a week, is a great goal for turns. My experience is that type of goal is too generic. All parts/SKUs are not created equal. If we’re talking fresh baked goods then the minimum number of turns is 365. If we are talking material that goes into the next Mars Rover that the Jet Proposal Laboratory is building in Pasadena, then the right number of turns is one turn every five years. The right number of turns is relative to the type of product it’s measuring.

The second problem with inventory turns as a measure is that it is not actionable. So I set a goal of getting from 9 turns to 26 turns, now what do I do. Which of my six plants has the problem? Which of my 12 DCs is not meeting its goal? Which of my 24 inventory planners is doing a good job and who should I fire? Who is getting better and who is falling behind? Turns is usually measured in aggregate across the entire population of inventory because it’s calculated based on sales and I may not be able to distinguish all the components that went into a sale and where they came from. Turns is measured on past sales not future needs. What action should I take to increase my turns? The measure does not give me actionable information. What we as inventory managers and planners need is actionable data. Hold me accountable to a measure that I can easily see how I affect. We need a measure that we can segment from the entire population of inventory down to individual plant, the individual DC, individual planner, supplier and individual part number. Further, we need a measure that has a comparison to perfect inventory performance. We need a measure that is based on future demand not past sales.

There is a measure that is: Is based on future requirements not past sales. It is measurable down to the part number level, and compares to perfect inventory performance. It is the Inventory Quality Ratio (IQR).  There is a perfect IQR; it’s 100%.  If all your inventory is active, that is you need it all for current or future requirements, then your IQR is 100%. If you calculate your IQR as 40%, then you know exactly how far you have to go to improve inventory performance. IQR is calculated for various segments of inventory. You can measure the IQR for your A items separate from your B items. You can calculate your IQR by warehouse, by plant, by buyer or many other ways. IQR is both a measure of your entire inventory’s performance and it can also be used to measure any discrete segment of your inventory down to individual part numbers. IQR is a better metric than Inventory Turns. For more on IQR go to: http://www.InventoryPerformance.com

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