Set the decision boundary before using the numbers
Inputs and records to align
- One SKU or comparable category and one period. (not complete)
- Consistent opening, receipt, sale, transfer, shrinkage and closing units. (not complete)
- Average inventory on a documented units or value basis. (not complete)
- Stockout events, unfilled demand or substitution evidence rather than assumed lost sales. (not complete)
- Supplier lead time and order constraints from current records. (not complete)
- Contribution, holding, markdown and residual-recovery inputs for downside scenarios. (not complete)
Build one transparent decision model
Inventory turn = cost of goods sold ÷ average inventory; availability rate = available demand occasions ÷ measured demand occasions
- cost of goods sold
- Product cost assigned to units sold during the period (CU per period) — inventory and accounting records
- average inventory
- Average inventory under a stated measurement convention (CU or units) — inventory snapshots
- measured demand occasions
- Observed opportunities under the business availability definition (occasions or SKU-days) — stock and order records
The ratios use different denominators and cannot be added or converted into each other. Record the measurement convention beside each result.
- Reconcile inventory flow and measurement conventions.
- Calculate turn without mixing unit and value bases.
- Define and measure availability separately.
- Estimate stockout downside only from observed or labelled demand cases.
- Estimate overstock cash, holding and recovery downside separately.
- Compare policies symmetrically and set reorder or review decisions in the owning tools.
Worked example: compare two stock policies symmetrically
Invented base: 48,000 CU cost of goods sold, 12,000 CU average inventory and 950 available occasions out of 1,000 measured demand occasions.
| Line | Calculation | CU |
|---|---|---|
| Inventory turn | 48,000 ÷ 12,000 | 4.0 times |
| Availability rate | 950 ÷ 1,000 | 95% |
| Unavailable occasions | 1,000 - 950 | 50 |
| Average inventory exposure | entered period average | 12,000 |
| Case | Changed input | Result | Decision signal |
|---|---|---|---|
| Lean stock | Average inventory 9,000; availability 88% | 5.33 turns | Compare stockout downside |
| Base | Average inventory 12,000; availability 95% | 4.00 turns | Review cash and service |
| Higher stock | Average inventory 16,000; availability 98% | 3.00 turns | Compare markdown and cash downside |
Review the operational trade-offs before acting
- Treating high turn as proof of healthy availability.
- Treating high availability as proof of profitable stock.
- Mixing annual cost of goods sold with a point-in-time stock balance without convention.
- Calling every unavailable occasion a lost sale.
- Ignoring substitution, backorders and supplier lead-time variability.
- Using a universal service-level or safety-stock target.
Decision questions
- Is higher inventory turn always better?
- No. It can release cash, but the policy may increase stockouts, expedite cost or lost contribution. Compare those effects explicitly.
- Can availability be measured from stock snapshots?
- Only under a documented convention. Order, demand, substitution and unavailable-event records usually provide important context.
Sources and methodology
- Inventory Turnover methodology — Margin101: Turn, period and average-inventory conventions.
- Stockout Cost methodology — Margin101: Observed-event and lost-contribution boundaries.
Test the editable scenario
- Inventory Turnover Planner
Measure inventory turnover and target working-capital change
- Reorder Point Planner
Set an inventory reorder point from demand and lead-time risk
- Stockout Cost Planner
Estimate lost contribution and expedite cost from an inventory shortfall
- Gross Margin Return on Inventory Planner
Compare annualised gross margin earned with average inventory investment