Stock turnover ratio (STR)

What is STR?

Stock turn ratio measures the effectiveness of your investment in spare parts. It calculates whether the money you’ve spent on inventory is actually making an impact on your facility, or if it’s sitting idle on storeroom shelves. STR tells you if you have over-invested in inventory as a whole and indicates if you have the right mix of inventory. It directly relates your level of inventory to the level of demand for that inventory.

How is STR measured?

Stock turn ratio is calculated by dividing the dollar value of inventory issued in the past year by the dollar value of inventory held when the measure is taken.

Stock turn = (value used in past 12 months) / (value held today)

For example, if a company holds $5M of inventory today and has issued $2.5M of inventory in the past year, the STR is 0.5 (it has turned over its inventory investment at the rate of one half per year). A world-class STR is 2.5.

Note that the stock turn is a ratio vs a percentage. This is due to the units being different for the figures being used in the calculation. Value used in the past 12 months is dollars per year and value held today is in dollars. That’s why the value of the above example is 0.5, not 50%

How do I use STR?

You can use STR to figure out how to spend your inventory budget better. Stock turn ratio can help you investigate your investment in spare parts and spot operational inefficiencies in the way you purchase, track, and use inventory. For example, a stock turn ratio of 0.5 is low, yet typical, and indicates a plant that is overstocked, especially if stock outs are also low.

If stock outs are high and the STR is low, a facility is probably investing in inventory that isn’t being used, while lacking in-demand stock. STR targets are influenced by a number of controllable and uncontrollable issues, such as inventory purchasing processes and the location of the facility.

Common problems when using STR

There are a number of common problems when using and interpreting stock turn ratio.

1. Excluding certain inventory

   A stock turn ratio must be applied across the entire inventory. It’s not accurate if only certain inventory is selected. That’s because some inventory items will have a high turnover while others will be low, so it’s necessary to take everything into account. The aim of the ratio is to measure the overall efficiency of the inventory investment.

2. Using incorrect data

   The stock turn ratio shows the effectiveness of the investment in spare parts over a year, so the calculation should be based on the value used in the past 12 months. However, a common mistake is to base the calculation on the value purchased. Depending upon where a company is in the spare parts stocking cycle the two values of used versus purchased inventory could be significantly different. This then results in a misleading stock turn ratio.

3. Misinterpreting the ratio

   A common mistake is interpreting the calculation as a percentage vs a ratio. Using the example above with a stock turn of 0.5, it may be that 10% of the inventory value has moved 5 times and the other 90% has never moved. If a percentage is used, it would imply that 50% of the items have moved, when this is not the case.

How to improve STR

STR is best improved by managing your storeroom investment better. Achieving a best-in-class STR requires a number of carefully developed strategies and tactics implemented concurrently over a significant period of time.

To help determine which approaches will be most effective for your situation, it is helpful to start with the following steps:

1. Identify obsolete inventory

   Almost every storeroom has some parts that are for equipment no longer in service, have been redesigned, or are otherwise unusable. Any items found to be obsolete should be flagged in the system and physically segregated.

2. Identify excess inventory

   Excess inventory refers to stock that is usable but exceeds the amount of time anticipated for turn. For most items, inventory should not go past the sum of the reorder point plus the reorder quantity. In other words, excess inventory is the amount of on-hand inventory above that highest expected level.

3. Prioritize active inventory

   Determine the items that have the greatest impact on service and investment. This will help identify the inventory that you should spend the most time on. Make sure to exclude anything identified as obsolete.

4. Establish a baseline

   A baseline profile uses the results of the above activities to give a high-level view of the current state of your inventory. It shows the amount of investment that’s tied up in obsolete and excess material, how your inventory is distributed by activity level, and how quickly materials are turning over at an aggregate level.