January 08, 2025
Understanding Stock Turnover Ratio
The goals of companies across industries include how to trim expenses. For those with dedicated maintenance departments, one of the areas to track will be the stock turnover ratio (STR). In this article, we will discuss the following:
What is the Stock Turnover Ratio (STR)?
This metric serves as a barometer for the efficiency of spare parts investment. It gauges whether funds allocated to inventory are actively contributing to facility operations or languishing on storeroom shelves. You want to find the optimum amount of inventory to keep on hand that aligns with operational needs.
Supervisors will use historical records of maintenance activities to determine the quantity of stock needed. Just as important will be the minimum amount of stock on hand below which you’d purchase more.
How do you calculate this ratio? Find the value of stock used over the previous twelve months. Divide that by the stock value you currently have.
Let’s use a simple example. Today, you have $100 in inventory. Over the last year, you used $50. Fifty divided by one hundred is .5.
However, if you used $200 in stock over the past year, the ratio is 2.
The difference means that in the first set of numbers, you had a lot of stock sitting unused. Your business may pay taxes on that stock. You certainly use energy to store that stock. Therefore, you want to keep that turnover ratio higher.
However, while you want a higher ratio, as you’ll read later, this brings up a challenge beyond what you’ll find with determining the STR.
Remember to look at this as a ratio instead of a percentage. We’re dealing with dollars as the value.
Discover how streamlined maintenance processes can elevate production. Learn more.
Benefits of Tracking Stock Turnover Ratio
Optimized Inventory Levels: As mentioned, you want a tolerable amount of inventory. Too much or too little risks extra costs.
Overstocking means you have excess parts around that technicians don’t use. You incur expenses from energy for stocking and space better utilized. Understocking risks emergency purchases, higher shipping costs, and labor overtime.
Cost Reduction: All through this article, we’re looking at costs. One problem of overstocking comes in the form of having some of the parts going obsolete. You purchased parts for a piece of equipment the company no longer uses. Not only did you spend money on purchasing, you now have to spend for disposal.
Maintenance Activities Planning: This ties in with the above challenge mentioned which I’ll explain later. With a proper STR, you have better oversight of preventive maintenance (PM). You already should be tracking equipment history as part of asset management.
With STR, you learn where to adjust for purchasing parts and supplies.
Best Practices for Successfully Using Stock Turnover Ratio
Budget: Utilize STR to determine how to allocate your inventory budget more efficiently. Investigate your investment in spare parts. Where can you make improvements in purchasing, tracking, and using inventory?
Discovering Inefficiencies: Using the above example where you have a ratio of 0.5, this suggests an overstocked plant. However, if you experience high stockouts and low STR, it indicates investment in unused inventory.
Influencing Factors: You might put this point in the challenge section. Controllable and uncontrollable factors affect the ratio.
Location. Purchases methods. Industry. Take these factors into account when calculating STR.
Challenges in Maintaining an Optimal STR
Excluding Inventory: You should apply the calculation to all inventory. Leaving out parts skews the ratio and the reality of the situation.
Using Incorrect Data: The calculation of STR should have the value used in the past 12 months. Don’t include the value purchased. Using incorrect data may result in a misleading ratio.
Misinterpreting the Stock Turnover Ratio
Misinterpreting the Ratio: A reminder to view STR as a ratio, not a percentage.
Example: Let’s go back to the above ratio of 0.5. One cause of this—10% of the inventory value moved five times, but the other 90% never moved.
Inefficiencies in Maintenance: While a higher ratio looks good because you’re using more parts, this could signify problems in other areas. For instance, one machine constantly requires attention. Sure, you go through parts…but, you go through parts.
This means you spend more on parts. Instead, investigate why this machine needs so many parts so often. Maybe you want to adjust your PM strategy.
Improving the Stock Turnover Ratio
Obsolete Inventory: Flag, segregate, and eliminate obsolete or unusable parts.
Excess Inventory: Determine usable stock that exceeds anticipated turnover time. Adjust maintenance activities and purchasing.
Prioritize Active Inventory: Focus on items with the most significant impact on service and investment. Note critical spares and repairable parts to save money.
Establish a Baseline: I referred to this earlier where you have a minimum threshold for stock. If the quantity for that item drops below that minimum, you’ll consider two things. First, purchasing and adjusting minimum levels. Second, maintenance activities to see why you require more parts so often.
The Role of a CMMS in Managing STR
Utilizing a CMMS in your maintenance department brings benefits that affect STR. You can input a lot of the aforementioned data. In your inventory list note the following:
- Critical spares.
- Repairable parts.
- Minimum quantities.
- Physical count. A routine physical count of the stockroom helps you mark which parts don’t move. It also ensures better oversight over quantity.
- Costs and vendors for each part.
- Date last used.
- For better records, assign parts to assets, PMs, and work orders.
Achieving Balance with the Stock Turnover Ratio
Understanding the stock turnover rate means you’re paying attention to overall costs. For companies such as grocery stores, you want a high STR. You can’t have food items sitting on shelves going past expiration dates.
Other retailers desire a high ratio. This means stock moves. Clothes, shoes, appliances, and other stock get replaced throughout a twelve-month period.
For maintenance, however, you have to find a good balance. Too many parts used means a required look at operations. You want efficiency and productivity. Review your PM strategy.
Review purchases. Be aware of how many "items" come in a package. For instance: A package contains six widgets. However, you use one widget every six months.
You might look for a vendor that sells fewer in a package or limit the amount of packages you purchase.
Also, be aware of how many "items" you use. For instance: A package contains two widgets, but the work order calls for six.
This affects purchasing decisions and STR.
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