Why Aggregate Turnover Misleads You
Your overall inventory turnover is 6x. Great. Your CFO is happy.
But what does that actually mean? It means the average SKU turns 6 times per year. Here's the problem: no SKU is average.
Your best sellers might be turning 20x while your slow movers turn 0.5x. The aggregate number hides both the exceptional performance and the significant problems.
Product-level turnover analysis reveals what's really happening in your inventory—and where to focus improvement efforts.
The Basic Turnover Calculation
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
At the product level:
SKU Turnover = Annual Units Sold ÷ Average Units on Hand
Alternatively:
SKU Turnover = 365 ÷ Days on Hand
These calculations give you the same information in different forms. Turnover of 12 means the product turns once per month, or about 30 days on hand.
Setting Up Your Analysis
Step 1: Pull the Data
For each SKU, gather:
- SKU identifier
- Annual units sold (or TTM—trailing twelve months)
- Average units on hand
- Unit cost
- Annual revenue
- Category/segment
Calculate turnover for each SKU.
Step 2: Sort and Segment
Sort your SKUs by turnover, highest to lowest. You'll immediately see the spread:
- Top performers: 15-30+ turns
- Healthy middle: 6-12 turns
- Slow movers: 2-4 turns
- Problem inventory: <1 turn
Step 3: Cross-Reference with Other Metrics
Turnover alone doesn't tell the whole story. Cross-reference with:
- Revenue contribution
- Margin contribution
- ABC classification
- Product age (new vs. established)
- Category norms
A 3x turn might be terrible for a consumable but great for durable goods.
What Turnover Patterns Reveal
High Turnover, High Revenue (Stars)
These are your best products. They move fast and contribute significantly to the business. Focus here on:
- Never stocking out—the opportunity cost is huge
- Improving margins through supplier negotiation
- Understanding what makes these products successful
High Turnover, Low Revenue (Supporting Cast)
Fast-moving but small contributors. These are often:
- Low-priced consumables
- Accessories to main products
- Entry-level offerings
Management approach: Automate ordering. Don't over-invest in planning. Keep them in stock but don't over-analyze.
Low Turnover, High Revenue (Cash Cows)
Slow-moving but important. Common in:
- Higher-priced items
- Durable goods
- B2B products
Management approach: These tie up cash but deliver profit. Optimize inventory levels carefully. Consider made-to-order or quick-ship programs if feasible.
Low Turnover, Low Revenue (Problem Children)
Slow-moving and unimportant. Every catalog has them. The question is what to do:
- Discontinue and liquidate?
- Raise prices (low turns might mean prices are too low)?
- Reduce inventory depth?
- Promote more aggressively?
Many of these should probably be discontinued, but inertia keeps them around.
Turnover Trends Over Time
One snapshot is informative. Trends over time are actionable.
Track quarterly turnover for each SKU and watch for:
Declining turnover: Sales dropping or inventory creeping up. Early warning of potential dead stock.
Increasing turnover: Sales growing or inventory tightening. Might need more inventory investment to prevent stockouts.
Seasonal patterns: Some products have legitimately cyclical turnover. Factor this into your analysis.
New product ramp: New products start with low turnover and should increase. If they don't ramp as expected, investigate.
Category-Level Context
Turnover benchmarks vary dramatically by category:
| Category | Typical Turnover |
|----------|-----------------|
| Fresh food | 50-100+ |
| Grocery/CPG | 8-15 |
| Health & beauty | 4-8 |
| Apparel | 3-6 |
| Home goods | 3-5 |
| Electronics | 6-12 |
A 5x turn is excellent for furniture and terrible for snacks. Always compare within category.
Using Turnover to Drive Decisions
Identifying Markdown Candidates
Products with turnover below category norms for 2+ quarters are markdown candidates. Calculate:
Break-even discount = (Target Turn - Actual Turn) / Target Turn
If target is 6x and actual is 3x, break-even discount is 50%. Any discount less than 50% improves your effective turnover.
Setting Inventory Targets
Use turnover targets to set inventory targets:
Target Inventory = Annual Demand / Target Turnover
If you want 12x turnover and expect 6,000 units in annual demand:
Target average inventory = 6,000 / 12 = 500 units
Allocating Inventory Investment
Your total inventory investment should flow toward higher-turnover products:
- High turn products: Invest more, they generate returns faster
- Low turn products: Invest less, consider made-to-order or dropship
Evaluating New Products
Set turnover expectations for new products based on comparable items. If a new product isn't hitting expected turnover after 6 months, investigate:
- Is it priced wrong?
- Is it merchandised poorly?
- Does the market want it?
- Should it be discontinued?
The Turnover vs. Service Level Trade-off
Higher turnover is generally better. But pushing turnover too high increases stockout risk.
Example:
- Current: 8x turnover, 96% fill rate
- Target: 12x turnover, ??? fill rate
To increase turnover from 8 to 12, you need to reduce average inventory by 33%. Will your safety stock still be adequate? Run the numbers before implementing aggressive turnover targets.
Action Items from Turnover Analysis
Based on your SKU-level turnover analysis, create specific action lists:
Immediate attention (this week):
- SKUs with turnover below 0.5x—evaluate for discontinuation
- SKUs with turnover above 20x—check for stockout risk
Short-term actions (this month):
- SKUs declining from benchmark—investigate root cause
- SKUs improving toward benchmark—validate trend continues
Strategic decisions (this quarter):
- Portfolio rationalization—how many low-turn SKUs should you carry?
- Investment reallocation—shift dollars from low-turn to high-turn products
- Category strategy—are your low-turn categories strategic?
Key Takeaways
- Aggregate turnover hides product-level patterns
- Analyze turnover at the SKU level to find winners and problems
- Cross-reference turnover with revenue contribution and margins
- Track turnover trends over time, not just snapshots
- Compare turnover within category—benchmarks vary widely
- Use turnover to drive markdown, investment, and discontinuation decisions
- Balance turnover targets against service level requirements
Frequently Asked Questions
Should I use units or dollars for turnover calculations?
Either works consistently, but dollars are often more useful because they account for price differences. A high-priced item with 4x turn may be more valuable than a low-priced item with 8x turn.
How do I handle products with zero sales?
Zero sales means infinite days on hand (undefined turnover). Flag these separately as dead stock. They need discontinuation analysis, not turnover optimization.
What about new products with limited history?
Calculate turnover based on available data but flag them as "new." Expected turnover for a product launched 3 months ago is different from an established product. Reassess after a full year of data.
How often should I run this analysis?
Monthly review of turnover trends is valuable. Full analysis quarterly is practical for most businesses. More frequent if you have highly seasonal categories or rapidly changing assortment.
Should I calculate turnover including or excluding safety stock?
Include all inventory on hand. Safety stock is real inventory that ties up real cash. If your turnover target isn't achievable with necessary safety stock levels, either the target or the safety stock needs adjustment.