What is Inventory Turns?

A measure of how quickly materials are moving through a plant or through a value stream, calculated by dividing a given cost measure by the amount of inventory on hand. Probably the most common method of calculating inventory turns is to use the annual cost of goods sold (before adding general, administrative, and selling expenses) as the numerator, divided by the average annual inventory. Thus:

Inventory turns = Annual cost of goods sold
                             Average value of inventory during the year

Using the cost of goods rather than sales revenue removes a source of variation unrelated to the performance of the production system: fluctuations in sales prices due to market conditions. Using the average annual inventory rather than a year-end figure removes another source of variation: an artificial drop in inventory at year-end caused by managers' attempts to show good results.

Inventory turns can be calculated for material flows along value streams of any size. However, when making comparisons, remember that turns decline with the length of the value stream, even when performance is equally lean along the entire stream. For example, a plant that only assembles a product may have 100 turns or more, but when the plants that supply parts to the assembly plant are taken into account in the calculation, the turns will fall to 12 or fewer. And if materials are included upstream, back to their initial conversion (steel, glass, resins, etc.), turns will decline to four or fewer. This happens because the cost of goods sold at the final step of the stream does not change, but the amount of material in inventory grows steadily as more plants are added to the calculation.

Inventory turns are a great measure of a lean transformation if the focus shifts from the absolute number of turns at each plant, or across the entire value stream, to the rate of increase in turns. In fact, if turns are calculated accurately, using average annual inventories, the results can be quite reliable.