Turnover rate and Rotation of goods: Fast and slow movers

The inventory turnover, also known as the inventory turnover rate or inventory turnover coefficient, expresses how often an average inventory is completely withdrawn and replaced in a given period (usually a financial year). As a key figure, it can be related to the entire warehouse or parts of the warehouse, as well as to individual products; in this case, however, one speaks of goods rotation instead of inventory turnover.

The inventory turnover rate is highly significant in relation to the duration of capital commitment. Therefore most companies consider it to be the central key figure in inventory management. The reciprocal value of the inventory turnover rate is, consequently, the inventory range. Goods in the warehouse are tied up capital (keyword warehouse commitment); the stock is virtually waiting to be removed, i.e. sold or further processed. This concerns finished products as well as semi-finished products, raw materials, operating materials and auxiliary materials.

The higher the turnover rate, the more profitable the business is since the capital tied up in inventories is reduced for the same (annual) turnover. Money tied up in the warehouse cannot be used for any other purpose; at the same time, there are costs for storage itself and opportunity costs become relevant.

Definition of rotation of goods

The rotation of goods is the speed at which goods are sold. Depending on the industry, this is charged per year, month, week or day. The higher the sales of a product, the higher the rotation of goods. In warehouse logistics, an ABC analysis is often carried out based on goods rotation, which defines in descending classes whether an article has a high or low sales volume. For A-items the term “fast-moving” has become established, for C-items the term “slow-moving”. Differentiation is made both for the entire assortment of a warehouse and for individual merchandise categories.

Calculation of inventory turnover rate

Inventory turnover is calculated by dividing the stock (sales in euros) of a given period by the average stock (in euros). The average stock level is calculated as follows (calculation period one year):

  • As a less precise variant: Opening stock + closing stock divided by 2
  • As a more precise variant: Opening stock is added to twelve monthly stocks of a year and then divided by 13.

Rotation of goods: Fast and slow movers

The rotation of goods is the speed at which goods are sold. Depending on the industry, this is charged per year, month, week or day. The higher the sales of a product, the higher the rotation of goods. In warehouse logistics, an ABC analysis is often carried out based on of goods rotation, which defines in descending classes whether an article has a high or low sales volume. For A-items the term “fast-moving” has become established, for C-items the term “slow-moving”. Differentiation is made both for the entire assortment of a warehouse and for individual merchandise categories.

What are fast movers?

Fast movers are goods that spend little time within a warehouse and quickly leave it again. Large quantities are handled here in a short time. Fast movers are goods of daily use that are bought quickly and without large investments. They are usually not stored for long, so they hardly block storage space and cause only low storage costs.

What are slow movers?

Slow movers are goods that have a low sales speed. They usually remain in the warehouse for a longer time and block storage bins. Slow-moving items are usually goods for which there is little or very seasonal demand. But often a wrong price or poor product placement is also the cause for a bad sales speed. Since slow-moving products require storage capacity, they cause storage costs. It should, therefore, be regularly questioned whether these products still have a right to exist in the assortment.

Use of the key figure inventory turnover / rotation of goods

Contexts in which rotation of goods or rather the inventory turnover rate are considered:

  • For purchasing optimization and corresponding purchasing strategies
  • For the comparison of branches, articles as well as article groups regarding their profitability
  • For the identification of optimization needs in ordering as well as in the assortment compilation
  • As an orientation aid for (price) calculation
  • For warehouse optimization (better accessibility of fast-moving items for picking)

The inventory turnover rate can be improved (in other words, increased) by shortening the order cycles and discontinuing slow-moving items, as well as by increasingly switching to just-in-time delivery. The corresponding key figures vary depending on the sector; just how important these figures are, can be seen from the fact that continued optimization can have a positive effect on a company’s rating.

Summary

The turnover rate or rotation of goods is especially relevant in trading companies and in industrial companies with correspondingly high stock management. The key figure expresses how often the average stock of a product, a product group or an entire warehouse is completely withdrawn and replaced within a particular time. The lower the inventory turnover rate, the more capital is tied up and is not otherwise available.

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