Inventory Turnover and Days on Hand: What the Total Hides About Each Item

What the two figures tell you

Inventory turnover is the number of times a stock is used up and replaced in a period. Days of inventory on hand is how long the same stock lasts at the rate you have been using it. Both are built from the same two inputs, consumption and stock, so once you have one figure you have the other.

Inventory turnover = consumption in the period ÷ average stock

T = C ÷ S

Days of inventory on hand = average stock ÷ average consumption per day

D = S ÷ (C ÷ P) = P ÷ T

C is consumption in the period, S is average stock and P is the number of days in the period. Consumption and stock have to be valued the same way, both in pieces or both in euros at the same price.

You will also hear inventory turns or stock turn for the first figure. A distributor puts cost of goods sold on top of the fraction, a plant puts consumption or issues from stores. This article shortens the second figure to days on hand from here on.

Four places where plants calculate differently

The formula leaves four things open. None of the answers is wrong, but each one changes the figure.

Quantity or value. For a single item you can work in pieces. Across several items only value works, because you can't add seals and housings into one piece count.

Average or cut-off date. Average stock describes the whole year. The simplest average is opening stock plus closing stock, divided by two. A closer one adds the opening stock to twelve month-end stocks and divides by thirteen. The stock on a single date answers a different question. It tells you how long the parts on the shelf today will last.

360 or 365 days. Some calculations use a commercial year of 360 days, the calendar has 365. Some plants use their working days.

Cost or sales value. The usual choice is unit cost for both inputs. Value both at the sales price instead and, with the same markup on every item, you get the same figure. The figure stops meaning anything when the top of the fraction is at sales price and the bottom is at cost. Mistake 2 shows that.

This article uses values at unit cost, the average of opening and closing stock, and 365 days. Write your rule next to the figure. Two turnover figures only compare if they follow the same rule.

The example: six items from a spare parts store

The company, the items and every figure are made up for this example. They are chosen so that you can check each line with a pocket calculator.

A pump maker runs a spare parts store. The list shows six of its items over one business year of 365 days, with the stock on the first and the last day and the year's consumption. Unit cost stays the same all year.

Where a line doesn't divide evenly, the result is rounded.

Step 1: Average stock

Average stock = (opening stock + closing stock) ÷ 2

For the mechanical seal that is (450 pcs + 550 pcs) ÷ 2 = 500 pcs.

Step 2: Inventory turnover per item

Inventory turnover = consumption ÷ average stock

6,000 pcs ÷ 500 pcs = 12

The stock of mechanical seals was replaced twelve times in the year. Unit cost didn't change, so euros give the same answer: €108,000 ÷ €9,000 = 12.

Step 3: Days on hand per item

Consumption per day = 6,000 pcs ÷ 365 days = 16.44 pcs

Days on hand = 500 pcs ÷ 16.44 pcs per day = 30.4 days

The shorter route goes through turnover, because 365 days ÷ 12 is 30.4 days as well. A seal spends about a month on the shelf.

The same sums for all six items:

Step 4: The whole list

For the list, add up the values first and divide afterwards.

Inventory turnover = €387,200 ÷ €109,950 = 3.5216, rounded to 3.52

Consumption per day = €387,200 ÷ 365 days = €1,060.82

Days on hand = €109,950 ÷ €1,060.82 per day = 103.6 days

The list's turnover is not the mean of the six item figures. That would be 31.2 ÷ 6 = 5.2. The list weights each item by the money tied up in it, and most of the money sits in the slow items.

The cross-check

365 days ÷ 3.5216 = 103.6 days

Both routes have to land on the same days on hand. The rounded turnover of 3.52 would give 103.7 days, which is why this line carries four decimals.

Days on hand is waiting time, spent in the store. What waiting between stations does to a production order is worked through on six stations in how to calculate lead time.

The same list, calculated differently

First, closing stock in place of the average:

The list's closing stock is worth €101,100. That gives €387,200 ÷ €101,100 = 3.83 turns and 95.3 days on hand.

Counting 360 days leaves turnover alone and changes only days on hand. The 103.6 days become 360 days ÷ 3.5216 = 102.2 days.

Work in pieces and the list produces a third figure. 18,040 pcs consumed ÷ 3,050 pcs of average stock is 5.91. That sum counts a €6 gasket set the same as a €140 housing. It can't tell you where the money is.

Five ways to get turnover and days on hand wrong

Each mistake comes with the wrong and the right number from the example.

1. Taking closing stock for the average

The year started with 500 impellers on the shelf and ended with 300. Divide consumption by the closing stock and you get 1,200 pcs ÷ 300 pcs = 4.0. On the average of 400 pcs it is 3.0. Days on hand shrink on paper from 121.7 to 91.3.

The list behaves the same way. Opening stock is worth €118,800 and closing stock €101,100. Closing stock gives 3.83 where the average gives 3.52. Stock fell by €17,700 over the year, and that sum treats the €17,700 as if it had been missing since January.

Closing stock is the right input when you want to know how long today's stock will last. As a year's turnover it only works if the cut-off date was an ordinary day. A plant that runs stock down before the balance sheet date did not have an ordinary day.

2. Dividing sales by stock valued at cost

Suppose the company sells its spare parts at a 50% markup on unit cost. The €387,200 of consumption becomes €580,800 of sales. Divide those sales by the €109,950 of stock and you get 5.28. The right figure is 3.52.

Days on hand drop from 103.6 to 69.1 in that sum, and nothing in the store has moved. The figure is too high by exactly the markup, since 5.28 ÷ 3.52 = 1.5. If sales raises prices by 10%, it climbs to 5.81, and no part leaves the shelf any sooner for it.

Value the top and the bottom of the fraction the same way. Unit cost is the easy choice, because the stock list is already valued at it.

3. Settling for the figure for the whole list

3.52 turns and 103.6 days sound like a store where every part waits a little over three months. No item on the list has that figure. The mechanical seal waits 30.4 days and the housing for the old series 1,825 days. That is five years.

The housing ties up €28,000, which is 25.5% of the stock value. Its share of consumption is 1.4%. Without it, the other five items would come to €381,600 ÷ €81,950 = 4.66 turns.

Calculate turnover per item and sort the list by days on hand. The figure for the whole list tells you how much money sits in the store relative to consumption. It doesn't tell you which items hold it. An ABC analysis ranks the same list by consumption value instead of days on hand, with nine items added.

4. Counting stock that isn't on the shelf

The system shows 120 electric motors at the year end. At 1,200 a year, 3.29 leave per day, so the stock covers 36.5 days. Suppose the supplier needs 35 days. Order today and the delivery arrives a day and a half before the last motor goes out.

Suppose a count finds only 96 motors. 24 are missing because issues for repairs were never booked. The stock then covers 96 pcs ÷ 3.29 pcs per day = 29.2 days. The store has no motor for 5.8 days before the delivery arrives.

The formula was the same both times. The stock figure was wrong. Why book stock and shelf drift apart, and what a daily cycle count does about it, is in the article on stock discrepancies.

5. Reading safety stock as dead stock

The control board turns twice a year and has 182.5 days on hand. Next to the mechanical seal that looks like half a year of dead money.

Suppose the board's supplier needs 20 weeks. The company has therefore decided to hold 150 boards as safety stock and to order 300 twice a year. Average stock is then 150 pcs + 300 pcs ÷ 2 = 300 pcs, as on the list. Of the 182.5 days, 91.25 are safety stock. That is €18,000 of the €36,000. The stock level at which the board has to be reordered is worked out on the same list in how to calculate reorder point. Whether 300 per order is the cheapest quantity is worked out in how to calculate economic order quantity.

Whether 150 is the right quantity is a separate question. Drop the safety stock and you get 600 pcs ÷ 150 pcs = 4 turns, and no board left the first time a delivery runs late. The 150 boards are a decision with a reason behind it, and the figure doesn't know the reason. The housing for the old series shows 1,825 days, and nobody decided those.

The same goes for stock a company builds up ahead of a season. On a cut-off date just before the season it looks like a slow mover. For every item with many days on hand, note whether somebody wanted that stock there.

Why there is no benchmark here

No turnover figure is good for every store. The list shows it on a small scale. In this one store the fastest item turns 60 times as often as the slowest. An average from another industry says little about your store for that reason.

Compare your turnover with your own previous year, calculated by the same rule. And compare each item's days on hand with the time its supplier needs to replenish it.

The next step

Take twenty items from your stock list, the ten with the highest stock value and ten picked at random. Put opening stock, closing stock, yearly consumption and unit cost side by side and calculate turnover and days on hand for each item. Sort by days on hand and write next to the five longest who decided on that stock. A spreadsheet is enough.

If you want to know why stock stays on the shelf and at which point in the process the decision for it is made, that is the scope of our process analysis. Fixed scope, fixed duration, fixed price.