In general, retailers prefer high inventory turnover numbers. The higher the inventory turnover, the more times the retailer has sold their average inventory. This means that a higher turnover rate normally correlates with higher levels of sales and profits.
Retailer #1 carries an average retail inventory of $300,000 and has annual sales of $900,000. This gives them an inventory turnover of 3.0 ($900,000/$300,000). If Retailer #1 has no markdowns and a maintain margin of 10%, then they will achieve a profit of $90,000 ($900,000 * 10%).
Retailer #2 carries the same average retail inventory of $300,000, but manage their inventory more efficiently, turning it 4.0 times that year. This gives Retailer B annual sales of $1,200,000 ($300,000 * 4.0). If they also have no markdowns and a maintain margin of 10%, they will earn an annual profit of $120,000 ($1,200,000 * 10%).
Is it always true that a bigger turn number is better? While retailers do generally prefer that their inventory turnover rates increase, there are 2 exceptions to this rule.
The first is when dealing with a loss leader. If a retailer has a negative initial margin for a particular item, then they may not wish to drive their turnover numbers higher.
The second is when the retailer’s out of stock levels are high. This situation is one which will be covered in a future post.
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