Stock rotation index, what it is and how it is calculated

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What is the stock rotation index and how it is calculated

The warehouse rotation index is a key parameter for the companies.  What does this index represent, how is it calculated and how to consider this data?
Keeping track of inventory is critical for a company. Knowing what it represents and how the rotation index is calculated is essential to be able to develop stock management strategies and know the real value of the goods stacked in the warehouse.

The warehouse rotation index, along with the reciprocal index of cover, is an essential indicator for the survival of a company.This data offers a vision of the course of the resources of the warehouse: in practice, its function is to keep under control the inventory and to help the management to assess  whether you are incurring adequate warehouse costs compared to the service provided to customers.Both the index of spin that the index of cover are useful to the company in order to have information on the economic dimension of the warehouse, therefore on its costs.

The index of cover represents the average coverage period guaranteed by the average effective stock inventory in warehouse, the rotation index or „inventory turnover“ represents the number of times the average supply of a product has been completely renewed over a defined period of time (one year, one month, etc.). Thanks to the rotation index it is therefore possible to determine how long it takes to recover the financial resources invested in the products.

How to calculate the warehouse rotation index

In order to calculate the index of spin of the warehouse it is necessary to make the relationship between the cost of the assets sold or COGS („Cost of goods sold“) and the average value aggregated of the supplyes or AAIV („Average aggregate inventory value“):Rotation index = COGS / AAIV.The cost of goods sold is the annual cost that a company bears for the delivery of goods sold to a customer, without considering the administrative or sales costs. The average aggregate value represents the value of all those goods that the company holds in warehouse, estimated based on the cost.

How should companies manage the rotation index?

If a company has a high rotation index it’s not necessarily a bad thing: this data goes hand in hand with the sales: the more rotation of goods in stock there is so many more sales have However, this leads to high operating costs. In this case, to ensure that everything continues to go well, companies should:

  • have a total and updated view of the goods in stock
  • have security stocks
  • have very efficient order preparation

On The contrary, in case the rotation index is too low (and therefore could be elevated amounts of stock in warehouse) the companies can adopt custom marketing ands sales strategies, discounts, sales or flash deals.

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