Definition
Inventory is the level of physical stock held. It will typically be measured at different points in a pipeline. A retailer may have inventory on order from suppliers, at warehouses, in transit to stores, in the stores’ backrooms, and on store shelves. [1]
Classification control is a form of dollar inventory control in which the dollar value of each classification of goods is smaller than the total stock of the department—e.g., the sporting goods department may be divided into several classifications or dissections, such as golf, fishing, active sport, etc. [2]
Inventory Metrics
Inventory turns refers to the number of times that inventory “turns over” in a year. It is calculated on the basis of the revenues associated with a product and the level of inventory held. [1]
Inventory Turns (#) = Annual Product Revenues ($) / Average Inventory ($)
Inventory days refers to the speed with which inventory moves through the sales process. To calculate it, marketers divide 365 days of the year by the number of inventory turns, yielding the average numbers of days of inventory carried by a firm. [1]
Inventory Days (#) = Days in Year / Inventory Turns
Inventory velocity or inventory turnover is the time period starting with receipt of raw materials or purchased inventory and ending with the sale of the finished goods to the customer (the period over which a business has ownership of inventory). It is measured by dividing the cost of goods sold by the average inventory on hand. [1]
Inventory velocity/turnover = Cost of goods sold ($) / Average inventory on hand ($)
References
- Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.
- American Marketing Association, AMA Dictionary.