Question

It determined at the end of the year you had 30% turnover (demand) of a specfic item and you would like 100% annually. How much do you reduce (forecast) inventory to achieve that 100% turnover?

Answer 1

Turnover means inventory turnover, which basically means how many times your inventory is being turned over in a year. For example, 30% turnover means only 30% of the Inventory was turned over into Sales in the year, which simply means there is excess inventory. You should always try to increase Turnover or Inventory Turnover, leading to a reduction in average inventory held and hence lower inventory carrying costs.

Inventory Turnover = (COGS / Average Inventory) OR (Sales / Average Inventory)

=> 30% = Sales / Inventory

=> Sales = 0.30*Inventory OR S = 0.3*I

To achieve 100% inventory turnover, 100% = Sales / Inventory(new)

Assuming that no effort is made to increase sales, Sales remain the same as before = S

=> 100% = S / I(new)

=> I(new) = S/100% = S

=> I(new) = 0.3*I

Thus, change in inventory = {I - I(new)} / I = (I - 0.3*I) / I = 0.70 or 70%.

So, inventory should be reduced by 70% in order to achieve 100% Inventory Turnover from current 30% Inventory Turnover.